Good employee benefits boost worker job satisfaction in any company, and the ability of a small business to offer a competitive benefit package lets those businesses compete more effectively in the war for talent. The key to the success of a small business to offer competitive benefits is often a professional employer organization (PEO), a growing source for benefits, human resources expertise and other employment-related services.

What is a PEO?

Professional employer organizations are companies that contract with small- to mid-sized businesses to manage their human resource and personnel functions.

While the responsibilities of the PEO will vary by contract, typical duties include paying wages; reporting, collecting, and depositing employment taxes with state and federal authorities; handling claim management for workers compensation and unemployment insurance; ensuring safety and nondiscriminatory regulatory compliance; and supplying employee handbooks and other policies. And, importantly, it also provides benefit packages, including group health insurance.

In contrast, a small-business purchasing alliance, which is another means for small businesses to find affordable health insurance, offers access only to health care insurance.

The National Federation of Independent Businesses (NFIB), whose member companies’ average 10 employees, looks at PEOs as a possible way to avoid government-mandated health coverage by making affordable insurance more readily available. Fifty-six percent of employees in its member companies currently lack health insurance.

The big trade-off

When small businesses contract with a professional employer organization, the PEO becomes a co-employer of that company’s employees. And the owner of the business becomes an employee of the PEO, while retaining ownership of their company.

It’s all perfectly legitimate under U.S. tax code, which allows a business to have two “masters,” says Yager. Yet the dual role of small-business people as both employees of the PEO and owners of their company can be threatening, Yager concedes. “At first, they don’t like having to tell the PEO how much they get paid,” he says. “But you get paid the same; you still control that. The PEO has responsibility over salaries, but it doesn’t set them.”

The benefits of benefits

Small businesses with PEO arrangements are also more likely to offer workers a 401(k) retirement savings program in an era when access to 401(k) programs is dropping among small-business workers, according to the U.S. Small Business Administration (SBA). One reason is the cost barrier. Without a PEO, a business faces more than $7,000 to establish a 401(k) program. A business client of a PEO can avoid this expensive set-up fee by having its workers participate in the PEO’s plan, NAPEO reports.

Any business can find value in a PEO relationship, NAPEO states. An average client of a NAPEO member company is a business with 16 worksite employees. Increasingly, larger businesses also are finding value in a PEO arrangement, because PEOs offer robust Web-based HR technologies and expertise in HR management. PEOs can partner with companies that have 500 or more employees and work in conjunction with their existing human resources department.

Who joins a PEO?

NAPEO reports that PEO clients include many different types of businesses, ranging from accounting firms to high-tech companies and small manufacturers. Many different types of professionals, including doctors, retailers, mechanics, engineers and plumbers, also benefit from PEO services.

But not all businesses will be welcomed with open arms by PEOs. Some, like off-shore drilling enterprises, professional athletic teams, and dog groomers, are hard to regulate for safety issues and thus make less appealing clients, according to NAPEO information.

What’s in it for the PEO?

The PEO industry is estimated at $42 billion in gross annual revenues, with over 700 PEO’s offering array of benefits in all 50 states. With the additional benefit offerings available through a PEO, the average member company has grown over 20 percent per year in each of the past six years, NAPEO reports.

PEOs provide enhanced access to employee benefits for two to three million working Americans, with the number growing every year because of the savings and benefits that a PEO can provide to small businesses. PEO expertise improves the work environment and increases safety.