As small businesses adapt to an increasingly complex business environment, many are turning to Professional Employer Organizations (PEOs) to simplify operations, reduce costs, and improve workforce management.
Transitioning to a PEO model can provide transformative benefits, particularly in the post-pandemic landscape. This article will provide the steps, trends, and success stories to help your business transition seamlessly to a PEO and thrive within this dynamic economic business cycle.
A Professional Employer Organization (PEO) is a service provider that manages HR functions like payroll, employee benefits, and compliance on behalf of businesses. Through a co-employment arrangement, the PEO becomes the employer of record for tax and benefits purposes, while the company retains control of daily operations and workforce decisions.
For an in-depth explanation of what a PEO does and how it operates, you can read our previous article What is a PEO and Should My Business Consider Joining One here.
Why Transition to a PEO?
Small businesses face numerous challenges in managing HR tasks, especially amid growing compliance demands.
PEOs offer:
The COVID-19 pandemic forced businesses to adapt quickly to remote work, safety mandates, and economic uncertainty. For many, PEOs were invaluable partners in navigating these changes. Even after the lockdowns were lifted, changes in the business world and consumer behaviors remained dynamic.
Here are some of the ways that PEOs helped small businesses survive and thrive both during and post-pandemic.
PEOs supported businesses by implementing remote work policies, ensuring compliance with emergency regulations, and providing critical HR guidance. For instance, a New York-based retail chain partnered with a PEO to handle furloughs and safety protocols during the pandemic, ensuring a smooth reopening.
PEOs help small businesses access employee benefits and negotiating leverage that is typically reserved for larger organizations. This cost-efficiency extends to more robust compliance management, which can help to minimize the risk of fines for labor law violations by keeping SMBs abreast of and in compliance with complex labor regulations.
By outsourcing many administrative tasks, businesses can dedicate more time and resources to strategic growth initiatives. For example, a remote work-based tech startup with only two dozen employees and an HQ based in Austin, Texas, leveraged a PEO to manage multi-state payroll, enabling leadership to focus on scaling its product development.
Transitioning to a PEO requires strategic planning and careful implementation. Follow these steps to ensure a smooth process:
Begin by identifying the HR challenges your business faces. For instance, are you struggling with compliance, offering competitive benefits, or managing payroll? Understanding your pain points will help you evaluate how a PEO can meet your needs.
Not all PEOs are created equal. Look for one accredited by the Employer Services Assurance Corporation (ESAC) or certified by the IRS. While voluntary, the IRS certification (making it a CPEO) means that a PEO has met the background, experience, business location, financial reporting, tax compliance, and bonding requirements described in the statute and regulations PDF of the CPEO program.
Consider industry expertise, client testimonials, and scalability. A restaurant chain, for example, might choose a PEO specializing in hospitality for tailored solutions specific to their business model.
Review the contract carefully to clarify the division of responsibilities. While the PEO handles most of the HR functions, your business will retain control of day-to-day operations. This allows business leaders to focus on their business, but it is important to understand the separation of responsibilities.
Communicate the benefits of transitioning to a PEO with your employees. Clear communication fosters trust and alleviates concerns about changes to payroll or benefits. Outlining who employees should speak with for questions regarding benefits or other PEO-handled issues can help keep confusion at a minimum as well.
After transitioning, regularly assess the PEO’s impact on key performance indicators, such as employee satisfaction and operational efficiency.
The demand for PEOs continues to grow, driven by the need for flexibility and cost-efficiency in a competitive marketplace. Here are some notable trends:
Startups and small businesses are increasingly leveraging PEOs to scale operations without investing heavily in their in-house HR departments. Industry reports reveal that businesses using PEOs grow 7-9% faster than those that do not.
Modern PEOs utilize advanced technology, such as cloud-based platforms, to provide seamless HR solutions. For instance, a healthcare practice adopted a PEO with an integrated scheduling and payroll system, improving efficiency and reducing errors.
PEOs are tailoring their services to specific industries. A marketing agency in San Francisco, for example, benefited from a PEO’s expertise in crafting creative sector-specific employee benefit packages that aligned with the types of talent the agency sought to attract.
CFO Services Group and Business Diversification
During the pandemic, businesses like CFO Services Group re-evaluated their operations to adapt to new challenges. The company diversified its offerings and streamlined HR and compliance needs specific to lockdowns, vaccination mandates, and state-by-state regulations by partnering with a PEO.
This allowed the leadership team to focus on core business strategies while delegating administrative tasks like payroll and employee benefits management. These changes not only helped the business survive but also set it up for post-pandemic growth.
Enhanced Employee Retention in Small Enterprises
According to research, companies using PEOs often see reduced employee turnover, which is critical for small businesses aiming for stability. Businesses leveraging PEO services experienced 10–14% lower turnover rates and were better equipped to provide tailored benefits such as flexible work arrangements and comprehensive leave policies. These initiatives improved employee satisfaction and organizational resilience.
Tech Startups Leveraging PEOs for Growth
Young tech startups often utilize PEOs to access high-quality employee benefits that rival those offered by larger companies. By doing so, they attract top talent without overwhelming their lean and agile-driven internal teams. Companies such as Gusto (formerly ZenPayroll), WeWork, Beyond Pricing, and Envoy reported higher rates of growth and employee satisfaction through this approach.
Construction Firms Navigating Compliance
For industries like construction, where compliance and worker safety are paramount, PEOs provide crucial support. Companies such as Sunwest Electric, Greenwave Construction, Miller Framing, and Blueprint Contracting have found success using PEOs for workers' compensation assistance and HR compliance expertise, reducing their legal and operational risks while focusing on project execution.
PEOs have been instrumental in helping businesses pivot and thrive in the wake of the pandemic.
PEOs Supporting Resilience During Economic Shocks
A study by the National Association of Professional Employer Organizations (NAPEO) highlighted that small businesses using PEOs during the pandemic were 50% less likely to close than those that did not. By offloading complex HR functions, these businesses could place their focus on innovation and maintaining cash flow.
Example: Retail Adapts to E-Commerce
Many brick-and-mortar retail businesses transitioned to e-commerce with HR support from PEOs, handling remote work policies and logistics seamlessly. Some examples of these small businesses turning to PEOs for help with these issues are Wildflowers Boutique, The Artisan’s Pantry, Mason’s Furniture Store, as well as Pearl’s Crafts and Home Goods.
Transitioning to a PEO can be a game-changer for small businesses, providing access to resources, expertise, and efficiencies that fuel growth. Especially in the post-pandemic landscape, PEOs have proven their value in helping businesses survive and thrive.
To ensure a seamless transition, your business should first assess its needs, choose the right PEO, and implement a clear onboarding plan. By embracing the PEO model, your business can future-proof its operations and focus on achieving long-term success.
