What Is a PEO? A Guide to Understanding Professional Employer Organizations

Organizations that enter a PEO relationship maintain control of their business. The PEO may assist with many employment-related aspects of a company, such as payroll, HR administration, employment-related taxes, and employee benefits. This support helps the organization to find more time to oversee its day-to-day business operations, encompassing employee hiring, performance management, leadership development, and accounting.

Seventy-eight percent of business leaders report it's extremely or highly likely that they will outsource HR administration in the year ahead.¹ The top priority for outsourcing to a PEO was to help with HR management for employee relations, strategy, policies, and procedures.

Where does outsourcing to a PEO deliver the most value? Leaders rank these areas as most helpful to outsource:¹

1. HR management support
2. Recruiting and onboarding
3. Payroll processing
4. 401(k) administration
5. Benefits administration
6. Assistance with managing employee performance
7. Risk management/workers’ compensation
8. Assistance with maintaining regulatory compliance

PEOs in the United States provide services to more than 200,000 small and mid-sized businesses, employing 4.5 million people.²

A PEO's economies of scale and buying power can help to lower certain employment costs and increase the bottom line. You may be able to maintain a simple in-house HR infrastructure or none at all by relying on the PEO, thereby reducing overhead. A PEO can assist with employer compliance and time savings by handling routine and redundant activities.

The cost of a PEO is determined by several factors, including the size of the business, which HR services will be outsourced, and the number and type of employees on the payroll. PEOs typically charge either a flat fee per employee or a percentage of the total payroll.

Suppose you have the choice of using either pricing model. In that case, you may wish to calculate the yearly expenses using both pricing models to evaluate expected PEO costs and determine which option makes the most financial sense for your business.

PEOs generally generate revenue through fees associated with their service agreement with their clients. The charges typically vary based on the total number of employees in the organization and the extent of services requested.

When researching PEOs, knowing how or if they are accredited and independently audited should be an essential part of your selection process. For example, Paychex PEO has a SOC 1 Type II certification focusing on outsourced services performed by service organizations relevant to a company's financial reporting. Paychex is accredited by the Employer Services Assurance Corporation (ESAC). ESAC is the nationally recognized financial assurance, standard-setting, and monitoring entity for the Professional Employer Organization (PEO) industry. Through its voluntary accreditation process, ESAC ensures that participating PEOs adhere to ethical, financial, and operational standards to promote high integrity and responsibility within the PEO industry. As a condition of continued accreditation, we must submit quarterly reports to ESAC, including financial statements and an independent Certified Public Accountant's verification of the timely and accurate payment of all payroll taxes, employee benefits contributions, and insurance premiums.

Staffing agencies generally find and place employees at a client organization for a fee. While A PEO may help with aspects of the hiring process (such as posting open positions on job boards, helping to write position descriptions, and applicant tracking), they are not responsible for hiring and placing employees for a client organization. Instead, a PEO will generally provide payroll, benefits, HR administration, and compliance monitoring services.

"Employee leasing" generally refers to a business arrangement in which a staffing agency supplies its employees to another business, typically for a specified period or project duration. Whether a PEO is considered a leasing company may depend on state-specific definitions and regulations.

PEO specialists bring a breadth of cross-industry expertise. They meet diverse challenges and use a comprehensive toolbox for effective problem-solving. This versatility can result in helpful employee- or HR-related resolutions.

Look for a PEO that prioritizes continuous training, helping to ensure specialists stay abreast of the latest employee relations and HR developments. This commitment places PEOs at the forefront, providing clients with up-to-date solutions and strategies.

Moreover, PEOs often provide digital technology platforms for employees to access essential documents, including pay stubs, W2s, and PTO balances. Additionally, PEOs can improve a company's benefits package, introducing valuable features like Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), commuter benefits, and employee assistance programs (EAP), helping to enrich the overall employee experience.

Several PEOs handle payroll taxes on behalf of a client by using the PEO's tax ID for federal purposes and in states when it's allowed. Upon exiting the PEO arrangement, the shift occurs to pay taxes under the client's tax IDs, and certain wage base contribution caps will start over. This underscores the importance of strategically timing the exit from a PEO, making January 1st an ideal choice to ensure a smooth transition and compliance with tax obligations.

Working with a PEO won't inherently affect your organization's culture unless that aligns with your specific goals. Some PEOs may offer guidance and recommend strategies to shape your company's culture and brand, where this is part of your objectives. This can support your goal of employees perceiving your business in a manner that reflects your desired image both presently and in the future.

Business Process Outsourcing (BPO) involves delegating internal company practices to a third party covering payroll, IT management, website and social media management, benefits administration, and customer service. BPO companies assist businesses in saving costs by offering outsourced services as needed. For instance, small businesses may benefit from outsourcing IT management without the expense of hiring a full-time IT manager.

PEOs, unlike temp or staffing agencies, do not control hiring and firing decisions for their clients. PEOs offer a comprehensive range of employee and HR-related services, including payroll processing, tax handling, onboarding, benefits, and insurance.

While BPOs charge for specific services, PEOs often offer a more comprehensive bundled arrangement, offering multiple HR solutions for a combined fee.

PEOs do not supply labor to worksites or other staffing services, nor do they take over the hiring and management of your employees. PEOs are defined by their service agreements, so there can be some differences between PEOs depending on the extent to which they provide HR and employee relations support services for a business's existing workforce. In short, PEOs offer outsourced HR services.

Read more about the HR services offered by PEOs.

No. PEOs provide advanced HR tools, compliance support, and employee self-service features while allowing you to retain control over key business and personnel decisions.

No. You remain in charge of hiring, promotions, and terminations. PEOs assist with administrative tasks, allowing you to focus on these essential decisions.

Yes. PEOs can save businesses money by streamlining HR processes and offering competitive benefits, reducing costs and compliance risks.

Yes. Accredited PEOs, like Paychex HR PEO, meet high standards of ethical, operational, and financial reliability through organizations such as ESAC.

No. PEOs can offer more comprehensive and competitive benefits through collective buying power, including medical, dental, vision, life insurance, retirement plans, disability benefits, voluntary benefits, employee assistance programs (EAP), and other perks.

No. PEOs can enhance your HR team's efficiency by helping to support administrative burdens, allowing your HR staff to focus on employee engagement and development.

No. Not all PEOs are alike. Paychex PEO offers customized solutions, specialized support teams, and transparent billing, tailored to meet your specific business needs.

Any business can find value in a PEO relationship. The PEO industry’s 208,000 clients represent 17 percent of all employers with 10 to 99 employees.^{1 2}

PEO clients include various types of businesses from various industries, including professional services firms, skilled trades companies, and high-tech organizations.

PEOs provide full-service HR outsourcing — assisting with payroll, benefits, training, and compliance guidance. HR software simply gives you a platform to manage these tasks yourself.

Payroll companies help you run payroll and calculate taxes, but you remain responsible for all obligations. PEOs take on payroll processing responsibilities, handle tax filing and remittance, and provide comprehensive support including compliance, workplace safety, workers' compensation, and HR administration.