• Startup
  • Payroll/Taxes
  • Human Resources
  • Employee Benefits
  • Business Insurance
  • Compliance
  • Marketing
  • Funding
  • Accounting
  • Management
  • Finance
  • Payment Processing
  • Taxes
  • Overtime
  • Outsourcing
  • Time & Attendance
  • Analytics
  • PEO
  • Outsourcing
  • HCM
  • Hiring
  • Onboarding
  • Recruiting
  • Retirement
  • Group Health
  • Individual Insurance
  • Health Care
  • Employment Law
  • Tax Reform

What is a PEO? A Small Business Guide to Professional Employer Organizations

Human Resources

As a small business owner, you may think that effective employee management and offering an impressive benefits package to help you retain top talent seem beyond your grasp, particularly when other areas of the business require your time and attention. That’s why outsourcing your HR function to a PEO may open a wider range of benefits to your team, improve recruiting and employee retention, and free up time for your management team to focus on running your business.

What is a PEO and How Do They Work?

PEO stands for professional employer organization. A PEO allows companies to outsource key human resources functions like payroll, benefits, training and guidance to assist small and mid-sized companies with maintaining compliance with federal and state labor and employment laws. Doing so allows business owners and their teams to put the majority of their time and focus on the business. To shed light on the multiple ways a PEO can help your business, it's important to familiarize yourself with the many aspects of business operations that a PEO can cover.

Do PEOs Provide Employee Benefits?

In a PEO relationship, a company’s employees can gain access to benefits normally available only to Fortune 500 companies. A PEO can provide employee benefits such as health insurance, employee assistance and discount programs, and 401(k) plans, and group health insurance through their negotiating position gained from having a large business or employee count. The PEO also provides online access to employees' payroll reports, pay stubs, and W-2 forms.

Companies that partner with a PEO usually experience lower group insurance costs, workers' compensation discounts, and, in most cases, a lower state unemployment insurance (SUI) rate because their employees are listed under the PEO's federal ID number for payroll purposes.

But the aid of a PEO is not limited to employee benefits packages. From assistance with recruiting and hiring to consulting on employee management issues, a PEO can provide businesses both substantial administrative relief and valuable resources. The PEO also provides training and guidance to assist companies with maintaining compliance with federal and state labor and employment laws.

Benefits of working with a PEO

While it may be difficult to trust valuable aspects of your business operations to an external organization, business owners across the country are realizing the myriad benefits attained from working with a PEO.

PEO benefits include:

  • Time savings: Clients find that having the PEO absorb the time commitment associated with general HR tasks allows them to focus on core business operations.
  • Cost savings: The buying power that a PEO can offer regarding workers' compensation and health insurance are generally beyond what's available to small businesses.
  • Peace of mind: Business owners feel at ease knowing they are not alone at any point throughout the employment life cycle.
  • Better benefit offerings for employees: Companies looking to offer competitive benefits packages gain access to Fortune 500-level benefits and professional administrative services.
  • Improved tracking and administrative functions: The PEO will conduct an in-depth HR assessment designed to minimize risk and maximize growth and development opportunities.

Jillienne Allgäuer, SPHR, SHRM-SCP, Paychex PEO HR consultant, adds some additional benefits for business owners to consider: "A PEO offers administrative services that span the entire employment life cycle. From assistance with recruiting and hiring, employee handbook development, cultivating an attractive benefits package, and ongoing management training, to consulting on employee coaching and dismissal processes and handling unemployment claims, a PEO can provide businesses both substantial administrative relief and valuable resources."

New research conducted by the National Association of Professional Employer Organizations (NAPEO) reiterated the benefits of a PEO. In 2018, NAPEO reported that the biggest reason more small businesses didn't partner with a PEO was simply a lack of awareness. If more small businesses were fully informed on the benefits associated with partnering with a PEO, they would follow suit. NAPEO further reports that current PEO users are significantly more likely to report business growth last year compared to non-users, 82 percent vs. 66 percent, respectively.

The research also found that businesses working with a PEO were 

  • 50 percent less likely to fail

  • grew 9 percent faster than average

Partnering with a PEO minimizes risk, increases confidence and organizational aptitude, and positions business owners for long-term growth.

What Should I Look for When Choosing a PEO?

While there are many considerations when choosing a quality PEO, start by looking for the following:

  • Professional certifications and credentials
  • Expertise in HR matters for your state and industry
  • A range of quality employee benefits offerings
  • Professional references from previous or current business partners
  • A detailed yet easy-to-understand agreement that specifies how the PEO will assist your organization

Investing some time now can reap significant rewards for your small business moving forward. Learn more about today's leading PEOs available on the market today.

Professional employer organization (PEO) services are sold and provided by Paychex Business Solutions, LLC (PBS) and its affiliates, which are registered and licensed to sell and provide PEO services, including in Florida. PBS FL license numbers are Paychex Business Solutions, LLC, GL7, PBS of Central Florida, LLC, GM14, PBS of America, LLC, GM46, Paychex PEO I, LLC, GM455, Paychex PEO II, LLC, GM456, Paychex PEO III, LLC, GL193, Paychex PEO IV, LLC, GM519 and Paychex PEO V, LLC, GM 522.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.