What Is a PEO? A Guide to Professional Employer Organizations
- Human Resources
6 min. Read
Last Updated: 11/11/2022
Table of Contents
What is a PEO? Use this guide to learn more about how PEOs work, why companies may use them, and what makes PEOs different from other services.
As a business owner, you may think that comprehensive HR solutions and impressive benefits packages seem beyond your grasp, particularly when other areas of the business require your time and attention. That's why understanding what a professional employer organization can offer and the potential benefits of using one to outsource your HR functions may open a wider range of benefits to your team.
What Is a PEO and What Does It Stand For?
Businesses looking for HR help may wonder: What are PEO services? PEO stands for a professional employer organization, and they allow companies to outsource certain key human resource administrative functions like payroll, benefits, workers' compensation, and training. They can also gain guidance to assist with maintaining compliance with federal and state employment laws. Working with PEO services from Paychex can help you as a business owner and your management teams focus on the business.
How Does a PEO Work?
With a PEO, the client company and the PEO enter into a service contract typically known as a client service agreement (CSA). The CSA addresses the relationship between the client employer and the PEO and generally includes the following:
- The PEO performs certain administrative services while the client remains the worksite employer. The PEO can offer support to a business's in-house HR staff and teams.
- The client company maintains the responsibility for hiring and managing the employees and for handling all other non-employee related aspects of the business operations (e.g., sales, marketing, customer service).
- The professional employer organization is responsible for processing employee wages, benefits, and withholdings and for remitting and reporting taxes to any applicable state and federal authorities for the duration of the CSA.
- The PEO helps the client company maintain compliance by keeping track of complex employment laws and offering risk management strategies. This may include payroll tax laws and reporting requirements, workers' compensation, and employee relations issues.
- An HR professional may work with the client company to help the organization proactively address key areas of risk, helping ease concerns around employee relations and accommodations, terminations, and other employee-workplace issues.
- Certain tasks, such as development of an employee handbook, may be shared between the client company and the PEO as outlined in the CSA.
- PEOs can assist with many human resources functions, allowing businesses and internal HR teams to focus on company culture and employee engagement.
- The client company obtains access to the PEO's pool of benefits options, as well as support for administering them.
Why Do Companies Use a PEO?
While it may be difficult to trust certain aspects of your business operations to an external organization, business owners across the country are realizing the benefits of a PEO. So why use a PEO? For time- and energy-strapped employers, working with a professional employer organization can free up a considerable amount of company resources that would otherwise be spent on payroll and other required, but time-consuming tasks.
Paychex client HR business partner Jillienne Allgäuer, SPHR, SHRM-SCP, outlines some of the most important PEO benefits for business owners to consider: "A PEO can offer support with administrative services that span the entire employment life cycle. From assisting 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."
Businesses can expect many valuable PEO advantages, including:
- Time savings: Clients may find that having the PEO absorb the time commitment associated with general HR tasks allows them to focus on other core business operations.
- Cost savings: The buying power that a PEO can offer regarding workers' compensation and health insurance is generally more affordable than what's available to small businesses on their own.
- Peace of mind: Business owners may 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 generally conduct an in-depth HR assessment designed to minimize risk and maximize growth and development opportunities.
- Business growth: According to NAPEO "Businesses in a PEO arrangement grow 7-9 percent faster, have 10-14 percent lower turnover, and are 50 percent less likely to go out of business."
- Help with recruiting and retention: Recruiting, engaging, and retaining staff can be time-consuming and expensive. A PEO can help you maximize the investment in your people by assisting in the recruiting and hiring process, helping communicate policies via employee handbooks, providing training programs, and offering guidance throughout the employee life cycle.
- Employment-related compliance help: Having support and guidance from a PEO can assist business owners with their compliance efforts as they navigate increasingly complex regulations and demanding business processes.
Differences Between PEO and Other Services
A PEO is one type of HR outsourcing. Other options are also available, all of which can help you manage your business more effectively. When evaluating your options or familiarizing yourself with PEO terminology, it's important to know the differences between PEO vs. HR software, PEO vs. payroll company, PEO vs. ASO and PEO vs. HRO.
PEO vs. HR Software
How does support from a PEO differ from solely leveraging HR technology? A PEO allows your company to outsource key HR functions such as payroll, benefits and employee training, as well as providing guidance for maintaining compliance with federal and state employment laws. Software only provides a platform for you to manage these activities on your own.
PEO vs. Payroll Company
When it comes to payroll, PEOs and payroll services both aim to streamline the process. So, what is the difference between a PEO and a payroll company? Essentially, they handle the payroll process in different ways. Depending on the provider you use, outsourcing to a payroll company means that you receive assistance with running payroll, as well as help calculating, preparing, and remitting payroll taxes and returns to government agencies. However, the business is ultimately responsible for meeting all of its payroll and tax obligations, even if it uses a third party. A PEO offers a more comprehensive solution. The PEO assumes full responsibility for processing employee wages, benefits, and withholdings, as well as remitting and reporting taxes to any applicable state and federal authorities on behalf of the client company. Additionally, PEOs go beyond payroll and offer support in other areas such as employee benefits, compliance, workplace safety, workers’ compensation, and HR administration.
PEO vs. ASO
An administrative services organization (ASO) is a model where certain HR-related tasks are outsourced to a third party, but the client completely retains administrative employer status. This is different than a PEO, which acts as the administrator for certain administrative tasks and the client company acts as the worksite employer. With a PEO service, employee wages are reported with the PEO's federal employer identification number (EIN) for federal and state withholding purposes, as well as in some states for unemployment insurance reporting.
PEO vs. HRO
Human resources outsourcing, or HRO, provides businesses with the flexibility to outsource a few or many HR tasks to a third party. This can include services such as hiring and recruiting assistance, expert guidance from an HR professional, or any combination of solutions. Ultimately, HRO provides customizable and scalable HR options for businesses. And unlike PEOs, choosing an HRO means a business outsources certain HR tasks based on business needs, while also maintaining full administrative employer status.
How To Choose a PEO
Although PEOs offer multiple cost and time saving strategies, working with a PEO may not be right for every business. Even after determining that a PEO can benefit your company, it's important to select the PEO that offers the right combination of add-on services, range of benefits, and flexibility in service agreements. The PEO's stability and reputation in the industry may also be important factors. Since a PEO can have a significant impact on the experience of your employees, consider these best practices to help choose the right PEO that can deliver on your most important needs.
Examine Accreditation, Auditing, and Performance
PEOs are a highly regulated industry, given that they handle sensitive employee data, complex documentation and tax forms, and a large volume of cash flow. Your first line of due diligence when choosing a PEO is to ensure it is as well-run as possible. You might consider the following to evaluate a PEO:
- Are they a member of the National Association of Professional Employer Organizations (NAPEO)?
- Are the PEO's financial statements and operations verified by an outside source? Wherever possible, ensure the PEO's financials are reviewed and approved by an objective auditor.
Get Compliance Support
Failing to comply with all applicable state and federal tax and employment laws can have time-consuming and costly consequences for your business. That's why working with a PEO provider that has compliance expertise is integral. A PEO should have the knowledge to help you with your compliance concerns and the ability to support you as you develop systems and processes that make compliance easier, from monitoring changes to meeting critical compliance deadlines.
Gain Access to a Range of Benefits
Another important area to consider is what benefits the PEO offers. A major reason companies choose to work with PEOs is to obtain access to a larger pool of benefits options. Take the time to learn what programs the PEO offers, how those programs compare with your current offerings, and what the costs will be. Consider any value-add services offered by the PEO, such as pet insurance or employee assistance programs, that can help you recruit or retain high-quality employees.
Evaluate Client and Professional References
Ideally, you want to work with a PEO provider that has an established track record of working with businesses like yours. Factors to consider could include your industry, company size, or specific goals and business challenges. Look for case studies that can demonstrate how they'll solve your challenges — then speak to customers, references, and business partners to get an outside perspective on their performance. By getting another opinion, you'll be able to better verify the information you've gathered on your own and have a better understanding of what to expect before entering into a PEO services agreement.
Do PEOs Provide Employee Benefits?
A company's employees may gain access to benefits normally available only to large companies when they leverage a PEO. This can include health insurance, disability insurance, employee assistance and discount programs, 401(k) plans, and others. Beyond these, the PEO also provides online access to employees' payroll reports, pay stubs, and W-2 forms without requiring the client company to purchase and set up the infrastructure to provide these services to its employees.
Companies that work with a PEO usually experience lower group health insurance costs, since PEOs can negotiate excellent rates with insurance companies with its larger employee count. In certain states, PEOs can offer a lower state unemployment insurance (SUI) rate because its employees are listed under the PEO's ID number for payroll purposes.
How Many Businesses Use a PEO?
PEOs in the United States provide services to 173,000 small and mid-sized businesses, employing 4 million people, according to a 2021 NAPEO survey. NAPEO also reported that the typical PEO has 19 worksite employees per client employer.
How Does a PEO Help Control HR Costs?
A PEO's economy of scale helps you to lower employment costs and increase the bottom line. You can maintain a simple in-house HR infrastructure or none at all by relying on the PEO, thereby reducing hiring overhead. A PEO provides critical assistance with employer compliance, as well as time savings, by handling routine and redundant activities.
How Much Does a PEO Cost?
The PEO cost is determined by several factors, including the size of the business, which 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.
To evaluate expected PEO costs, calculate the yearly expenses using both pricing models. Many PEOs are willing to be flexible on pricing arrangements when starting a new contract, so it can be helpful to know which option makes the most financial sense for your business.
Free Up Time and Resources With a PEO
Choosing the right professional employer organization can take your human resources efforts and responsibilities to the next level — resulting in increased retention, better benefits, and significant cost savings for your business.
Learn more about Paychex PEO Services, which provide various options to help you meet your business needs. This investment can reap significant rewards for your small business moving forward and free you up to focus on continued business growth in the future.