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

What is a PEO? Use this guide to learn more about what a PEO is, how PEOs work, why companies may use them, and the different types of PEOs.

As a business owner, you may think that comprehensive HR solutions and impressive benefits packages seem beyond your grasp, mainly when other business areas require your time and attention. That's why it may be helpful to understand what a professional employer organization (PEO) can offer your business and the potential benefits you might be able to expect when outsourcing HR administrative tasks.

What Is a PEO and What Does It Stand For?

A PEO or “professional employer organization” supports their clients’ HR, payroll, benefits, risk management, and compliance. Under certain circumstances you may also hear this referred to as co-employment. In a co-employment relationship, employer and PEO responsibilities will be defined in a service agreement.

Business leaders looking for HR help can outsource specific HR administrative tasks like payroll, benefits, workers' compensation, and employee training when working with a PEO to help save time and money. You can also gain guidance to help maintain your compliance with federal and state employment laws and other specialized support for time-consuming tasks such as 401(k) plan administration and health, dental, and life insurance so you and your management team can stay focused on the business and your customers.

Are There Different Types of PEOs?

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.

How Does a PEO Work?

In this type of arrangement, a client company signs a service agreement with the PEO, which generally includes the following:

• The PEO performs certain HR administrative services while the client remains the worksite employer. The PEO can help support a client's in-house HR staff and teams.
• The client company is responsible for hiring and managing their employees and handling non-employee-related business operations (e.g., sales, marketing, customer service).
• For the duration of the service agreement, the PEO is responsible for processing employee wages, benefits, and withholdings and for remitting and reporting taxes to any applicable state and federal authorities.
• 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 works with the client company to help the organization address, easing concerns about employee relations and accommodations, terminations, and other employee-workplace issues.
• Specific tasks, such as developing an employee handbook, may be shared between the client company and the PEO as outlined in the service agreement.
• PEOs can assist with many HR functions, allowing businesses and internal HR teams to focus on company culture, client satisfaction, and employee engagement.
• The client company has access to the PEO's Fortune 500-level benefits options and support for administering them.

What Doesn't a PEO Do?

In contrast to leasing or staffing companies, which typically supply new workers on a temporary or project-specific basis, a PEO takes a different approach. A PEO doesn't engage in recruiting or hiring employees for their clients.

PEOs do not:

• Supply labor to worksites. PEOs provide services and benefits to the employer and may also provide services directly to the client’s employees.
• Control your business or your employees; they provide access to HR advice and guidance to lean on when you need assistance.
• Replace your internal HR staff if you already have resources in place. A PEO can provide specialized and supplementary HR guidance from a team of subject matter experts for regulatory compliance, safety, benefits, risk management, and other HR and employee-related topics.

PEOs are sometimes mistaken for other outsourcing service organizations that include similar or related services, such as:

• Staff leasing company
• Employee leasing company
• Managed payroll
• Human resources outsourcing organization (HRO)
• Administrative services only (ASO)

Busting Myths About PEOs

There are several misconceptions about professional employer organizations (PEOs) that can create confusion for business leaders considering this model. However, the truth is that PEOs offer significant advantages while allowing businesses to maintain control over critical HR decisions. Let’s explore and debunk some common myths about PEOs:

Why Do Companies Use a PEO?

While it may be challenging 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 PEO can free up a considerable amount of company resources that would otherwise be spent on administering payroll and other required, time-consuming tasks.

Paychex client and HR business partner Jillienne Allgäuer, SPHR, SHRM-SCP, outlines some of the most critical PEO benefits for business owners: "A PEO can offer support with administrative services spanning 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 most of the time commitment associated with general HR tasks allows them to focus on other core business operations.
• Cost savings: A PEO's buying power regarding workers' compensation and health insurance is generally greater, which helps to make these purchases more affordable than what's available to small businesses.
• 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. Additionally, some PEOs may provide comprehensive benefits packages that encompass all areas of employee wellness: physical, mental, and financial wellness among them.
• Improved tracking and administrative functions: The PEO typically conducts an in-depth HR assessment to help minimize risk and maximize growth and development opportunities.
• Business growth: According to the National Association of Professional Employer Organizations (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 an employee handbook, 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.
• Employee morale and satisfaction: PEOs provide access to competitive benefits, boosting job satisfaction and fostering a positive work environment, leading to higher morale and productivity.
• Improved onboarding and training: PEOs streamline onboarding through efficient processes and provide ongoing training, setting employees up for success and boosting retention.
• Access to advanced technology: PEOs utilize advanced HR platforms that automate tasks like payroll and benefits management, improving efficiency and offering employees self-service options.

What Types of Companies Use and Benefit From PEOs?

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}

Increasingly larger businesses are also finding benefits with a PEO arrangement because PEOs offer robust web-based HR technologies and expertise in HR management. PEOs can work in conjunction with their clients’ existing HR departments.

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

Differences Between PEO and Other Services

A PEO is one type of HR outsourcing. Other options are available, which can also help you manage your business more effectively. When evaluating your options or familiarizing yourself with PEO terminology, knowing the differences between a PEO vs. HR software and PEO vs. payroll companies is essential.

PEO vs. HR Software

A PEO differs significantly from solely leveraging HR technology. A PEO allows your company to outsource HR functions such as payroll, benefits, employee training, and access guidance to help your company comply with federal and state employment laws. Software only provides a platform for you to manage these activities independently.

PEO vs. Payroll Company

When it comes to payroll, PEOs and payroll services companies both aim to streamline the process, but there are significant differences in how the process is executed. Depending on your provider, outsourcing to a payroll company means you receive assistance running payroll and help calculating, preparing, and remitting payroll taxes and returns to government agencies. However, the business is ultimately responsible for meeting its payroll and tax obligations, even using a third party.

A PEO offers a more comprehensive solution. The PEO generally assumes responsibility for processing employee wages under the terms of the service agreement, as well as benefits, withholdings, and 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 regulatory compliance, workplace safety, workers' compensation, and HR administration.

PEOs vs. Traditional HR Models

When choosing between a professional employer organization (PEO) and a traditional HR model, businesses must weigh factors like cost, resource allocation, and strategic needs. Both approaches offer distinct benefits depending on the company's size, industry, and goals. Below is a comparison of key differences to help figure out which option is best for your business.

• Cost: PEOs offer cost savings through pooled benefits and reduced administrative burden, while traditional HR models require ongoing investment in HR staff and software.
• Resource Allocation: PEOs help handle day-to-day HR admin tasks like payroll, allowing businesses to focus on growth. Traditional HR models require businesses to manage these tasks internally.
• Compliance: PEOs help address changes in employment laws and business impacts. Traditional HR models require businesses to stay current on regulations, increasing administrative workload.
• Employee Benefits: PEOs can offer competitive benefits packages through group rates, which may be more challenging for smaller businesses to offer independently.
• Control: Traditional HR models offer more direct control over HR policies and processes.
• Scalability: PEOs are ideal for small and mid-sized businesses looking to scale quickly without building an HR department. Traditional HR models are better suited for larger companies with established HR teams.

Future Trends in PEO Services

As the business landscape evolves, PEOs are adapting to meet new challenges, leveraging technology, and addressing the needs of an increasingly global and remote workforce. Below are some key trends expected to shape the future of PEO services:

• AI-Supported HR Analytics: PEOs will likely use AI to support real-time insights into employee performance, turnover, and engagement, helping businesses make data-driven decisions about hiring and retention.
• Personalized Employee Engagement Programs: Future PEOs may offer tailored wellness, benefits, and development programs based on individual employee needs, improving satisfaction and loyalty.
• Expanded Remote Workforce Support: PEOs will assist businesses in managing compliance and HR needs for global remote teams, ensuring adherence to local laws and providing consistent benefits worldwide.
• Advanced Compliance Management Tools: Automated compliance systems will help businesses stay updated with changing regulations, reducing legal risks and administrative burdens.
• AI-Powered Learning and Development: PEOs may introduce AI-driven training programs that personalize employee learning paths, enhancing skill development and career growth.
• Integration with Emerging Technologies: PEOs could integrate blockchain for secure data, virtual reality for training, and predictive analytics to better anticipate HR needs and improve efficiency.
• Focus on Employee Wellness and Mental Health: Expect to see more comprehensive wellness programs, including mental health support and personalized wellness plans, to foster a healthier, more engaged workforce.

How To Choose a PEO

Although PEOs offer multiple cost- and time-saving strategies, working with a PEO may not suit every business. Even after determining that a PEO can benefit your company, selecting the PEO that offers the right combination of add-on services, a range of benefits, flexibility, stability, and reputation remains essential for any employer. Learn more about choosing a PEO.