A PEO, or professional employer organization, is a type of full-service human resource outsourcing known as co-employment. In this arrangement, the PEO performs various employee administration tasks, such as payroll and benefits administration, on behalf of a business. Some PEOs also have strategic services, but no two are exactly alike, so it's important to research providers and compare their capabilities.
Why use a PEO?
With the expert, strategic guidance of a PEO, you may be able to grow your business and have peace of mind that you're more protected while doing so. PEOs typically help with:
- Payroll and tax filing
PEOs process payroll and in some cases, can pay local, state and federal employment taxes. Many also integrate payroll with time and attendance, which helps reduce duplicate data entry and errors.
- Benefits administration
A co-employment arrangement often comes with access to high-quality, cost-effective health insurance, as well as dental care, retirement benefits and other employee perks. The PEO will usually handle the employee enrollment for these benefits and process claims for you.
PEOs typically have compliance experts who can help you protect your business from fines and penalties. Their area of expertise may include payroll tax law and reporting requirements, unemployment insurance, workers’ compensation, hiring and HR compliance.
- Risk and safety
In addition to workers' compensation insurance, PEOs sometimes provide safety audits and training programs to help you limit claims. They may also assist with Occupational Safety and Health Administration (OSHA) inspections.
- Human resource support
In many cases, a PEO has HR professionals who provide HR services and support. If you already have an in-house HR person or team, the PEO partners with them both strategically and administratively.
- Talent management
Some PEOs offer end-to-end talent services, like recruiting and strategic hiring, employee training and engagement, and performance management.
PEO for small business
Small and midsized business owners often turn to PEOs for support with critical and strategic HR management so they can focus on their core competencies, including creating, enhancing and selling the products and services that made their names. Learn more about how a PEO can benefit small businesses.
Help reduce your employer liability
By partnering with a PEO, you may be able to mitigate some of the liabilities associated with being an employer. For instance, ADP TotalSource® provides unparalleled support through unforeseen circumstances and offers a legal defense benefit in the event you follow our guidance, but still get sued by an employee (subject to terms and conditions).
Go beyond HR administration
Some PEOs offer data analytics and benchmarking services that provide insights into your workforce. With the right data and HR expertise, you may be able to better answer critical questions, such as:
- How much do you pay certain employees and how does it compare to the market?
- Which skill sets best match an available job opening?
- Which departments need more employees?
- How does your turnover compare to peer companies?
Information like this can help you realign your business practices to improve employee retention and reduce turnover.
How PEOs work
In a co-employment relationship, both the business and the PEO share certain employer responsibilities. The PEO typically processes payroll, withholds and pays payroll taxes, maintains workers’ compensation coverage, administers employee benefits and provides human resources guidance. This leaves you to manage regular business operations, like providing products and services to customers, and making decisions about which employees to hire or terminate.
How to choose a professional employer organization
To choose the right PEO for your business, shop the co-employment market just as you would for any other strategic business need. Look for PEOs that:
- Have a strong track record and fiscal stability
- Can meet the unique needs of your business and employees
- Supply references from other clients in your particular industry
- Provide comprehensive support and compliance expertise
- Offer services and coverage where you do business.
- Are accredited by ESAC or certified by the IRS
What kinds of businesses benefit from PEOs?
Small and midsized businesses tend to be in co-employment arrangements the most, but larger organizations can also benefit. In fact, PEOs are a good fit for almost all industries, including, but not limited to:
- Real estate and property management
- Computer services and technology
- Securities brokers and dealers
- Engineering services
- Health services
- Legal services
- Management consulting services
- Business services
- Accounting, auditing and bookkeeping
- Plumbing, HVAC, electrical and other trades
What does it not do?
Although a PEO may handle HR administration, that doesn't mean you cede ownership or complete control of your organization to them. A PEO will not:
- Make decisions regarding your business independently
- Help with marketing, sales or product distribution
- Dictate pay rates, hours or schedules
What do they cost?
PEOs typically charge by a percentage of payroll, but some base their fee on the number of employees you have. When shopping for a PEO, you'll often have to provide information about your workforce, as well as your existing or desired benefits to get a price estimate.
Consider the following when evaluating estimated PEO costs:
- Reputable providers usually include a cost analysis so you can see how your payments will be allocated to payroll, benefits, workers’ compensation, etc.
- You may pay more for in-depth services, like data insights or talent management, but these features could improve your return on investment.
- Your time is valuable. Managing HR on your own may take your focus away from business activities that generate revenue.
Types of PEOs
Although there is only one type of PEO, known as co-employment, there remains some confusion among employers about the business model. This misconception is largely because employee leasing has been incorrectly used to describe PEOs and their services over the years. In fact, some state legislatures continue to refer to PEOs as a type of leasing in their statutes.
PEOs and other categories of outsourcing
PEOs are a type of HR outsourcing, but they're also distinctly unique because of the co-employment arrangement. Other outsourcing services that are similar to or sometimes mistaken for PEOs include:
- Employee leasing company
- Staff leasing company
- Human resources outsourcing organization (HRO)
- Administrative services organization (ASO)
- Managed payroll
Certified PEOs (CPEOs) have met the rigorous financial, legal and reporting requirements of the IRS. Working with one may afford you certain financial protections and tax benefits. For example, a CPEO can pay federal taxes on your behalf and you may not be subject to double taxation, as might be the case if you partnered with a non-certified PEO. Only a small percentage of PEOs are certified by the IRS.
What does working with a CPEO help ensure?
- Financial guarantee
The certification program requires a CPEO to post a bond each year guaranteeing payment of its federal employment tax liabilities.
- Tax restart elimination
Certification eliminates the wage-base “restart” for certain federal payroll tax purposes if you join or leave a CPEO relationship midyear.
PEOs must renew their certification periodically, proving that they consistently meet fiduciary standards and other requirements.
ESAC accredited professional employer organizations
In addition to IRS certification, PEOs may be recognized by the Employer Services Assurance Corporation (ESAC). Those with ESAC accreditation have demonstrated financial stability, ethical business conduct and adherence to operational standards and regulatory requirements.
See what other employers are asking about PEOs:
Who is the employer in a PEO?
In a co-employment arrangement, the PEO is the employer of record for tax purposes, but the client business maintains full authority of its workforce.
What is the benefit of a PEO?
A PEO partners with you so that you don’t have to navigate HR, risk and compliance on your own, thereby helping you protect and grow your business.
What does PEO mean?
PEO means professional employer organization. They serve to help small and midsized businesses manage certain HR responsibilities and risks through co-employment.
How does a PEO make money?
PEOs make money by charging a fee for their role in co-employment. This cost usually depends on the total number of employees you have and the breadth of services you purchase. For example, PEOs that only handle basic HR administration, like payroll and benefits, may be less expensive than those that offer a full set of services.
What is the difference between a PEO and a staffing company?
Staffing companies lease employees to other businesses and remain the sole employer for those workers. PEOs, on the other hand, don’t supply a workforce, but assume certain responsibilities that make them co-employers with their partner organizations.
Does partnering with a PEO affect my company culture?
A co-employment relationship will not necessarily affect your organization's culture unless that is one of your desired goals. In which case, some PEOs can recommend strategies to shape your culture and brand in a way that represents how you want your business to be perceived by your employees today and in the future.
By partnering with a PEO, do I also become a co-employer of other companies’ employees?
No contractual relationship is ever created between all of a PEO's clients. Therefore, you are not responsible for any employees other than your own.
What is the difference between a PEO and HR outsourcing?
In a co-employment relationship, you share certain employer responsibilities with the PEO that cannot be achieved through typical HR outsourcing. For example, a PEO usually provides access to robust health insurance and other perks for employees, while an HR outsourcing firm may simply help administer your existing benefits, HR or payroll. ADP TotalSource also offers a legal defense benefit if you follow our guidance and an employee sues your business (subject to certain terms and conditions).
This article provides practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.