What Is A Professional Employer Organization (PEO)?

Professional Employer Organization (PEO)

A Professional Employer Organization (PEO) is a firm that provides comprehensive HR solutions for small and medium-sized businesses. PEOs enter into a co-employment relationship with their client companies, taking on many of the administrative and HR-related responsibilities, while allowing the client companies to maintain day-to-day control over their employees' work.


A Professional Employer Organization can be defined as a company that provides comprehensive human resources services through a co-employment model. In this arrangement, the PEO becomes the employer of record for tax purposes and takes on many of the responsibilities and liabilities associated with being an employer, while the client company continues to direct the employees' day-to-day activities.

Key Services Provided by PEOs

PEOs typically offer a wide range of HR-related services, including:

  1. Payroll Processing: Managing employee pay, including tax withholdings and direct deposits.
  2. Benefits Administration: Offering and managing employee benefits, often at rates typically available only to larger companies.
  3. HR Compliance: Ensuring compliance with federal, state, and local employment laws and regulations.
  4. Risk Management: Providing workers' compensation coverage and claims management.
  5. Talent Management: Assisting with recruitment, onboarding, and employee development.
  6. Performance Management: Offering tools and support for employee performance evaluations.
  7. Employee Relations: Handling employee disputes and providing HR guidance.
  8. Training and Development: Offering access to training programs and resources.

The Co-Employment Model

The core of the PEO concept is the co-employment relationship:

Shared Responsibilities: The PEO becomes the employer of record for tax and insurance purposes, while the client company maintains control over the workforce and business operations.

Employee Leasing: Technically, the PEO "leases" employees back to the client company, though the employees continue to work at and for the client company.

Contractual Agreement: The relationship between the PEO, the client company, and the employees is governed by a contract that outlines the responsibilities of each party.

Benefits of Using a PEO

Partnering with a PEO can offer several advantages to businesses:

  1. Cost Savings: PEOs can often secure better rates on benefits and insurance due to their larger employee pool.
  2. Time Savings: By handling HR tasks, PEOs free up business owners to focus on core operations.
  3. Compliance Management: PEOs help ensure businesses stay compliant with complex employment laws and regulations.
  4. Access to Expertise: Small businesses gain access to HR professionals and resources typically available only to larger companies.
  5. Improved Employee Benefits: PEOs can offer a wider range of benefits, helping businesses attract and retain talent.
  6. Reduced Legal Risk: PEOs share some of the employer-related legal liabilities.
  7. Scalability: PEOs can help businesses manage growth more easily by handling increased HR demands.

Challenges and Considerations

While PEOs offer many benefits, there are also some potential drawbacks to consider:

Loss of Control: Some companies may feel they have less control over certain HR functions.

Employee Perceptions: Employees might be confused about their employment status or feel less connected to the company.

Cost: While often cost-effective, PEO services do come with a fee that may not be suitable for all businesses.

Integration Issues: There may be challenges in integrating PEO systems with existing company processes.

Dependence: Companies may become reliant on the PEO for critical functions.

Who Should Consider Using a PEO?

PEOs can be particularly beneficial for:

  1. Small to Medium-Sized Businesses: Companies that want to offer big-company benefits but lack the resources to manage complex HR functions.
  2. Startups: New businesses that need to quickly establish HR infrastructure.
  3. Companies in High-Risk Industries: Businesses that can benefit from improved risk management and workers' compensation coverage.
  4. Companies Expanding into New States or Countries: PEOs can help navigate different employment laws and regulations.
  5. Businesses Struggling with HR Compliance: Companies that need expert help to ensure they're meeting all legal requirements.

The PEO Industry

The PEO industry has seen significant growth and evolution:

Market Size: The industry has been growing steadily, with millions of worksite employees now covered by PEOs in the United States.

Regulation: Many states have specific laws regulating PEOs, and some require licensing or registration.

Certification: The IRS offers a voluntary certification program for PEOs, known as Certified Professional Employer Organizations (CPEOs).

Industry Associations: Organizations like the National Association of Professional Employer Organizations (NAPEO) provide industry standards and advocacy.

How to Choose a PEO

When selecting a PEO, businesses should consider:

  1. Accreditation: Look for PEOs accredited by the Employer Services Assurance Corporation (ESAC) or certified by the IRS.
  2. Service Offerings: Ensure the PEO provides all the services your business needs.
  3. Technology: Evaluate the PEO's technology platform for compatibility and user-friendliness.
  4. Industry Experience: Consider PEOs with experience in your specific industry.
  5. References: Ask for and check references from current clients.
  6. Financial Stability: Verify the PEO's financial health to ensure long-term stability.
  7. Contract Terms: Carefully review the service agreement, including pricing structure and termination clauses.

Alternatives to PEOs

For businesses considering HR outsourcing options, alternatives to PEOs include:

  1. Administrative Services Organization (ASO): Provides HR services without the co-employment relationship.
  2. Human Resource Outsourcing (HRO): Outsources specific HR functions rather than comprehensive HR management.
  3. In-House HR Department: Building and maintaining an internal HR team.
  4. HR Consulting Firms: Engaging consultants for specific HR projects or ongoing support.
  5. Payroll Service Providers: Outsourcing payroll processing while keeping other HR functions in-house.

Future Trends in the PEO Industry

The PEO industry continues to evolve, with several emerging trends:

  1. Increased Technology Integration: Greater use of AI and machine learning in HR processes.
  2. Focus on Employee Experience: PEOs are offering more services aimed at improving overall employee satisfaction and engagement.
  3. Expansion of Services: Many PEOs are broadening their offerings to include services like cybersecurity and data protection.
  4. Global PEO Services: Growth in international PEO services to support businesses expanding globally.
  5. Specialization: Some PEOs are focusing on specific industries or types of employees (e.g., remote workers).
  6. Enhanced Analytics: Providing more sophisticated data analysis to help clients make informed HR decisions.
  7. Emphasis on Compliance: Increasing focus on helping businesses navigate rapidly changing employment laws and regulations.