What is PEO in business?

A Professional Employer Organization (PEO) handles HR, payroll, and compliance tasks for businesses, enhancing efficiency and compliance. PEOs support companies by managing administrative processes, offering benefits, and ensuring legal compliance.

By Douglas Wade, Attorney

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Table of Contents

1. Introduction

2. What Does PEO Stand for in Business?

3. Are There Different Types of PEOs?

4. What Does a PEO Do?

5. What Doesn’t a PEO Do?

6. What Kind of Companies Use a PEO

7. The Benefit of Using a PEO

8. How to Choose a PEO

9. Frequently Asked Questions About PEOs in Business

Introduction

There is a lot involved in taking care of your employees to keep them happy and healthy. There is even more involved in complying with state and federal employment laws in the US. If you cannot keep up with these requirements by yourself, you are not alone. Most businesses either hire a HR department or use a PEO to ensure their employees are well taken care of, and they are compliant with the applicable employment laws. Hiring an internal HR department while not exactly simple is self-explanatory. In this article, we will explain what is PEO in business.

What Does PEO Stand for in Business?

PEO in business stands for professional employer organization. It is a company that will do your payroll and other HR admin tasks on behalf of your organization. Unlike an employer of record, a PEO does not employ your employees on behalf of your company. Instead, they just manage the agreed-upon HR tasks.

Some examples of the types of HR administrative tasks a PEO will complete on behalf of a company include:

Benefits management and administration
Employee training
Federal law compliance
Health insurance (including dental)
Life insurance
Payroll
State law compliance
Workers’ compensation

It is worth noting that each PEO will have different services and inclusions, so it is worth researching which PEOs will provide the level of support you need.

Are There Different Types of PEOs?

No, there are not different types of PEOs. However, some PEOs may serve specific niches. This means that they have chosen to work with a specific type of client rather than providing all types of businesses with PEO services. For example, a PEO may be a small business PEO, or they may choose to niche down to serve a specific type of industry or business model.

What Is the Difference Between a PEO and HR Software?

PEOs may provide HR software to enhance their services or to help you optimize your employee management elsewhere in your business. However, a PEO does far more than HR software can. They offer a nuanced service that can benefit multiple aspects of your business, especially in relation to responsibilities as denoted by laws and regulations, your responsibilities to your employees, and how to keep them happy.

What Is the Difference Between a PEO and a Payroll Company

While payroll management is one of the big reasons why businesses may look for outside help, a PEO can offer support with more than just business payroll. If we are to look at just payroll, a PEO will take responsibility for processing your employee wages, benefits, and withholding. They will also report any federal or state taxes. Where applicable, they will also manage your workers’ compensation plan and process any claims. They may also be able to advise your business and internal stakeholders on average salaries for various roles and how to create a benefits plan that will attract the kind of employees you want.

What Does a PEO Do?

A PEO will provide businesses with the following services:

Benefits selection and administration – Most PEOs will have benefits packages options that they will enroll the business’s employees in for an outsourced benefits service.
Compliance support – PEOs will often support businesses with compliance consulting for employment laws, workers’ compensation, or payroll tax laws. Their consulting services will be performed by specialist lawyers and will include anything from audits and advice to implementing the changes on the business’s behalf.
HR Administrative services – Either as an outsourced HR department or as additional support for the business’s internal HR teams.
HR services – Any HR services that a business needs, a PEO can provide (with the exception of recruitment). Businesses can either entirely outsource their HR functions or split their HR functions between the PEO and their internal HR staff.
Internal process documentation – This is usually an additional service that a PEO may choose to provide in addition to their usual services. They may be able to support the business in creating or documenting internal processes and policies (e.g. creating an employee handbook.)
Payroll processing – The PEO will process the wages of all employees, including withholdings, taxation, and benefits.
Reporting payroll taxes – The PEO will report federal and state taxes to the relevant authorities on behalf of the business.

The partnership between the PEO and the business will be governed by an agreement or contract so that both parties are clear on what the PEO does do and what it doesn’t do.

What Doesn’t a PEO Do?

PEOs can often be confused with a staffing agency or an employer of record. It is as important to know what a PEO doesn’t do so you can ensure you are partnering with the right type of organization to serve your business needs.

A PEO will not do the following things for a business:

Hire staff on your behalf – A staffing agency will hire staff and “lease” them to businesses to fill short-term (or medium-term) needs. This allows businesses to access the skills they need for projects or to address temporary staffing shortages. PEOs do not offer this service as they are not responsible for your employees. They just help you manage the tax and processes of being an employer.
Controlling your business – A PEO cannot make decisions on behalf of your business. You will still retain full decision-making ability in your business. They will present you with options and consult you on what path to take.

Ultimately, you and the PEO will come to an agreement on the scope of the services they will provide your business. If you do not want the PEO to replace your internal HR staff, they will not. If you want them to provide a full suite of HR services, then they will.

What Kind of Companies Use a PEO

Any employer would find a PEO’s services useful because they handle the difficult tasks of being an employer (like payroll and compliance support) for a fraction of the cost of hiring HR staff for your business. Many businesses use a PEO service, either to completely outsource their HR tasks or to support their HR department with time consuming HR administration, allowing them to focus on their internal processes and employee wellbeing.

There is a clear benefit to using a PEO for small businesses, who often have tight budgets and need a lot of support as they grow. But you would be surprised how many big, household names use PEOs.

The Benefit of Using a PEO

While it may seem daunting to outsource aspects of your business that have the highest penalties if you get it wrong; this is usually a good way to ensure that these tasks are done correctly and you avoid said penalties. HR tasks require specialist knowledge, often overlapping with other specialist fields like law and tax accounting. This specialist knowledge comes at a steep price if you were to hire the expertise you needed internally. PEOs often have a number of disciplines, including lawyers specializing in the various applicable fields, accountants, and HR professionals working on client accounts. This allows businesses to have the expertise on hand whenever they need them for a fraction of the cost.

Here are some of the main benefits of using a PEO in business:

Compliance support – PEOs have a number of experts who can provide compliance support for businesses. These services may range from audits and recommendations through to establishing and implementing new processes and policies to improve business compliance.
Improve administrative processes and KPI tracking – PEOs can optimize your HR processes and tracking to maximize business opportunities and company growth. It is important to develop a close relationship with your PEO to maximize their insight into your business growth.
Improve employee retention – PEOs help you to look after your current employees, which improves your staff retention and reduces the need for recruitment. They do this through their benefit services, policy support, and guidance on employee management processes. PEOs are often a great source of information on the market rate for various job roles and seniority levels, which can help you to ensure you are not losing staff to better paying competitors.
Offer attractive benefits packages – The benefits you offer can play a significant role in attracting top talent to your business. PEOs can often help employers of all sizes create benefits packages that attract their ideal candidates.
Save money – PEOs save you money on your internal resources, as discussed above. However, they also have great negotiating power when it comes to benefits, health insurance, and workers’ compensation plans because they are negotiating based on their entire client portfolio, not just the size of your company.
Save time – HR administrative tasks can be incredibly time-consuming, and they occur on a regular schedule. Having a PEO handle those time-consuming tasks frees up your internal HR team to focus on more valuable tasks. Even if you don’t have internal HR staff, your PEO will save time for your legal or finance team by taking on some of the tasks that overlap with HR, like payroll.
Support your business – It can bring a lot of peace of mind knowing that you are partnering with specialists as you are building your business. PEOs can provide expert support and advice, which is invaluable, especially to small business owners.

Which of these benefits are most valuable to your business? As each PEO offers different services and technology, it is important to know what benefits you want to see from working with a PEO. This will help you to choose the PEO and their service package that is the best fit for your needs – both now and in the future.

How to Choose a PEO

The PEO you partner with needs to not just serve your current business needs but be someone who can support your growth plans too. Before you can start choosing a PEO, make sure you have a 3-5 year plan for your business. This is an important and often overlooked step in choosing a PEO.

Once you have a framework for what success would look like in the partnership with the PEO, take the following steps:

Research suitable PEOs by looking online and asking your business contacts which PEOs they have used. Getting firsthand experiences can be helpful when determining what to look for.
Compare the services and experience of the PEOs against what you are looking for. Any that don’t offer the level of service you need or who don’t have the expertise you require don’t make the shortlist.
Contact your shortlisted PEOs with your questions. It is perfectly okay (and encouraged) to ask questions so you can decide whether the PEO is a good fit or not. PEOs may ask questions back so they can tailor their responses. Be transparent about both your current circumstances and your growth plans. You want to see if this PEO will be a trusted partner or not.
Ask how they will help you to transition to their services. Whether you currently have a PEO or not, ask them what support they will give you to ease the transition and what they will need from you for the transition. How they will handle the transition can be a major deciding factor in choosing the right PEO for your business.

Don’t forget to get the related stakeholders in your business involved in choosing the PEO. Your legal team or accounting team may have requirements that are important to the decision-making process too. Ask them what they need and how they envision a successful partnership with a PEO before you contact shortlisted PEOs with your questions.

Frequently Asked Questions About PEOs in Business

1. Are PEOs regulated?

Yes, when you are choosing a PEO for your business, make sure you ask potential PEOs on your shortlist to send you their accreditations. In the US, the ESAC (Employer Services Assurance Corporation) accredits PEOs, giving you information about the ethical, operational, and financial standards that the PEO is bound by.

In addition, ask the PEO to explain any independent auditing they undergo, including how often they are audited. Some of the common auditing standards that a PEO may undergo include:

SOC 1 Type II
ESAC (quarterly auditing)
CPA verification.

These auditing standards will give you peace of mind that you are partnering with a PEO that you can trust. You are not just taking their word for it that they uphold rigorous standards, there is independent evidence that they do.

2. Can a PEO help reduce HR costs?

Yes. Not only is working with a PEO less expensive than hiring a whole HR department, but because of the expertise and negotiating power that a PEO brings to the table, it can actually help grow the bottom line of your business.

Save money on any penalties or fines arising from compliance issues.
Get the benefits package that makes sense for your business at a discounted rate.
Grow your business faster.
Improve your employee retention rate and save money on recruitment.

3. Do PEOs handle employee benefits?

Yes they can. It is up to you whether you have your own employee benefits or pursue employee benefits via your PEO. However, one of the benefits of PEOs is that they can allow small or medium businesses to compete with the benefits packages offered by large corporations. They may even be able to provide you with a discounted rate because of all the companies they are providing benefits for. For example, your PEO will negotiate health insurance rates based on the total number of employees across all their clients.

They will also be able to consult with you to ensure your business has a benefits plan that reflects your company culture and the priorities of the talent you want to attract.

4. Does working with a PEO affect company culture?

As the decision-making power lies with the employer and not the PEO, working with a PEO will only affect company culture as much as you let it. Your partnership with the PEO will be consultative, with the PEO consulting on the best path forward and then implementing the decision you have made.

Working with a PEO may positively impact your company culture because the PEO will help you to define and strengthen your company culture. They will be able to provide insight into what each of the options you could take would mean for your culture.

5. Who is responsible for the employees in a PEO partnership?

The business/employer is responsible for their employees. The role of the PEO is simply to make the administration and compliance of employee management easier. While the PEO will demonstrate care for your employees and your organization when they are managing the payroll, benefits, and any other HR administrative tasks, the business is ultimately responsible for their employees.

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