What is a PEO – and how can it help your business?

This is a complete guide to professional employer organizations (PEOs). 

In this guide you’ll learn about PEOs – companies that can work with your organization to provide a comprehensive HR solution including payroll, benefits and human resource services through a business-to-business relationship called “co-employment.”

We’ll cover:

If you want to learn what a PEO is and whether it’s a good option to help manage your company’s human resources (HR), this guide is for you.

Let’s begin.

What is a PEO?

A PEO is an all-inclusive outsourcing option for your most time-consuming HR tasks and employer liabilities – those that are typically your sole responsibility, such as payroll and benefits.

When you join a PEO, it becomes the professional employer of your existing workforce, providing services and benefits (but not any staff). 

As operating employer, you maintain control of all organizational decision-making, like managing your employees’ job functions and day-to-day tasks.

Which HR burdens get outsourced and which liabilities get shifted to the PEO depends on what you and the PEO agree to include in your contract, often called a client service agreement (CSA).

Now that you can answer the question, “What is a PEO?” let’s look closer at the benefits of using one.

How does a PEO work?

The co-employment relationship is a contractual agreement between you (the client company) and the PEO that allocates and divides up your employer responsibilities. In this agreement, your company’s employees (also called worksite employees) are employed by your company and by the PEO.

PEOs typically price their services as a percentage of payroll or as a flat monthly fee per employee.

What a PEO doesn’t do

1. PEOs don’t control your business.

Rest assured that a PEO is your co-employer only for the purposes you would expect based on your agreement (e.g., paying your employees and the other HR responsibilities specifically named in your CSA). 

PEOs provide access to HR consultants whose guidance and advice you can call on when you need assistance. 

They help manage your company’s employee-related administration and risks, but you maintain control of business and all operational decisions.

2. A PEO won’t replace internal HR staff.

PEOs align with your company’s existing HR department or staff to provide complimentary expertise, such as support in administering workplace policies and making shifts in company culture. 

A reputable PEO will employ seasoned, certified HR professionals who have experience with various industries. And as a PEO client, their expertise is at your disposal. 

This can prove invaluable when you’re faced with complicated HR situations or workplace improvement initiatives, such as: 

• Increasing employee engagement
• Addressing conflict effectively
• Developing compensation programs that connect to business goals

Read more in our blog about how to keep your HR staff from freaking out about HR outsourcing.

3. Reputable PEOs don’t cause disruption to your workplace

Your existing employees will experience little-to-no disruption when you become a PEO client. 

They’ll notice the PEO’s name on their paychecks, but they’ll pay the most attention to how their benefits package has likely been upgraded since your involvement with a PEO.

In addition, some PEOs offer online self-service options that allow employees to access and manage their personal information, benefits and pay stubs whenever they want.

HR pain points PEOs help solve

When you join forces with a PEO, they can provide you the infrastructure, resources and time so you can focus on growing your business.

1. Provide better benefits and employee experience

A PEO can usually give you access to a wider range of benefits options, often at better rates, than what you could access on your own as a small or medium-sized organization.

Through a PEO, your employees gain access to big-business benefits and have a single point of contact for information and questions. This can help you recruit and retain better talent for your organization.

2. Help reduce risk

One of the biggest mistakes you can make as an employer is to miscalculate the importance of operating within the boundaries set by government regulation and employment laws. Often businesses don’t know there’s a problem until charges are brought against them. And then it’s too late. One error can lead to costly litigation and fines, not to mention the loss of time and production.

To avoid this disruption to your business, you must get ahead of these issues. But how do you do this when you have so many other to-dos already on your plate?

That’s where a PEO can help.

3. Help reduce costs

Not only do PEOs help their client companies save time. They can also help you save money through:

• Better hiring practices that reduce turnover
• Finding new ways to motivate your employees
• Making strategic plans for the future

And when you begin accessing HR services and benefits through a single source, you’ll have a better sense of your overall investment in your workforce.

4. Relief from payroll and HR administration overload

Pass off your daily HR duties – like administering benefits, managing employee paperwork, processing payroll and tax reporting – to a group that specializes in HR.

5. Prepare for growth

If growth is your goal, it’s important to plan ahead to keep your business moving in the right direction.  A successful growth plan is deliberate and requires forethought.

When you work with a PEO, you have access to specialists who can take a broad look at your business, employee base and management structure and advise you on how to put your company on the best trajectory for growth. Having a team of HR experts proactively directing your path can keep your business from taking a wrong turn and losing momentum.

Balancing the tactical and strategic sides of HR

By working with a PEO, you gain access to the kind of HR expertise that helps you run a smooth operation day to day – while also cultivating the kind of work environment where employees are empowered, engaged and committed to helping your business succeed.

Engaged employees:

• Boost your bottom line
• Are more productive
• Demonstrate commitment
• Deliver high-quality customer service
• Provide a greater return on investment

It starts with taking a good look at how you’re running your business. Do you operate within a tactical HR structure? Or are you proactively managing your employees to maximize their success and the success of your business (a strategic approach)?

The truth is: You need both. Tactical execution keeps operations moving. Strategic planning drives growth. A PEO can help you with each.

Take a look at some of the differences:

Tactical HR tasks:

• Processing payroll
• Filing payroll taxes
• Sponsoring and managing employee benefit plans
• Enforcing workplace policies

Strategic HR efforts:

• Setting employee goals that are tied to your business objectives
• Recruiting people who fit your company culture
• Developing motivation and reward programs
• Proactively dealing with conflict resolution

When you create a collaborative work environment that your employees appreciate, they’ll care more about their jobs and be more vested in the success of your company. This isn’t something that happens overnight. It’s a process that’s cultivated, nurtured and tailored to fit your workforce and your business needs.

What’s the value of a PEO when faced with uncertainty?

Uncertainty, crisis or really any major change, whether expected or not, can occur at any moment. Company leaders often need to make weighty decisions in a short amount of time. Reliable business advisors and efficient internal processes are critical in these moments.

A PEO can provide you with both.

Specifically, a PEO’s HR outsourcing services help you:

• Take care of your people during a crisis.
• Support you through any new employer-related administrative and compliance burdens.

As a result, you may find it easier to focus more fully on navigating the financial impact of the situation and connecting with your customers.

The PEO model is battle-tested and optimal for times of turmoil. Here are nine areas that demonstrate the immense value of a PEO in a crisis.

9 ways a PEO adds value in challenging circumstances

1. Foster business continuity
   • On-time payroll processing
   • Ongoing benefits and leave administration
   • Timely help with employee relations issues
2. Inform you of regulatory changes
   • Guidance on new legislation (e.g., emergency sick leave, tax credits)
   • Risk mitigation support
3. Provide guidance on keeping employees safe
   • OSHA and CDC compliance
   • Sample safety plans and preparedness checklists
4. Help you communicate clearly with employees
   • Email and text templates for crisis scenarios
   • Talking points to maintain calm and professionalism
5. Offer guidance on managing a remote workforce
   • Help transitioning to remote work
   • Support for managing flexible or hybrid schedules
6. Help you adjust policies and procedures
   • Draft or revise crisis-related HR policies
   • Update employee handbooks
7. Help you increase operational efficiency
   • Evaluate organizational structure
   • Plan for hiring freezes, furloughs, or layoffs
8. Oversee unemployment administration
   • Respond to claims
   • Reduce paperwork during layoffs or furloughs
9. Help you rehire employees
   • Build and execute rehiring strategies
   • Support for onboarding returning staff

What services does a PEO offer?

When you join a PEO, your employees may have access to:

Additional services

Most reputable PEOs and CPEOs also offer access to additional services beyond their standard offering. These may include things like:

Services beyond the standard PEO/CPEO offering may incur additional fees, so it’s a good idea to ask for clarification around what’s included and what costs extra.

What is a full-service PEO partner?

Among PEOs, level of service matters.

This is because PEOs aren’t all created equal in their service delivery. For example, some PEOs:

• Specialize in or prioritize certain services over others
• Provide self-service only, usually pointing clients toward online resources
• Use general call centers for customer service rather than assigning dedicated teams
• Don’t offer client companies the option to meet in person
• Are web-based versus having fully staffed offices
• Have a reactive versus proactive approach to service
• Have a limited geographical scope of operations

What sets full-service PEOs apart?

Services cover both tactical, day-to-day HR tasks all the way to HR strategy and niche areas of HR expertise.

• They consult with client companies on a regular, ongoing and proactive basis.
• They are right there with you, ready to offer advice, best practices and answers to burning questions when you need them – in person, on the phone or virtually.
• You have a dedicated team or point of contact you can reach out to personally each time.

Many full-service PEOs offer a comprehensive, all-inclusive HR outsourcing option – like a one-stop shop for all things HR. Ideally, a full-service PEO also operates in all (or nearly all) 50 U.S. states so they can deliver service, and have knowledge of the regulatory environments, in the locations where your business operates – or may operate in the future. Additionally, in today’s virtual and hybrid workplaces, employees may live anywhere and you want to be prepared to capitalize on the best talent without restrictions on where your PEO operates.

These are all factors you should consider when selecting a PEO.

Pros of having a single, full-service PEO partner

1. The ‘big picture view’
2. Ability to scale up and down easily
3. Reduced potential for errors
4. Comprehensive benefits solution
5. Peace of mind

Considerations for using a single, full-service PEO

• Potentially cumbersome separation
• Unused services included in your fee
• Some compromise may be necessary
• Possibility of costly termination penalties

PEO vs. certified PEO

You may have come across a PEO that says it’s a certified PEO. Next, we’ll describe what this designation means.

The IRS has an established classification for PEOs – the certified professional employer organization (CPEO). 

This certification process involves providing extensive financial information to the IRS, particularly about the PEO’s employment tax payment track record. Being certified by the IRS as a CPEO has certain federal employment tax consequences for both the CPEO and its customers and clients.

Let’s break down what that means.

When you join a PEO, from the IRS’ perspective, the PEO becomes your workers’ employer of record, and their wages are reported with the PEO’s federal employer identification number (EIN). 

When a PEO isn’t certified, if employment taxes aren’t paid, the IRS can go after both the PEO and the client company for what is owed, even if the client already paid the PEO for these taxes.

But a CPEO assumes the sole responsibility for federal employment taxes for wages it pays to worksite employees. 

So, one of the key benefits to using a certified PEO is greater peace of mind that comes from knowing your PEO is committed at a higher level and will be held accountable by the IRS for some of their responsibilities to your organization.*

But that’s not all you need to know about CPEOs. To learn more, read: What is a CPEO? Here’s your easy-to-understand guide.

*The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations go to www.IRS.gov.

What is a local PEO?

Local PEOs offer specialized services customized to businesses operating in specific regions. They understand the unique employment laws, compliance issues and benefits requirements that vary from state to state. Partnering with a local PEO ensures your business stays compliant with regional regulations while providing competitive benefits packages to your employees. This localized expertise can be valuable for businesses expanding into new markets or navigating complex local regulations.