What is a PEO and how does it work?

What is a PEO?

A professional employer organization (PEO) is a human resources outsourcing entity that partners with employers to co-employ and manage staff. In the co-employment model, the PEO and the employer share liability for the workers.

How does a PEO work?

Small and medium-sized businesses often invest in PEOs to minimize HR burdens and reduce risk. PEOs are unique because they serve as co-employers alongside companies, but they’re not the same as HR outsourcing solutions, like employee leasing.

Certified PEOs

In the United States, some PEOs meet the legal, financial, and reporting standards set by the Internal Revenue Service (IRS), earning them the designation of certified PEOs (CPEOs). Partnering with a CPEO often comes at a higher cost, but it provides an added layer of trustworthiness, making it an appealing choice for companies searching for a top-tier PEO.

ESAC accredited PEOs

Another prominent certification comes from the Employer Services Assurance Corporation (ESAC). This independent nonprofit examines a PEO's financial health, ethical conduct, and adherence to regulatory standards before bestowing its seal of approval on a company.

Similarly, the National Association of Professional Employer Organizations (NAPEO) provides resources, education, and advocacy for the PEO industry. Member companies must meet strict financial and ethical standards, such as independent auditing and certified risk management services.

While the U.S. is home to hundreds of PEO companies (more than 500 in 2022, according to NAPEO), they’re less common in other countries, which means finding a global PEO that offers international coverage is, in some regions, a challenge.

What can a PEO do for your business?

As a co-employer of staff, PEOs offer a wide range of services to support businesses with managing HR. The exact offerings vary between providers, but key functions PEOs handle include:

Payroll services and taxes

Managing payroll is one of the primary services most PEOs offer. This includes managing employee attendance, tracking hours worked, distributing paychecks or direct deposits, and maintaining workers' compensation coverage.

In addition to payroll processing, PEOs usually file and pay local, state, and federal employment taxes. By outsourcing these often complex and time-consuming tasks to a PEO, businesses reduce their risk of inaccuracies in fulfilling local payroll tax responsibilities, safeguarding them from possible tax violations and consequences from the IRS.

Benefits administration

Offering a robust employee benefits package is essential for attracting and retaining top talent, but managing such perks internally can be challenging, especially for smaller organizations. PEOs alleviate the burden by managing everything from negotiating cost-effective insurance plans to helping employees enroll in health, dental, vision, and life insurance benefits.

Throughout the year, a PEO acts as the primary contact for employees regarding benefit inquiries, guiding them through claims submissions or adjustments to their plans. This significantly reduces the administrative demands on the business.

Retirement planning

Helping employees plan for their financial future through company-sponsored retirement plans (such as 401(k)s) is another important aspect of a comprehensive benefits program. PEOs provide support through research on retirement plan providers, education on investment options, facilitation of enrollment and contributions, compliance assurance with regulations, and management of required filings.

Human resources

Many PEOs offer a vast spectrum of HR services to help hire and onboard new employees, advise on compensation and performance management, coordinate employee training and development programs, and assist with sensitive issues like terminations.

Partnering with a PEO gives businesses without an internal HR staff access to expert guidance, freeing up resources to focus on other goals. Companies with in-house HR teams can also benefit from a PEO's specialized knowledge and economies of scale.

Compliance issues

Navigating the ever-changing landscape of employment laws and regulations is a significant challenge. PEOs alleviate this burden by helping companies understand and comply with all applicable rules, such as wage and hour laws, anti-discrimination regulations, and worker safety requirements.

How can small and medium-sized businesses benefit from using a PEO?

There are several benefits to using a PEO, especially for small and medium-sized enterprises that might need more resources for managing HR tasks. By partnering with a PEO to co-employ staff, businesses can:

• Reduce liability: Collaborating with a PEO minimizes certain risks. For example, some PEOs offer legal defense benefits if an employee sues the employer (e.g., for an allegation like discrimination).
• Minimize administrative burden: HR is a big job, covering everything from compliance to payroll. For smaller businesses with limited resources, PEOs lighten the load by taking on many administrative tasks.
• Fine-tune HR practices: Top-tier PEOs go beyond traditional HR functions, offering insights into hiring and retaining the best talent. They analyze data to ensure salaries are on par with industry standards and pinpoint why staff might be leaving—info that's a game-changer for building and maintaining a winning team.

How much does a PEO cost?

Many PEOs charge a set percentage of their clients’ payroll as a fee. Alternatively, some use a pricing model based on the number of employees and the specific services they’ll provide. 

To ensure you choose the best PEO for your company, be sure to consider:

• Service selection: PEOs that provide a wider range of services, such as strategic HR consulting, tend to be more expensive than those that only handle administrative tasks. Carefully evaluate which services are a must.
• Employer size: Generally, larger companies with more employees pay a lower per-employee rate than smaller businesses. However, the total cost will be higher.
• Value-added savings: PEOs are an investment, but be sure to factor in the indirect cost savings a PEO may provide, such as lower-cost benefits, reduced legal exposure, and increased HR efficiency.

What a PEO doesn’t cover

PEOs handle a broad range of HR and compliance functions, but some things fall outside their typical scope.

A PEO generally won’t weigh in on a company's specific business operations, make decisions about overall strategy and goals, or offer input regarding product or service offerings. The client maintains full control over their business and retains responsibility for day-to-day employee management, such as overseeing work schedules, assigning specific tasks or projects, and monitoring performance and productivity.

Keep in mind that a PEO doesn't necessarily eliminate the need for in-house HR staff. Instead, it serves as a strategic partner that provides additional expertise and support.

Pros and cons of PEO services

When deciding whether co-employing staff with a PEO is right for you, weighing the benefits against the potential drawbacks is a must. 

Advantages of PEO services

• Improve employee benefits: By pooling employees from many clients, PEOs often have access to higher-quality, more cost-effective benefit plans than individual companies could obtain on their own.
• Support compliance: A PEO's expert guidance and diligent recordkeeping can help clients navigate complex HR regulations and avoid potentially costly penalties.
• Save time and boost efficiency: Outsourcing time-intensive HR tasks to a PEO allows business leaders and staff to focus on core responsibilities and generating revenue.

Disadvantages of PEO services

• Reduced flexibility: Clients are typically limited to the benefits, policies, and procedures the PEO offers, with little room for customization.
• Potentially higher costs: While PEOs provide savings in some areas, the total cost to outsource HR may be higher than handling it in-house, especially for larger companies. Careful analysis is essential.
• The need for direct entities: If a company wants to use PEO services to hire and manage employees in another country, it would have to establish a legal entity there in order to co-employ staff with the PEO.
• Compliance responsibilities remain: As a co-employer, the client company would share the risk and liability of employing workers.

When to consider an EOR instead

While PEOs are a popular HR outsourcing choice for fully U.S.-based companies, an employer of record (EOR) may be a better fit for businesses hiring internationally. An EOR is a third-party organization that acts as the legal employer of a company’s international workforce, handling HR tasks such as onboarding, payroll, and benefits according to local compliance requirements. This makes hiring beyond borders possible without a company needing to set up its own legal entities in those countries. The EOR assumes liability for the employment relationship, freeing the client to focus on managing their international team's day-to-day work.

Oyster's global employment platform makes it easy to hire, pay, and manage a globally distributed workforce. Our international expertise and user-friendly technology empower companies to navigate the intricacies of international hiring with confidence.

Learn more about how Oyster can help your business expand worldwide.