What Is a PEO

What Is a PEO and How Does It Work?

A Professional Employer Organization (PEO) is an organization companies use to handle HR tasks such as payroll, tax filing, and benefits administration. Discover how a PEO work, the pros and cons, and how it compares to other HR services.

Jemima Owen-Jones
Written by Jemima Owen-Jones
September 28, 2021
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Key Takeaways

  1. Small and midsized business owners often turn to PEOs for support with HR management so they can focus on their core competencies.
  2. PEOs are co-employers and do not assume full legal responsibility in case of legal disputes.
  3. Companies planning to expand internationally are better suited to EORs, which provide additional international hiring, global payroll, and compliance support.

How does a PEO work?

Doing business with PEO isn’t the same as outsourcing HR tasks to an external HR company. When a company engages a PEO, they enter into a co-employment relationship which means the PEO assumes partial legal responsibility for the employees for tax purposes and must use its Employer Identification Number.  

At the start of the co-employment arrangement, the company and PEO sign a contract called a client service agreement (CSA), which outlines the responsibilities of each party. The client company remains in charge of the employee’s work schedule, the scope of work, daily responsibilities, and recruitment, while the PEO helps take on specific HR functions. 

Business owners also retain management control and are responsible for administrative fees. A PEO cannot make independent decisions on behalf of the business; this includes working hours, schedules, and salaries. A PEO doesn’t intervene with sales, marketing, or distribution.

What services does a PEO provide?

Each PEO varies in the array of HR services it offers. Below are some of the typical services a PEO provides to businesses:

  • HR support: PEOs can help in-house HR teams manage employee contracts, onboarding, terminations, background checks, employment verification, performance management, and more. 
    Payroll services: PEOs typically handle payroll processing, payroll tax withholding, and deductions on behalf of a company. Payroll also involves meticulous record keeping and reporting, delivering online pay stubs, invoices, forms, and PTO tracking.  
  • Compliance: PEOs comprise legal experts that ensure compliance with local tax and employment laws to avoid penalties and disputes.   
    Employee benefits administration: PEOs can administer mandatory and voluntary benefits packages such as healthcare, workers’ compensation, retirement plans,  unemployment insurance, and more.
  • Employee training: PEOs can provide training courses, workshops, and self-serve knowledge bases to help employees hone their skills and become stronger company assets.
  • Recruiting and talent services: Some PEOs can help companies execute their headcount planning and recruiting efforts, assisting with job descriptions, posting, and interviews.  

What are the pros and cons of a PEO?

The pros of a PEO

Time-savings: A PEO takes over time-consuming and repetitive administrative tasks allowing businesses to focus their resources on core business activities. 
Improved safety and risk management: PEO experts ensure the company remains compliant with country and state laws. To mitigate risks, PEOs provide safety training programs, assist with inspections and audits, and take care of liability insurance.
Access to exclusive benefits: PEOs provide their clients with employee benefits typically reserved for Fortune 500 companies. With a PEO, even small businesses can provide their employees with top health insurance providers, retirement plans, and educational opportunities that help to attract and retain top talent and result in cost savings.

The cons of a PEO

No international experience: PEOs specialize in local law and compliance. Global companies that hire and operate internationally require expertise in international labor law and regulatory compliance to avoid fines, claims, and penalties.

Shared liability: PEOs do not assume full legal responsibility since they are a joint-employer. This arrangement means the client company could still be liable if a legal dispute arises, for example, if the PEO fails to pay employees the correct overtime in line with the law. 

Less control over benefit plans: When a company chooses a PEO, they buy into the service packages a PEO offers. If your employees like their current benefit carrier, they may be forced to use another if the PEO prefers a particular provider.


PEO vs. employee leasing companies

The main difference between a PEO and an Employee Leasing 
Company (ELC) is their relationship with the employees and their job permanence.
PEOs only provide services for client companies and existing workers of that company. Once a PEO and client company terminate their relationship, employees stay with the company, and their ties with the PEO cease. PEOs do not provide the company with a supply of new employees.
Employee leasing companies provide the company with new workers, usually for temporary projects. After the leased employees complete the work for the company, they return to the ELC that assigned them to find another short-term job.

PEO vs. temporary staffing services 

Like an ELC, temporary staffing services provide client companies with additional staff. These organizations recruit workers for companies experiencing seasonal shortages, temporary skill shortages, or employee absenteeism. 

PEO vs. administrative services outsourcing (ASO)

ASO is another type of HR solution, except unlike with a PEO arrangement, the company retains full employer status and must report payroll taxes using its own Employer Identification Number. With an ASO companies can also maintain their existing benefits and worker’s compensation providers. 

PEO vs. human resources outsourcing (HRO) 

An HRO is also an HR service provider where the client company retains full administrative employer status. However, unlike PEOs and ASOs, HROs provide specific HR-related tasks based on the HRO provider’s experience and specialty. HROs are popular with larger companies that have developed internal departments and only require specific HR expertise. 

PEO vs. employer of record (EOR)

Like a PEO, an employer of record takes care of a company’s human resources while the company manages the employee’s day-to-day activities, schedules, and workloads. However, an EOR is a legal employer of your workforce, which means they assume complete responsibility for your full-time employees and are liable in case of a law breach.
An EOR is particularly beneficial for companies planning international expansion since they can legally hire employees in another country or region on their behalf, saving the company from needing to establish a foreign subsidiary there.
EORs are also providers of global payroll services and comprise international law and compliance experts. When an EOR hires an international employee on a company’s behalf in a new country, they ensure that the worker’s contract, payment, and mandatory benefits packages comply with local laws and regulations, providing total peace of mind in case of external audits. 
Some EORs, like Deel, come with additional advantages such as:  

  • Exclusive access and enrollment in flexible, high-quality, and cost-effective benefit plans and perks, including discounted healthcare, health insurance, workers’ compensation insurance, and unemployment insurance  
  • The ability to hire and pay employees and independent contractors
  • Background checks
  • Onboarding, offboarding, and terminations
  • Equipment supply
  • Free HR tools and integrations
  • Visa and mobility support
  • 24/7 client support and employee helpdesk

How to choose a PEO service for your company

 Pick a PEO that: 

  • Has a good reputation, financial stability, and transparent pricing
  • Provides services that match your business needs
  • Certified by an accredited authority

In the US, PEOs can earn certified status, which means they meet the IRS financial, reporting, and legal requirements and have been recognized and awarded with an ESAC certificate. 
To find a service partner with the expertise you need, visit the National Association of professional employer organizations (NAPEO) directory.

Manage and grow your workforce with Deel

Struggling to find the time and resources to assemble a robust HR department, let alone build a talented international team? As a business owner, you have so much to think about: payroll, health insurance, additional benefits, and staying compliant with local and international laws.

Deel provides your organization with HR support and helps you tackle international growth by covering everything from running your payroll and managing compliance to hiring global talent cost-effectively and with minimal effort. 

Book a demo today to see how we can help.

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