What is a professional employment organization (PEO)

A professional employment organization (PEO) is a service provider that enters into a co-employment relationship with an employer to provide domestic HR services.

It’s also referred to as a professional employer organization.

What does a PEO offer?

Business owners use PEOs for HR outsourcing tasks like payroll and paycheck processing, tax administration, and regulatory compliance. Additional HR and administrative duties you can outsource to a PEO include:

• Recruiting and hiring

• Onboarding and offboarding

• Employee benefits administration, including health insurance, unemployment insurance, and workers’ compensation coverage

• Compliance assistance

• Candidate screening

• Policy and employee handbook creation

• Safety audits

• Family and medical leave

How does a PEO co-employment relationship work?

Small and medium-sized businesses, ranging from accounting firms to high-tech companies and small manufacturers, can use PEO services. 

When a company engages with a PEO, they enter into a co-employment arrangement. As co-employers, the PEO and client contractually share employer responsibilities and liabilities. Both parties outline the allocation of these responsibilities in a PEO agreement (also known as a PEO client service agreement).

The client company retains ownership and control over its operations, including day-to-day management of employees and product development, marketing, sales, and service. The PEO will typically assume responsibility for administrative tasks, employee records, employee benefits, payroll processing, and employment taxes. 

In addition to identifying each party’s responsibilities, the agreement defines which employees are covered and sets compliance obligations.

Both the client company and the PEO have compliance obligations. However, PEOs typically assume much of the liability for the business of employment, such as risk management, human resource management, payroll taxes, and employee tax compliance—all of which contribute to peace of mind for business owners. 

PEOs are often responsible for workers’ compensation insurance liability and will focus on improving safety and compliance. PEOs can also provide worksite employees with coverage under many domestic employment laws and regulations, including federal, state, and local discrimination laws.

How much does a PEO cost?

PEOs will charge an administrative fee for their services, often using one of two pricing structures: a fixed monthly fee per employee, usually around $1,000 per employee annually, or a percentage of your overall payroll, usually 2-11%. It’s also important to be aware of hidden fees when comparing prices.

Does a PEO replace my HR department?

No. Outsourcing to a PEO is not about replacing your HR team. Instead, it’s about working collaboratively with your existing team to bolster your HR functions and ensure you meet full regulatory compliance. 

Your team is probably doing many tasks they don’t need to. A PEO frees your HR team to concentrate on more in-depth strategic matters that require a deep knowledge of your company and its plans. 

It’s also important to note that a PEO does not manage staffing or provide employee leasing. Your HR department retains recruitment responsibilities. 

Learn more about human resources outsourcing (HRO).

Advantages and disadvantages of a PEO

A PEO can be an excellent solution for outsourcing your domestic HR duties but cannot help you expand internationally. Nor can a PEO protect you in the case of an international compliance issue.

Advantages of using a PEO

• Relieves your businesses of many HR-related tasks

• Offers domestic compliance support 

• Bolsters your domestic HR

• Saves you money in the long run 

Disadvantages of using a PEO

• Can influence your company culture and prompt resistance from employees

• Does not provide legal guidance and support in the case of international expansion

• Does not take full legal responsibility in case of international compliance issues

• Does not help with creating employment contracts

The best PEOs are accredited by an outside agency, such as the Employer Services Assurance Corporation (ESAC), Internal Revenue Service (IRS), or Better Business Bureau (BBB).

Is a PEO the same as an EOR?

No. Employers of record (EORs), also called international or global PEOs, are similar to PEOs but allow international hiring and additional legal protection. 

As mentioned above, PEOs are co-employers of people who work for you and are based solely in the US. You share responsibility for your employees, who must reside wherever your company is registered. 

EORs, on the other hand, are the full legal employers of anyone you hire through them and have foreign entities in numerous countries. You can hire someone wherever the EOR has established a local entity or partnership.

Deel, for example, can help you hire employees and contractors in over 150 other countries. With Deel as your EOR, you don’t have to set up an entity in a new country to hire there.

Another significant benefit of an EOR is the additional legal protection they provide. Staying compliant in every city, state, and country, where your employees are doing work, can be tricky. EORs have local experts that are familiar with labor laws. And since EORs are the sole employer of your international hires, they also take full legal responsibility in the case of a compliance-related issue. 

In addition, the best EORs provide:

• Tailored onboarding services, training, and development

• Global payroll software

• Localized employee benefits such as healthcare and retirement plans

• Additional fringe features for employee engagement

• Non-EOR services for hiring foreign independent contractors

Whether you opt for a PEO or an EOR depends on your company’s future growth plans. A PEO is a good option if you only want assistance with HR management and don’t plan to hire outside your country of origin. However, you’ll want to consider employer of records services to tap into the global talent pool.