A professional employment organization (PEO) is a service provider that handles HR services on behalf of an employer through a co-employment relationship.
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 and ACA compliance
Workers’ compensation coverage and claims
Policy and employee handbook templates
Family and medical leave
Salary and market comparison data
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%.
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).
What are advantages and disadvantages of a PEO?
A PEO can be an excellent solution for outsourcing your domestic HR duties but are not designed to help you expand internationally.
Advantages of using a PEO
Relieves your businesses of many HR-related tasks
Offers domestic compliance support in all supported states
Bolsters your domestic HR
Saves you money in the long run
Disadvantages of using a PEO
Does not support international expansion
Does not take full legal responsibility in case of international compliance issues
Does not help with creating employment contracts
PEOs can be accredited in the US. The IRS certifies PEOs under the CPEO program (Certification Program for Professional Employer Organizations), while ESAC (Employer Services Assurance Corporation) serves as the independent third-party accreditation provider. PEOs in the US are usually members of NAPEO (National Association of Professional Employer Organizations).
Is a PEO the same as an EOR?
As mentioned above, PEOs are co-employers—you manage and take responsibility for your employees while the PEO is responsible for running local payroll and handling HR tasks.
EORs, on the other hand, are the full legal employers of anyone you hire through them. The EOR handles the legal employment and labor compliance for these workers, on top of facilitating payroll and HR. You can hire anyone in any country where the EOR owns a local entity or has a local partnership. Deel, for example, has local entities in over 100 countries. With Deel as your EOR, you can engage anyone as an employee from any of those countries without needing to set up your own entity or master local labor laws.
You may need a full-featured EOR service if you also want:
Global payroll features for calculating local pay and taxes
Additional fringe features for employee engagement
Compatibility with hiring foreign independent contractors
Should I use a PEO or an EOR service?
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 already have a local workforce—the PEO can bolster your existing HR department and ensure you meet full regulatory compliance with payroll and labor laws. However, if you want to hire internationally, you’ll want to consider employer of records services to allow you to hire quickly and compliantly. And if both situations apply to you, consider a service like Deel, which offers services for companies wanting maximum flexibility with hiring and expansion.