What Is A Professional Employer Organization: Your HR Co-Pilot

What is a Professional Employer Organization?

Something we get asked a lot is “What is a professional employer organization?”. Well, here it goes:

A professional employer organization (PEO) is a business that assists other businesses and organizations with HR-related administration and strategy. Services range from administrative tasks such as payroll and benefits administration to developing effective compensation strategies. 

What Services Do PEOs Offer?

Organizations hire PEOs to manage a broad range of HR-related tasks such as:

• Payroll and Tax Filing Services: Handling payroll processing, PTO management, tax compliance, and more.
• Employee Benefits Administration: Creating competitive benefits packages, including health insurance, retirement plans, and other perks.
• Regulatory Compliance: Ensuring adherence to local labor laws and tax regulations to minimize risk.
• Recruiting & Staffing: Supporting hiring, onboarding, and international recruitment.
• Employee Onboarding: Facilitating stress-free employee onboarding that is locally compliant
• Talent Management: Overseeing performance management, compensation management, and strategic employee development.
• Employee Training: Managing ongoing training through automated processes and customized programs.
• Risk and Safety Management: Identifying workplace risks to reduce liability, or managing workers’ compensation filings and requirements.
• HR Investigations: Assisting with sensitive workplace investigations, ensuring fair resolution and legal compliance.

While some simply provide consultancy and administrative services, others are built on a co-employment model where they share employer responsibilities with their client and handle a number of the crucial HR functions in a co-employment relationship.

Certified PEOs (“CPEO”s) have been certified by the IRS to handle federal taxes on your behalf, but only around 10% of PEOs are certified to that level.

Benefits of Working With a PEO

PEOs are HR professionals for hire who can relieve administrative burdens, advise on numerous HR and compliance issues, and help organizations recruit, retain, and motivate their employees.

The benefits of working with a PEO can include:

• Reduced administrative burdens: By outsourcing HR to a PEO, businesses can significantly reduce the time and resources spent on administrative work, freeing up internal staff to focus on strategic activities.
• Access to better benefits: PEOs can offer employees access to high-quality benefits, such as health insurance, retirement plans, and other perks, at lower costs due to their ability to pool clients and negotiate better rates with providers.
• Improved compliance: PEOs stay up-to-date with the latest employment laws and regulations, ensuring that businesses remain compliant with federal, state, and local requirements, thereby reducing the risk of legal issues and penalties.
• Enhanced employee support: PEOs often provide additional support services for employees, such as HR advice, conflict resolution, and access to professional development resources, contributing to a more satisfied and productive workforce.
• Risk management: PEOs help manage risks associated with employment, such as workers' compensation claims and lawsuits, by implementing organizational policies and best practices and providing guidance on risk mitigation strategies.

Potential Disadvantages of Working With a PEO

OK so I’ve been quite evangelical so far, but what are the potential downsides of working with a PEO?

• Loss of control: Relinquishing some control over HR functions and processes can potentially lead to decisions and practices that don’t fully align with the company's specific culture or values.
• Costs: PEO services come with fees that may be significant and need to be carefully weighed against the potential benefits.
• Dependency on PEO performance: The business becomes reliant on the PEO's performance and stability. Issues such as financial instability or service disruptions within the PEO can negatively impact the client company.
• Potential for misalignment: The PEO’s standard practices and procedures may not always match the specific needs or preferences of the client company, leading to potential conflicts or inefficiencies.
• Data security concerns: Sharing sensitive employee information with a third party involves data security risks. Businesses must ensure that the PEO has robust data protection measures in place.
• Complexity in terminating agreement: Ending a relationship with a PEO can be complex and time-consuming as it involves transitioning HR responsibilities back in-house or to another provider at the risk of disrupting business operations.
• Employee perception: Employees might feel uncertain or disconnected knowing that an external organization manages their employment matters, which can impact morale and loyalty if not managed carefully.
• Limited customization: PEOs often have standardized service packages that may not fully accommodate the unique needs of every business, resulting in less flexibility.

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How to Choose a Professional Employer Organization

Since a PEO will effectively act as an arm of your business, it stands to reason that the PEO you end up engaging with should be chosen carefully. 

Here's a comprehensive process for whittling down your options and finding a great fit:

1. Assess your business need

• Identify the specific HR services your business requires (e.g., payroll and benefits administration) and determine the level of support needed in these areas.

2. Research potential PEOs

• Look for PEOs with experience in your industry.
• Check their client reviews and testimonials to gauge their reputation and service quality.

3. Compare services and costs

• Evaluate the range of services offered by each PEO.
• Understand their pricing structure (e.g., flat fee, per-employee fee) and compare the cost-effectiveness.

4. Check accreditation and compliance

• Ensure the PEO is accredited by relevant bodies like the Employer Services Assurance Corporation (ESAC).
• Verify their compliance with local and federal employment laws.

5. Review employee benefits offered

• If applicable, compare the quality and range of employee benefits each PEO offers.
• Assess how these benefits align with your workforce's needs and how they might aid in employee retention and recruitment.

6. Evaluate technology and infrastructure

• Check if the PEO provides robust technology solutions for payroll, record management, and employee self-service portals.
• Assess the ease of integration with your existing systems.

7. Understand the scope of liability

• Clarify what liabilities are shared and what remains the responsibility of your business.
• Discuss the PEO’s practices in handling compliance issues and legal disputes.

8. Ask for references and case studies

• Request references or case studies from businesses similar to yours.
• Learn from their experiences and the impact of the PEO services on their operations.

9. Review the service agreement carefully

• Thoroughly read the contract or service agreement.
• Pay special attention to the terms of service, cancellation policy, and any hidden fees.

10. Plan for transition

• Develop a clear plan for transitioning to the PEO.
• Ensure there are strategies in place for communicating changes to employees and integrating the PEO’s services with your current operations.

11. Evaluate continuously

• After selection, regularly assess the PEO’s performance. A good method is by gathering employee feedback.
• Ensure they continue to meet your evolving business needs and maintain a strong partnership.

What Are the Costs of a PEO?

PEOs usually charge based on a business’s payroll, meaning the costs can vary depending on the size of the client company.

You will likely need to provide some details about your payroll in order to get an accurate quote on pricing.

Remember that PEOs are meant to lead to time savings, which ultimately saves money. Overall, businesses have reported saving on average 27% cost savings from bringing on a PEO. 

The time saved from better handling HR matters should balancing out the costs of the PEO itself.

What Kinds of Organizations Benefit From Using a PEO?

While professional employment organizations offer myriad benefits, they're not for every organization. If one or more of the following describes your org, you may be a good candidate to work with a PEO:

• Small to Mid-Sized Businesses
• Start-ups
• Companies with limited hr expertise
• Businesses looking to scale rapidly
• Organizations with a high employee turnover
• Companies needing streamlined hr processes
• Industries with high regulatory compliance demands
• Businesses seeking competitive employee benefits
• Organizations without an established hr infrastructure
• Businesses operating in multiple states or internationally
• Companies looking for risk management support.

Before approaching a PEO, it's advantageous to consult with your leadership team and audit how your existing HR ops are working and their strengths and weaknesses. This way, you'll be better prepared to approach a PEO with clear goals for the business relationship.

Other Types of HR Outsourcing 

It's possible that your organization only needs to outsource one or two areas of your people management operations.

If that's the case, you might consider engaging with a firm that specializes in outsourcing specific HR services, such as:

• Employer of record: EOR services perform many of the same functions as an PEO but is the legal employer, making them better suited to global HR management outsourcing. For more, read our article on the difference between PEO and EOR.
• Payroll Services: These firms take care of payroll processing, including tax deductions, pay slip generation, and compliance with tax laws.
• Recruitment process outsourcing (RPO): RPO service providers can take over your entire hiring process or specific parts of the recruitment process according to your needs.
• Employee benefits administration: These services allow you to outsource the management of employee benefits such as health insurance, retirement plans, and wellness programs.
• Training and development: Many providers offer professional development and training programs to help your employees develop new and existing skill sets.
• HR consulting: There's always the option of engaging external HR experts for strategic advice, often for specific projects or to address particular challenges.
• Employee assistance programs (EAP): Employee support service providers can be contracted to offer services that complement standard healthcare plans, including counseling, mental health support, and work-life solutions.
• Compliance management: Since compliance can be a legal minefield, you may wish to seek external expertise to ensure adherence to employment laws and regulations.
• HR Technology Services: These firms support the management of HR-related software and technology systems, such as HR information systems (HRIS).
• Performance management: You can hire external services to design and implement performance appraisal systems and processes.
• HR audits: Consider engaging a firm to conduct audits of HR policies, practices, and procedures to ensure effectiveness and compliance.

Best Professional Employer Organizations

While a PEO may help you run your business, they will not run your business for you. This means that they will not make difficult management decisions, and they won’t make any decisions unilaterally.

A professional employment organization is meant to make business easier—especially when your team is outgrowing your in-house HR capacity.

To find the right PEO service for you, check out our pick of the best professional employer organizations. Here’s the shortlist below:

1. 1. Deel — Best PEO company for reliable end-to-end payroll management
2. 2. Rippling — Best PEO service provider for USA and Canada-based companies
3. 3. ADP TotalSource — Best PEO company for accessing benchmarked salary data
4. 4. Paychex PEO — Best PEO company for its industry reputation and US-based support
5. 5. Paychex Flex — Best for advanced benefits administration and HR consulting services
6. 6. Atlas HXM — Best PEO service for global mobility and immigration support
7. 7. Velocity Global — Best PEO provider for relocation services
8. 8. Globalization Partners — Best PEO company for flexible payment methods
9. 9. CloudPay — Best PEO and global payroll service that offers pay on-demand
10. 10. Mercans — Best PEO company with additional specialty services for global operations

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Trends in PEO Services and Technology

PEO companies are evolving by shifting their service models to meet modern client demands while incorporating advanced technology into their PEO software. Key trends include:

• Specialized Services: More tailored HR solutions for SMEs and specific industries, moving away from generic offerings.
• AI and Machine Learning: Streamlining HR tasks like payroll and benefits while enhancing predictive analytics.
• Automation: Compliance and risk management are increasingly automated for accuracy and efficiency.
• Blockchain: Some PEOs are exploring blockchain for secure payroll and verification processes, enhancing transparency in HR operations.

These advancements position PEOs to offer flexible, tech-driven solutions to meet their client's needs.