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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:

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.

FAQs

What are Certified PEOs?

A Certified Professional Employer Organization (CPEO) is a specific designation by the IRS for PEOs that meet rigorous, federally regulated standards. CPEOs undergo a thorough certification process by the IRS, ensuring they meet requirements related to financial responsibility, tax compliance, and other regulatory criteria.

The advantages of working with a Certified PEO (CPEO) versus a standard PEO include:

  • IRS Certification: CPEOs must pass stringent IRS requirements to ensure compliance.
  • Tax Liability Protection: CPEOs assure against certain federal employment taxes.
  • Financial Transparency: CPEOs are subject to financial audits.
  • Credibility and Trust: CPEO certification demonstrates a higher level of credibility.
  • Reduced Tax Risks: CPEOs can reduce the risk of tax-related issues for client companies.

What are the benefits of working with a PEO?

PEOs are HR professionals whose job it is to 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 tasks 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.

What are ESAC Accredited Professional Employer Organizations?

ESAC (Employer Services Assurances Corporation) accreditation is another form of PEO certification. EOs that are ESAC accredited have undergone a rigorous process to meet specific financial, ethical, and operational standards set by ESAC.

ESAC Accredited PEOs offer many of the same benefits as CPEOs. The key differences are:

Certification Body
CPEO: Certified by the IRS based on federal tax compliance and financial standards.
ESAC: Accredited by the Employer Services Assurance Corporation for operational, financial, and ethical standards.
Focus of Accreditation
CPEO: Focuses on tax compliance and financial responsibility.
ESAC: Emphasizes financial stability, ethical practices, and operational standards.
Government Recognition
CPEO: Recognized and regulated by the IRS.
ESAC: Focuses on broader compliance aspects, including financial, ethical, and operational standards.
Scope of Assurance
CPEO: Primarily focuses on tax-related assurances and financial aspects.
ESAC: Broader focus covering financial stability, ethical practices, and operational standards.
Client Protections
CPEO: Provides certain protections related to federal employment taxes.
ESAC: Offers client protections through adherence to higher operational and ethical standards.
Emphasis on Compliance
CPEO: Strong emphasis on IRS compliance and tax-related matters.
ESAC: Focuses on broader compliance aspects including financial, ethical, and operational standards.

CPEOs vs. ESAC Accredited PEOs

How do PEOs make money?

PEOs make money through fee structures based on the services they provide to their client companies. Here are common ways PEOs generate revenue:

  1. Administrative fees: PEOs typically charge a service fee, often calculated per employee or as a percentage of total payroll. This fee covers the cost of managing HR tasks such as payroll processing, benefits administration, and HR compliance.
  2. Insurance commissions: PEOs may earn commissions or receive a portion of the premiums from insurance products they offer, such as health insurance, workers’ compensation, and retirement plans. They often negotiate better rates by pooling employees from multiple client companies.
  3. Markup on services: PEOs might charge a markup or earn revenue by providing certain services, such as HR consulting, training programs, or additional HR-related tools and technologies.
  4. Interest income: PEOs may earn interest by temporarily holding funds before distributing payroll or taxes to appropriate entities. However, regulations often limit the duration and use of these funds.
  5. Ancillary service charges: PEOs can generate revenue through additional services not included in the standard package, such as employee training, background checks, or specialized HR consulting.

How will a PEO partnership impact our day-to-day operations?

Partnering with a Professional Employer Organization (PEO) can significantly impact your day-to-day operations in several ways:

  1. Streamlined HR tasks: A PEO can handle various HR functions like payroll processing, benefits administration, and compliance tasks, freeing up your time to focus on core business activities.
  2. Access to expertise: A PEO affords you access to HR professionals who offer expertise in navigating complex employment laws and regulations—ensuring compliance and reducing the risk of errors.
  3. Improved employee benefits: PEOs often offer access to better employee benefits and cost-effective insurance plans by pooling employees from multiple client companies.
  4. Enhanced HR technology: Many PEOs provide access to advanced HR software and technology, streamlining processes like time tracking, payroll, and employee self-service portals.
  5. Focus on strategic growth: With routine HR tasks managed by the PEO, your company can focus on strategic growth initiatives, innovation, and enhancing the overall business strategy.
  6. Co-employment relationship: The co-employment model means the PEO shares employer responsibilities, impacting certain HR decisions that might require coordination with the PEO. There are also certain co-employment risks to be aware of.

Change in administrative procedures: Your company might need to adapt to new administrative procedures or systems implemented by the PEO, affecting how certain HR-related tasks are executed.

What is the difference between a PEO in the USA vs PEOs abroad?

The primary differences between PEOs in the USA and those abroad center around regulations and market focus:

  • Regulatory Environment: U.S. PEOs focus heavily on complying with federal, state, and local employment laws, which vary across states. Abroad, PEOs must navigate complex international labor laws, tax regulations, and cultural differences.
  • Service Offerings: International PEOs often offer Employer of Record (EOR) services for companies hiring across borders, which is less common with U.S.-based PEOs that deal mostly with domestic employment.
  • Market Focus: U.S. PEOs typically serve small to mid-sized businesses, while international PEOs may cater more to companies expanding globally.

David Rice

David Rice is a long time journalist and editor who specializes in covering human resources and leadership topics. His career has seen him focus on a variety of industries for both print and digital publications in the United States and UK.