A Professional Employer Organization (PEO) is a third-party company that helps businesses manage HR-related tasks, including payroll, employee benefits, compliance, and tax filings. The PEO handles administrative and regulatory operations, allowing companies to focus on major operations while sharing employer responsibilities. The co-employment partnership is beneficial for small and mid-sized businesses looking to improve their productivity.
The three types of PEOs are full-service PEOs, administrative services organizations, and specialized PEOs. Full-service PEOs, which handle all HR tasks, including payroll, benefits, compliance, and training. Administrative Services Organizations (ASOs) focus only on administrative work without co-employment agreements. Specialized PEOs provide services according to specific industries or tasks, including compliance or benefits, making them a good choice for unique business needs.
A PEO operates through a co-employment model. The business keeps control of its daily operations while the PEO handles HR tasks. The co-employment model helps companies to save time, reduce administrative work, and comply with labor laws. Employees continue to work for the business but also get access to better benefits and support through the PEO. Partnering with a PEO offers many advantages, including the ability to save money by accessing group benefits and reducing risks by ensuring compliance with labor laws and tax rules.
The cost of a PEO depends on the number of employees and the services provided. Prices range from 2% to 12% of payroll or a flat monthly fee of $40 to $200 per employee. Businesses look at their experience in the industry, the services they provide, their pricing, and whether they are certified by organizations, including Employer Services Assurance Corporation (ESAC).
What is a professional employer organization (PEO)?
A Professional Employer Organization (PEO) is a company that helps businesses manage important HR tasks, including payroll, employee benefits, taxes, and labor law compliance. PEO works through a co-employment agreement, where the PEO handles these responsibilities. At the same time, the business focuses on running its daily operations, according to the research article published in 2008 titled Professional Employer Organizations: What are They, Who Uses Them, and Why Should We Care?
PEOs are beneficial because they simplify HR management, especially for small and medium-sized businesses. They provide access to resources, including better employee benefits and compliance support, which are usually available only to larger companies. PEOs help businesses attract and retain talented employees while meeting all legal requirements. Businesses need PEOs to free up time and focus on growth instead of getting caught up in complicated HR work. PEOs are a cost-effective way to get professional HR support without needing a full HR team.
What is a certified PEO?
A Certified Professional Employer Organization (CPEO) is a PEO officially recognized and certified by the Internal Revenue Service (IRS) in the United States. The certification means the PEO meets strict financial, tax, and operational standards set by the IRS. Certified PEOs are responsible for paying federal employment taxes on behalf of their clients, which provides added security and peace of mind for businesses.
What are the types of PEO services providers?
There are three types of Professional Employer Organization (PEO) service providers: Full-Service PEOs, Administrative Services Organizations (ASOs), and Specialized PEOs.
The 3 types of PEO service providers are explained below.
- Full-Service PEOs. Full-service providers handle all HR tasks, including payroll, benefits, compliance, training, and risk management. Full-service providers are ideal for businesses looking for a complete solution to outsource their HR functions.
- Administrative Services Organizations (ASOs). ASOs focus only on administrative tasks, including payroll and benefits administration. ASOs do not enter into co-employment agreements, giving businesses more control over employee management, unlike full-service PEOs.
- Specialized PEOs. Specialized PEO providers offer services according to specific industries or needs, including compliance with certain labor laws or managing employee benefits in niche sectors. Specialized PEOs are a good choice for businesses with unique requirements.
How does a PEO work?
A Professional Employer Organization (PEO) works through a co-employment arrangement in which the business and the PEO share employer responsibilities. The business controls its daily operations, including managing employees and making business decisions, while the PEO handles HR tasks, including payroll, benefits, taxes, and compliance with labor laws.
When a company partners with a PEO, employees are employed by both the business and the PEO. This allows the PEO to handle administrative tasks efficiently while the business focuses on its core work. The PEO processes payroll, manages employee benefits, ensures legal compliance, and provides support for hiring, training, and workplace safety. The partnership helps businesses save time, reduce risks, and offer better benefits to employees without the need for an in-house HR team.
Which services does a PEO provide?
A Professional Employer Organization (PEO) provides a range of services to ease business workflows and improve operations.
The 10 important services provided by a PEO provider are listed below.
- Human resource consulting. PEOs help businesses plan and manage HR strategies, including creating policies, resolving employee issues, and improving workplace productivity. Human resource consulting benefits HR managers by offering expert advice and freeing up time for other important tasks. For example, small businesses create employee handbooks with PEO guidance.
- Payroll processing. PEOs handle payroll, including calculating salaries, processing payments, and issuing paychecks. Payroll processing ensures timely and accurate payroll management, especially for startups with limited resources. Companies, including startups, rely on PEOs to avoid payroll mistakes.
- Employer payroll tax filing. PEOs manage payroll taxes by calculating, filing, and paying them on behalf of businesses. Employer payroll tax filing service reduces compliance risks for business owners and freelancers who do not have tax expertise.
- Worker’s compensation insurance. PEOs provide access to affordable worker’s compensation insurance, which covers employee injuries at work. Worker’s compensation insurance helps startups and legal consultants meet safety requirements while controlling costs.
- Health benefits. PEOs offer more affordable and competitive group health insurance plans, which helps businesses attract and retain employees. Small businesses use PEOs to provide healthcare benefits they couldn’t afford on their own.
- Retirement plans. PEOs provide retirement plans, including 401(k) plans, which allow businesses to offer long-term benefits to employees. Freelancers transitioning into business owners use retirement plans to attract experienced employees.
- Regulatory compliance assistance. PEOs ensure businesses follow labor laws and regulations, reducing legal risks. Recruiters working with international teams benefit by avoiding legal risks.
- Safety and risk mitigation services. PEOs help create safer workplaces by offering safety training and managing risks. Construction companies partner with PEOs to meet safety standards.
- Training and development. PEOs provide training programs to enhance employee skills and improve overall productivity. HR teams in growing companies use training and development services to upskill employees.
- Workforce management technology. PEOs offer tools to track employee hours, manage time off, and monitor performance. Startups and recruiters use workforce management tools to manage the team.
What are the functions of a PEO?
The functions of a Professional Employer Organization (PEO) include managing payroll, handling employee benefits, ensuring compliance with labor laws, and offering HR support. These functions are designed to help businesses make their operations clear and focus on growth.
A PEO processes payroll for employees, including calculating wages, issuing payments, and managing tax deductions. PEO also manages benefits, including health insurance, retirement plans, and worker’s compensation, making it easier for businesses to offer competitive benefits. Another important function is ensuring compliance with employment laws and tax regulations, which helps businesses avoid legal issues.
PEOs also provide HR support, including recruitment assistance, employee training, and performance management. They help with workplace safety and risk management, ensuring employees work in a safe environment. PEOs allow business owners to focus on running and growing their companies without being burdened by administrative work.
What are the responsibilities of a PEO services provider?
A PEO service provider manages payroll, administers employee benefits, ensures compliance with labor laws, and supports HR operations.
The 4 key responsibilities of a PEO service provider are listed below.
- Payroll management. A PEO ensures employees are paid on time and handles wage calculations, tax deductions, and direct deposits. Payroll management reduces errors and saves businesses time.
- Benefits administration. PEOs manage employee benefits, including health insurance, retirement plans, and worker’s compensation. PEOs negotiate group rates to offer better benefits at lower costs, making businesses more attractive to top talent.
- Regulatory compliance. PEOs ensure businesses follow employment laws, tax regulations, and workplace safety standards. Regulatory compliance helps prevent fines and legal issues, especially for small businesses with limited legal expertise.
- HR support. PEOs help with recruiting, onboarding, employee training, and performance evaluations, allowing businesses to manage their HR processes and focus on their business growth.
What are the benefits of using a PEO?
The benefits of a Professional Employer Organization (PEO) are cost savings, improved employee benefits, reduced compliance risks, and time efficiency.
The 4 key benefits of using a PEO are listed below.
- Cost savings. PEOs help businesses save money by offering group rates on benefits, including health insurance and retirement plans. PEOs also manage HR tasks, reducing the need for a large in-house HR team.
- Improved employee benefits. PEOs offer better benefits packages, including healthcare, retirement plans, and paid leave, which helps businesses attract and retain talented employees.
- Reduced compliance risks. PEOs ensure businesses follow labor laws and tax regulations, minimizing the risk of fines or legal issues, especially for small businesses without a legal team.
- Time-saving. PEOs free up time for business owners and managers to focus on growth and operations by handling payroll, benefits, and compliance.
What are the drawbacks of using a PEO?
The drawbacks of a Professional Employer Organization (PEO) are limited control, costs, potential mismatches, and dependence on the PEO.
The 4 main drawbacks of using a PEO are listed below.
- Limited control. Businesses feel they have less control over HR functions since the PEO handles payroll, benefits, and compliance. The limited control over HR functions is challenging for companies that prefer to manage these tasks internally.
- High costs. PEOs save money in the long run, but their services come with fees, which are expensive for very small businesses or startups with tight budgets.
- Potential mismatches. Not all PEOs are a perfect fit for every business. If the PEO does not specialize in the industry or does not align with the company’s needs, it results in inefficient and poor service.
- Dependence on the PEO. Relying heavily on a PEO for major functions creates challenges if the partnership ends, as the business would need to quickly manage HR tasks on its own.
How much does a PEO cost?
The cost of a Professional Employer Organization (PEO) depends on the number of employees and the services provided. PEOs charge in two ways: as a percentage of the company’s total payroll or as a flat fee per employee. For percentage-based pricing, the cost ranges from 2% to 12% of payroll, depending on the complexity of services. For flat-fee pricing, businesses expect to pay between $40 and $200 per employee per month.
Additional costs apply for customized services, including industry-specific compliance support or advanced employee benefits packages. Businesses save money in the long term through reduced administrative expenses, access to group rates on benefits, and improved compliance with labor laws.
What are the best PEO services providers?
The best Professional Employer Organization (PEO) service providers are Employ Borderless, Deel, Justworks, Papaya Global, and Rippling.
- Employ Borderless. Employ Borderless helps businesses of all sizes expand globally. Expert Borderless helps with hiring employees in different countries without setting up local offices, managing HR for a global team, or staying compliant with international labor laws. Their tools and expert advice make it easy to manage the global workforce smoothly and efficiently.
- Deel. Deel is recognized for its exceptional customer service. Deel supports employers in over 100 countries and provides global payroll solutions for both contractors and employees.
- Justworks. Justworks is praised for its user-friendly platform. Justworks makes HR tasks easier, making it an excellent choice for small businesses looking for HR management tools.
- Papaya Global. Papaya Global specializes in international compliance. Papaya Global assists companies in managing employees across more than 160 countries and ensures obedience to local labor laws.
- Rippling. Ripplings is valued for its scalability and allows businesses to transition between PEO and non-PEO plans. Rippling offers customizable HR solutions that grow with the company.
What to consider when choosing a PEO services provider for your business?
When choosing a Professional Employer Organization (PEO) for your business, several key factors should guide the decision.
The 5 major factors to consider before choosing a PEO provider are listed below.
- Consider the services offered. Ensure the PEO provides the specific HR tasks the business needs, including payroll, benefits, compliance, and training. Then, evaluate the PEO’s experience and expertise. Look for providers familiar with the industry, as they better understand the unique challenges and regulations.
- Check the cost structure. Check the cost structure to make sure it fits the budget. PEOs charge either a percentage of payroll or a flat fee per employee, so choose one that aligns with the financial plans.
- Read client reviews. It’s important to review the PEO’s reputation by reading client reviews and asking for references. A reputable PEO should be accredited by organizations, including the Employer Services Assurance Corporation (ESAC), or certified by the IRS.
- Consider the technology and tools. Look for the technology and tools the providers use. A modern PEO offers easy-to-use platforms for managing HR tasks, including payroll and employee benefits.
- Evaluate the level of support provided. Look for a PEO with responsive customer service and account managers who quickly address the concerns.
What is the difference between a PEO and an EOR?
A Professional Employer Organization (PEO) and an Employer of Record (EOR) both help businesses manage HR and administrative tasks, but they operate differently. A PEO works through a co-employment model, where the business and the PEO share employer responsibilities. The PEO handles payroll, benefits, and compliance, while the business retains control over day-to-day operations and employee management. An EOR, on the other hand, is the legal employer of the workforce in a specific country. Businesses use EORs to hire employees in regions without a legal entity. The difference between EOR and PEO is that the EOR takes full responsibility for payroll, taxes, and compliance with local labor laws while the business manages the employees’ work.
What is the difference between PEO and traditional HR management?
A Professional Employer Organization (PEO) and traditional HR management differ in how they handle human resources functions. PEO helps businesses to outsource HR tasks, including payroll, benefits, compliance, and employee management. Traditional HR management involves an internal HR team handling all these tasks within the company. Traditional HR teams give companies full control over HR processes but lack the expertise and cost efficiencies that a PEO offers.
Does PEO work across different countries?
Yes, PEOs work across different countries, but their ability to do this depends on the provider and the services they offer. PEOs specialize in managing HR functions for businesses operating in multiple regions and provide payroll support.
Can a PEO handle international or global employment services?
Yes, some PEOs handle international or global employment services. Global PEOs specialize in helping businesses manage HR tasks, including payroll, tax compliance, and employee benefits, in multiple countries. They allow companies to hire employees in different regions without setting up legal entities. Not all PEOs offer international services, so businesses need to choose providers experienced in global employment.
Can a small business hire a PEO service provider?
Yes, small businesses can hire a PEO service provider. PEOs are beneficial for small businesses as they provide access to resources, including affordable group benefits, payroll services, and compliance support that would otherwise be costly or difficult to manage in-house.
How many employees do you need for a PEO?
There is no strict employee number required to hire a PEO, but they are most beneficial for businesses with 5 to 500 employees. Small businesses with fewer employees still work with a PEO, especially if they want to offer competitive benefits or need help managing compliance and HR tasks. Larger companies also benefit, but the cost and services must go parallel with their business needs.
What is included in a PEO agreement?
A Professional Employer Organization (PEO) agreement is the shared responsibility between the business and the PEO. It includes details about payroll management, employee benefits, compliance with labor laws, tax filing, and HR support. The agreement specifies the scope of services provided by the PEO, including processing payroll, administering health and retirement benefits, ensuring legal compliance, terms for confidentiality, dispute resolution, and the termination process.
What are the alternatives to a PEO?
The alternatives to a Professional Employer Organization (PEO) include in-house HR teams, Administrative Services Organizations (ASOs), and Employer of Record (EOR) services. In-house HR teams involve businesses building their own HR departments to manage payroll, compliance, and employee management. The in-house HR teams offer complete control but are expensive and time-consuming. ASOs, on the other hand, handle administrative HR tasks, including payroll and benefits, without engaging in a co-employment arrangement, which makes them ideal for businesses looking for external support without sharing employer responsibilities. EORs act as the legal employer for companies hiring internationally, managing payroll, taxes, and compliance in foreign countries.
