What Is a PEO? Definition & How It Works

What is a PEO? Use this guide to learn about what a PEO is, how PEOs work, why companies may use them, and the different types of PEOs.

As a business owner, you may think that comprehensive HR solutions and impressive benefits packages seem beyond your grasp, mainly when other areas of the business require your time and attention. That's why it's essential to understand what a professional employer organization (PEO) can offer your business and the potential benefits you can expect when you outsource HR administrative tasks.

What Is a PEO and What Does It Stand For?

Businesses looking for HR help can outsource certain HR administrative tasks like payroll, benefits, workers' compensation, and employee training to a PEO to help save time and money. You can also gain guidance to help maintain your compliance with federal and state employment laws and other specialized and support for time-consuming tasks such as 401(k) plan administration and health, dental and life insurance so you and your management team can stay focused on the business and your customers.

Are There Different Types of PEOs?

PEOs do not supply labor to worksites or other staffing services, nor do they take over the hiring and management of your employees. There is only one type of PEO: the organization provides HR and employee relations support services for a business's existing workforce. In short, PEOs offer outsourced HR services.

How Does a PEO Work?

The client company signs a service agreement with the PEO, which generally includes the following:

The PEO performs certain HR administrative services while the client remains the worksite employer. The PEO can provide support to a client's in-house HR staff and teams.
The client company is responsible for hiring and managing their employees and handling non-employee-related business operations (e.g., sales, marketing, customer service).
The PEO is responsible for processing employee wages, benefits, and withholdings and for remitting and reporting taxes to any applicable state and federal authorities for the duration of the service agreement.
The PEO helps the client company maintain compliance by keeping track of complex employment laws and offering risk management strategies. This may include payroll tax laws and reporting requirements, workers' compensation, and employee relations issues.
An HR professional may work with the client company to help the organization proactively address critical areas of risk, helping ease concerns around employee relations and accommodations, terminations, and other employee-workplace issues.
Specific tasks, such as developing an employee handbook, may be shared between the client company and the PEO as outlined in the service agreement.
PEOs can assist with many HR functions, allowing businesses and internal HR teams to focus on company culture, client satisfaction, and employee engagement.
The client company obtains access to the PEO's pool of benefits options and support for administering them.

What Doesn't a PEO Do?

In contrast to leasing or staffing companies, which typically supply new workers on a temporary or project-specific basis, a PEO takes a different approach. A PEO doesn't engage in such practices, where temporary staffing services generally recruit and hire employees for short-term assignments like during employee absences, temporary skill shortages, or seasonal workloads. PEOs do not supply labor to worksites. PEOs provide services and benefits to both the worksite employer and the client’s employees.

PEOs, also known as a professional employment or employer organizations, are sometimes mistaken for other outsourcing service organizations that include similar or related services, such as:

Staff leasing company
Employee leasing company
Managed payroll
Human resources outsourcing organization (HRO)
Administrative services organization (ASO)

PEOs are not responsible for controlling your business or your employees; they provide access to HR advice and guidance to lean on when you need assistance. PEOs will also not replace your internal HR staff if you already have resources in place. A PEO can provide specialized and supplementary HR guidance from a team of subject matter experts for regulatory compliance, safety, benefits, risk management, and other HR and employee-related topics.

Why Do Companies Use a PEO?

While it may be challenging to trust certain aspects of your business operations to an external organization, business owners across the country are realizing the benefits of a PEO. So why use a PEO? For time- and energy-strapped employers, working with a PEO can free up a considerable amount of company resources that would otherwise be spent on administering payroll and other required, time-consuming tasks.

Paychex client and HR business partner Jillienne Allgäuer, SPHR, SHRM-SCP, outlines some of the most critical PEO benefits for business owners: "A PEO can offer support with administrative services spanning the entire employment life cycle. From assisting with recruiting and hiring, employee handbook development, cultivating an attractive benefits package, and ongoing management training, to consulting on employee coaching and dismissal processes and handling unemployment claims, a PEO can provide businesses both substantial administrative relief and valuable resources."

Businesses can expect many valuable PEO advantages, including:

Time savings: Clients may find that having the PEO absorb most of the time commitment associated with general HR tasks allows them to focus on other core business operations.
Cost savings: A PEO's buying power regarding workers' compensation and health insurance is generally greater, which helps to make these purchases more affordable than what's available to small businesses.
Peace of mind: Business owners may feel at ease knowing they are not alone at any point throughout the employment life cycle.
Better benefit offerings for employees: Companies looking to offer competitive benefits packages gain access to Fortune 500-level benefits and professional administrative services.
Improved tracking and administrative functions: The PEO typically conducts an in-depth HR assessment to help minimize risk and maximize growth and development opportunities.
Business growth: According to the National Associated of Professional Employer Organizations (NAPEO,) "Businesses in a PEO arrangement grow 7-9 percent faster, have 10-14 percent lower turnover, and are 50 percent less likely to go out of business."
Help with recruiting and retention: Recruiting, engaging, and retaining staff can be time-consuming and expensive. A PEO can help you maximize the investment in your people by assisting in the recruiting and hiring process, helping communicate policies via an employee handbook, providing training programs, and offering guidance throughout the employee life cycle.
Employment-related compliance help: Having support and guidance from a PEO can assist business owners with their compliance efforts as they navigate increasingly complex regulations and demanding business processes.

What Types of Companies Use and Benefit From PEOs?

Any business can find value in a PEO relationship. According to Paychex research, 59 percent of organizations with 5 to 500 employees currently use a PEO, and 16 percent have used a PEO in the past but are not currently working with one.¹ The PEO industry’s 173,000 clients represent 15.3 percent of all employers with 10 to 99 employees.²

Increasingly larger businesses are also finding benefits with a PEO arrangement because PEOs offer robust web-based HR technologies and expertise in HR management. PEOs can work with companies with large employers in conjunction with their existing HR department.

PEO clients include different types of businesses ranging from various industries, including professional services firms, skilled trades companies and high-tech organizations.

Differences Between PEO and Other Services

A PEO is one type of HR outsourcing. Other options are available, which can also help you manage your business more effectively. When evaluating your options or familiarizing yourself with PEO terminology, knowing the differences between a PEO vs. HR software and PEO vs. payroll companies is essential.

PEO vs. HR Software

A PEO differs significantly from solely leveraging HR technology. A PEO allows your company to outsource HR functions such as payroll, benefits, employee training, and access guidance to comply with federal and state employment laws. Software only provides a platform for you to manage these activities on your own.

PEO vs. Payroll Company

When it comes to payroll, PEOs and payroll services companies both aim to streamline the process, but there are significant differences in how the process is executed. Depending on your provider, outsourcing to a payroll company means you receive assistance running payroll and help calculating, preparing, and remitting payroll taxes and returns to government agencies. However, the business is ultimately responsible for meeting its payroll and tax obligations, even using a third party. A PEO offers a more comprehensive solution. The PEO generally assumes responsibility for processing employee wages under the terms of the service agreement, as well as benefits, and withholdings and remitting and reporting taxes to any applicable state and federal authorities on behalf of the client company. Additionally, PEOs go beyond payroll and offer support in other areas such as regulatory compliance, workplace safety, workers' compensation, and HR administration.

How To Choose a PEO

Although PEOs offer multiple cost- and time-saving strategies, working with a PEO may not suit every business. Even after determining that a PEO can benefit your company, selecting the PEO that offers the right combination of add-on services, a range of benefits, flexibility, stability, and reputation remains essential for any employer. Learn more about choosing a PEO.

Free Up Time and Resources With a PEO

Choosing the right professional employer organization can take your company to the next level — resulting in increased retention, better benefits, and significant cost savings for your business.

Learn more about Paychex PEO Services, which provides various options to help you meet your business needs. This investment can reap significant rewards for your small business moving forward and free you to focus on continued business growth.

What Is a PEO? Definition & How It Works | Paychex (2024)