Article
3 min read
What Is a PEO and How Does It Work?
PEO
Author
Jemima Owen-Jones
Published
September 28, 2021
Last Update
August 20, 2024
Table of Contents
How does a PEO work?
What services does a PEO provide?
Why would a business use a PEO: Top reasons
What are the pros and cons of a PEO?
PEO vs. employee leasing companies
PEO vs. temporary staffing services
PEO vs. administrative services outsourcing (ASO)
PEO vs. human resources outsourcing (HRO)
PEO vs. employer of record (EOR)
How to choose a PEO service for your company
Manage and grow your workforce with Deel
Key takeaways
- Small and midsized business owners often turn to PEOs for support with HR management so they can focus on their core competencies.
- PEOs are co-employers and do not assume full legal responsibility in case of legal disputes.
- Companies planning to expand internationally are better suited to EORs, which provide additional international hiring, global payroll, and compliance support.
A Professional Employer Organization (PEO) is a firm that provides comprehensive HR solutions for small and mid-sized businesses. Through a co-employment arrangement, the PEO manages various HR responsibilities, including payroll processing, employee benefits, workers’ compensation, and compliance with employment and labor laws and regulations.
How does a PEO work?
When a company engages a PEO, they enter into a co-employment relationship which means the PEO assumes partial legal responsibility for the employees for tax purposes and must use its Employer Identification Number.
Doing business with PEO isn’t the same as HR outsourcing when a company outsources HR tasks to an external HR company.
At the start of the co-employment arrangement, the company and PEO sign a client service agreement (CSA) contract, which outlines each party’s responsibilities. The client company remains in charge of the employee’s work schedule, scope of work, daily responsibilities, and recruitment, while the PEO helps take on specific HR functions.
Business owners also retain management control and are responsible for administrative fees. A PEO cannot make independent decisions on behalf of the business—this includes working hours, schedules, and salaries. A PEO doesn’t intervene with sales, marketing, or distribution.
What services does a PEO provide?
Each PEO varies in the array of HR services it offers. Below are some of the typical services a PEO provides to businesses:
- HR support: PEOs can help in-house HR teams manage employee contracts, onboarding, terminations, background checks, employment verification, performance management, and more
- Payroll services: PEOs typically handle payroll processing, payroll tax withholding, and deductions on behalf of a company. Payroll also involves meticulous record keeping and reporting, delivering online pay stubs, invoices, forms, and PTO tracking.
- Compliance: PEOs comprise legal experts that ensure compliance with local tax and employment laws to avoid penalties and disputes
- Employee benefits administration: PEOs can administer mandatory and voluntary benefits packages such as healthcare, workers’ compensation, retirement plans, unemployment insurance, and more
- Employee training: PEOs can provide training courses, workshops, and self-serve knowledge bases to help employees hone their skills and become stronger company assets
- Recruiting and talent services: Some PEOs can help companies execute their headcount planning and recruiting efforts, assisting with job descriptions, posting, and interviews
Deel PEO
Why would a business use a PEO: Top reasons
PEOs are particularly beneficial for businesses that want to scale without building an extensive internal HR infrastructure. Here are the top five reasons companies choose to partner with a PEO, demonstrating how it can streamline operations, enhance employee benefits, and drive business growth.
1. Access to better employee benefits
Using a PEO allows small and mid-sized businesses to offer competitive benefits like health insurance, retirement plans, and wellness programs. PEOs pool together employees from multiple client companies, enabling them to negotiate better rates and more extensive benefits packages than a single small business could access on its own.
2. Streamlined HR management and compliance
PEOs take over complex HR tasks such as payroll, tax filing, workers’ compensation, and regulatory compliance. This helps businesses ensure they remain compliant with ever-changing employment laws and regulations. This reduces the risk of fines, penalties, and legal challenges, allowing businesses to focus on growth and operations.
3. Reduced administrative burden
By outsourcing HR functions, companies can significantly reduce their administrative workload. PEOs manage time-consuming tasks like employee onboarding, benefits administration, and payroll processing, freeing up internal resources and allowing leaders to concentrate on core business activities.
4. Improved employee retention and satisfaction
Offering competitive benefits, streamlined HR processes, and better employee support through a PEO can enhance job satisfaction and loyalty. Employees appreciate having access to robust benefits and clear HR policies, which can reduce employee turnover and improve retention.
5. Scalability and growth support
A PEO provides scalable HR solutions for businesses experiencing rapid growth or looking to expand into new regions. PEOs can quickly onboard new employees, ensure compliance across different states or countries, and manage the growing administrative demands.
What are the pros and cons of a PEO?
The pros of a PEO
Time-savings: A PEO takes over time-consuming and repetitive administrative tasks, allowing businesses to focus their resources on core business activities.
Improved safety and risk management: PEO experts ensure the company complies with state laws. To mitigate risks, PEOs provide safety training programs, assist with inspections and audits, and take care of liability insurance.
Access to exclusive benefits: PEOs provide their clients with employee benefits typically reserved for Fortune 500 companies. With a PEO, even small businesses can offer their employees top health insurance providers, retirement plans, and educational opportunities that help attract and retain top talent and result in cost savings.
The cons of a PEO
No international experience: PEOs specialize in local law and compliance. Global companies that hire and operate internationally require expertise in international labor law and regulatory compliance to avoid fines, claims, and penalties.
Shared liability: PEOs do not assume full legal responsibility since they are a joint-employer. This arrangement means the client company could still be liable if a legal dispute arises, for example, if the PEO fails to pay employees the correct overtime in line with the law.
Less control over benefit plans: When a company chooses a PEO, they buy into the service packages a PEO offers. Suppose your employees like their current benefit carrier. In that case, they may be forced to use another if the PEO prefers a particular provider.
PEO vs. employee leasing companies
The main difference between a PEO and an Employee Leasing Company (ELC) is the PEO’s relationship with employees and their job permanence.
PEOs only provide services for client companies and existing workers of that company. Once a PEO and client company terminate their relationship, employees stay with the company, and their ties with the PEO cease. PEOs do not provide the company with a supply of new employees.
Employee leasing companies provide the company with new workers, usually for temporary projects. After the leased employees complete the work for the company, they return to the ELC that assigned them to find another short-term job.
PEO vs. temporary staffing services
Like an ELC, temporary staffing services provide client companies with additional staff. These organizations recruit workers for companies experiencing seasonal shortages, temporary skill shortages, or employee absenteeism.
PEO vs. administrative services outsourcing (ASO)
ASO is another type of HR solution. Unlike with a PEO arrangement, the company retains full employer status and must report payroll taxes using its own Employer Identification Number. With an ASO, companies can also maintain their existing benefits and worker’s compensation providers.
PEO vs. human resources outsourcing (HRO)
An HRO is also an HR service provider where the client company retains full administrative employer status. However, unlike PEOs and ASOs, HROs provide specific HR-related tasks based on the HRO provider’s experience and specialty. HROs are popular with larger companies that have developed internal departments and only require specific HR expertise.
PEO vs. employer of record (EOR)
Like a PEO, an employer of record takes care of a company’s human resources while the company manages the employee’s day-to-day activities, schedules, and workloads. However, an EOR is a legal employer of your workforce, which means they assume complete responsibility for your full-time employees and are liable in case of a law breach.
An EOR is particularly beneficial for companies planning international expansion. It allows them to legally hire employees in another country or region on their behalf, saving them from needing to establish a foreign subsidiary there.
EORs also provide global payroll services and advice from international law and compliance experts. When an EOR hires an international employee on a company’s behalf in a new country, they ensure that the worker’s contract, payment, and mandatory benefits packages comply with local laws and regulations, providing total peace of mind in case of external audits.
Complimentary reading
Some EORs, like Deel, come with additional advantages such as:
- Exclusive access and enrollment in flexible, high-quality, and cost-effective benefit plans and perks, including discounted healthcare, health insurance, workers’ compensation insurance, and unemployment insurance
- The ability to hire and pay employees and independent contractors
- Background checks
- Onboarding, offboarding, and terminations
- Equipment supply
- Visa and mobility support
- 24/7 client support and employee helpdesk
Deel Employer of Record
How to choose a PEO service for your company
Pick a PEO that:
- Has a good reputation, financial stability, and transparent pricing
- Provides services that match your business needs
- Certified by an accredited authority
In the US, PEOs can earn certified status, which means they meet the IRS financial, reporting, and legal requirements and have been recognized and awarded with an ESAC certificate.
To find a service partner with the expertise you need, visit the National Association of Professional Employer Organizations (NAPEO) directory.
Manage and grow your workforce with Deel
Struggling to find the time and resources to assemble a robust HR department, let alone build a talented international team? As a business owner, you have much to consider, such as payroll, health insurance, additional benefits, and staying compliant with local and international laws.
Deel PEO makes managing your US team easier. Offload compliance risks and HR admin to us so you can focus on scaling your business across all 50 states and beyond.
- Payroll and tax administration: Federal, state, and local tax payments and fillings, W-2, W-4, 1099, and new hire reporting
- HR administration and compliance: Regulatory compliance, unemployment administration, compensation management, HR policies
- On-demand HR support: Employee handbook with policies, procedures, and guidelines
- Employee benefits: Comprehensive benefit packages at attractive prices, 401K insurance, and FMLA compliance
- Mandatory training: Anti-sexual harassment and discrimination training
Book a demo today to see how we can help.
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FAQs
What is the difference between a PEO and a payroll company?
A PEO provides comprehensive HR services, including payroll processing, employee benefits management, compliance assistance, and HR support. When you partner with a PEO, they become a co-employer, meaning they share specific employment responsibilities with your company.
A payroll company focuses primarily on processing payroll and handling tax filings. While they may offer additional services like time tracking or limited benefits management, they do not provide the full HR suite that a PEO does, nor do they assume co-employment responsibilities.
What size company should use a PEO?
PEOs are generally most beneficial for small to mid-sized companies, typically those with a number of employees from 5 to 250. These companies may lack the resources for dedicated HR professionals and benefit from outsourcing comprehensive HR tasks like payroll, compliance, and benefits administration. That said, even larger organizations sometimes use PEOs for niche needs.
Can a sole proprietor use a PEO?
Yes, a sole proprietor can use a PEO, although it’s more common for businesses with at least a few employees. Some PEOs cater specifically to micro-businesses or sole proprietors, offering health benefits, retirement plans, and HR compliance services that are typically difficult to manage independently.
What is the difference between a PEO and an entity?
A PEO provides HR services and acts as a co-employer but does not provide the infrastructure needed to operate as a standalone legal entity in foreign markets. On the other hand, an entity refers to a legally registered business in a specific jurisdiction, such as a branch office, subsidiary, or local company, allowing a business to operate legally in a region. If a company needs a local presence in a new country, setting up an entity might be required, whereas a PEO is more about managing HR.
Is a PEO the same as a staffing agency?
No, a PEO is not the same as a staffing agency. A staffing agency primarily provides temporary workers and handles recruitment. In contrast, a PEO offers ongoing HR management services, such as payroll, benefits, and compliance. PEOs enter a co-employment agreement to handle HR functions for a company’s existing employees. In contrast, staffing agencies focus on sourcing and supplying temporary or contract workers.
What is a PEO liable for?
A PEO shares specific legal responsibilities with PEO clients. Typically, the PEO assumes liability for compliance with payroll tax filings, HR-related laws, workers’ compensation, and benefits administration. However, the client company still maintains control over daily operations and specific business decisions.
Are PEO employees considered leased employees?
PEO employees are sometimes referred to as leased employees because the PEO technically employs them for tax and benefits purposes. However, they are different from traditional leased employees from a staffing agency. The primary difference is that PEO employees are typically long-term, regular workers of the client company. In contrast, leased employees are usually temporary and managed entirely by the staffing agency.
Is a PEO a common-law employer?
In most cases, the client company remains the common-law employer, meaning it has the legal right to direct and control the work performed by the employees. The PEO assumes certain administrative and HR functions but does not typically take over the role of the common-law employer.
What is a certified PEO?
A certified professional employer organization (CPEO) is a type of PEO that has been vetted and certified by the Internal Revenue Service (IRS) in the United States. This certification ensures that the PEO meets specific financial and operational standards, providing greater assurance to clients regarding tax compliance and financial responsibility.
About the author
Jemima is a nomadic writer, journalist, and digital marketer with a decade of experience crafting compelling B2B content for a global audience. She is a strong advocate for equal opportunities and is dedicated to shaping the future of work. At Deel, she specializes in thought-leadership content covering global mobility, cross-border compliance, and workplace culture topics.
