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What is PEO (Professional Employer Organization) and How Does It Work?

29 min read

people employer organization

As employment needs are becoming more and more complex, businesses are seeking cost-effective HR support. PEOs or Professional Employer Organizations offer HR solutions to businesses of all sizes, handling payroll, benefits, and compliance tasks.

The Professional Employer Organization (PEO) market, valued at USD 59.62 billion in 2022, is expected to reach USD 152.14 billion by 2031, growing at a rate of 11.10% annually (Straits Research).

PEOs are more adaptive to changing workforce landscapes, provide flexible solutions, and allow companies to adjust to new employment trends.

This blog discusses the meaning of PEO along with its business importance in the modern workforce. It talks about how PEO benefits companies, how to choose the right one, and what its shortcomings are.

In the end, we will take inspiration from some of the success stories of PEO as we learn more about the topic.

What is a PEO: Meaning, Definition, & History

A Professional Employer Organization (PEO) is a company that offers outsourcing services to small and medium-sized businesses. The outsourcing services here are mostly HR and people-centric ranging from payroll to administration.

Partnering with a PEO gives business leaders several advantages, supporting employees and helping the organization achieve its mission.

Definition of PEO

According to the National Association of Professional Employer Organizations (NAPEO), a PEO is a company that offers complete outsourced HR solutions for small and midsize businesses. They typically handle services like payroll, employee benefits, HR management, tax administration, and regulatory compliance.

History of PEO

Professional Employer Organizations (PEOs) have a fascinating history rooted in the need for businesses to manage their employees more efficiently. Let us look at it through the years:

peo evolution

1980s:

In the 1980s, Professional Employer Organizations (PEOs) began by handling simple payroll activities for client firms like distributing paychecks and managing payroll data. However, this caused confusion about employer status, leading to regulatory interventions.

1980s and 2000s:

Between 1980 and 2000, employment laws grew by 60%, increasing costs for businesses. PEOs adapted by expanding services, including HR management, benefits administration, and regulatory compliance. They also took on complex tasks like retirement plan administration and Employee Assistance Programs (EAPs).

In contractual relationships, PEOs and client firms define responsibilities. PEOs handle HR duties and administrative tasks, becoming joint employers with clients. PEOs don’t provide daily supervision or interfere in recruitment processes.

Present time:

PEOs evolved to meet changing regulations and client needs, offering comprehensive HR solutions while alleviating administrative burdens for businesses.

This provides businesses with expert HR support, allowing them to concentrate on more core activities while ensuring that their employees receive proper HR services. Over time, the concept of PEOs has gained popularity, especially among smaller businesses. It simplifies HR complexities and helps companies thrive in today’s competitive market.

Importance of PEOs in the modern workforce 

peo importance

PEOs provide essential HR services like payroll processing, tax handling, and benefits management. They work under a co-employment model, acting as the administrative employer.
This unique relationship allows businesses to access large group benefit offerings, reducing costs and creating predictability around potential increases in the future.

Here are 6 main important points why businesses consider using PEOs:

1. Saves business costs

Professional Employer Organizations (PEOs) reduce costs for businesses by streamlining HR functions, managing compliance, and providing access to large group benefits. 

According to Onward Advisors, 58% of companies achieved an average savings of 24% or no increase in costs by using a PEO.

2. Provides access to HR expertise and resources

Professional Employer Organizations (PEOs) provide comprehensive HR knowledge and resources. They also grant access to cutting-edge HR technologies, enhancing efficiency and the overall employee experience.

Furthermore, these organizations streamline the tedious tasks of sourcing, selecting, and managing employee benefit programs, conserving internal resources in the process.

3. Improves compliance and risk management

55% of businesses gained control over legal risks and compliance management, reducing potential legal issues.

If a partnered company faces any violations, the responsibility extends to the collaborating PEO. Therefore, PEOs play a crucial role in guiding companies through legal challenges and ensuring effective compliance management. 

4. Enhances employee benefits

PEOs research, negotiate, and administer comprehensive benefits packages, ensuring employees receive valuable perks such as health insurance, retirement plans, and wellness programs. 

They leverage their expertise and purchasing power to provide competitive benefits, enhancing the overall employee experience and satisfaction.

5. Allows more focus on core business functions

PEOs provide businesses with the flexibility to adjust to changes easily. Whether it’s hiring more employees, entering new markets, or updating HR rules, PEOs have the knowledge and resources to make these transitions smooth. 

This lets businesses concentrate on their main goals without getting bogged down by administrative issues.

6. Offers additional services and guidance

Since PEOs are so invested in your company, they offer additional training and guidance to your company. Some examples are:

  • Training for sexual harassment.
  • Creating an employee handbook and maintaining it.
  • Training on Indian laws like the Minimum Wages Act, Code on Social Security, Code on Wages, etc. 
  • Guiding the best hiring and laying off practices. 

How do PEOs work: Key functions and services offered

The exact services provided by professional employer organizations vary depending on the entity. However, PEOs typically provide three main services: 

  • HR support
  • Employee benefits
  • Risk and compliance management 

The solutions are tailored to clients’ needs. Let’s take a closer look at the above category of services and the options available.

1. HR Support

PEOs guide businesses in human resources strategies from handling administrative tasks to ensuring efficient workforce operations. Here are some of the services offered under this category. 

  • HR Management
  • Payroll and Tax Solutions
  • Performance Management
  • Recruiting Services
  • Training and Development
  • Scheduling
  • Time and Attendance
  • Garnishment processing 
  • Tax & tax return remittance 
  • W-2 & W-3 reconciliation 
  • Certified payroll

2. Employee Benefits

PEOs manage comprehensive employee benefit programs by leveraging their collective purchasing power. They secure competitive benefits for employees. Some of the services under employee benefits are:

  • Healthcare benefits
  • Life, Disability, Dental, and Vision Plans
  • 401(k) and Other Savings Plans
  • Voluntary Benefits
  • Complimentary Benefits 
  • Online open enrollment 
  • Invoice reconciliation 
  • Accountability for remittance to carriers 
  • Responsible for employee terminations
  • COBRA and HIPAA administration

3. Risk and Compliance Management

By ensuring businesses adhere to regulations, PEOs minimize legal complications, allowing companies to operate smoothly without worrying about compliance challenges. The services and functions in this category are:

  • Employee Lawsuits
  • Workers’ Compensation Management
  • Workplace Safety Improvements
  • Affordable Care Act (ACA) Compliance
  • Leave of Absence Management
  • I-9 Verification
  • Occupational Safety and Health Administration (OSHA) Support
  • Employee Policies and Notifications
  • Investigations of fraudulent claims 
  • Return-to-work programs

What kinds of businesses benefit from PEOs?

Businesses aiming to create outstanding workplaces can greatly benefit from partnering with a PEO. By collaborating with a PEO, companies can receive guidance in HR strategies and delegate administrative HR tasks. 

A fantastic company culture, attracting top talent, and fostering employee growth are key traits of the best workplaces. A suitable PEO can assist businesses in reaching these goals.

PEOs are suitable for a wide range of industries, including:

  • Real estate and property management
  • Computer services and technology
  • Securities brokers and dealers
  • Engineering services
  • Health services
  • Legal services
  • Management consulting services
  • Business services
  • Accounting, auditing, and bookkeeping
  • Manufacturing
  • Plumbing, HVAC, electrical, and other trades
  • Insurance
  • Wholesale
  • Nonprofits

How do the above businesses benefit from a PEO?

A collaboration with a PEO offers access to expert HR professionals at lower costs, ensuring compliance with complex employment laws and regulations. Shared liability with the PEO provides peace of mind, and group purchasing power enables better employee benefits. 

PEOs handle benefits administration, saving time and reducing costs related to insurance. Efficient HR technology solutions streamline processes, and businesses can access a variety of HR services and vendors through one platform, contributing to their overall success and growth.

How do PEOs differ from traditional HR and payroll services?

Here are the key differences between Professional Employer Organizations (PEOs) and Traditional HR

S.NoKey DifferencesPEOsTraditional HR
1.Employer of Record StatusActs as the official employer for tax and insurance purposes.The company directly serves as the employer of record.
2.Co-Employment RelationshipEstablishes a co-employment relationship, sharing certain employer responsibilities.Involves a direct employer-employee relationship without a third party.
3.Comprehensive HR ServicesProvide a wide range of HR services, including payroll, benefits, and compliance management.Companies handle HR tasks internally, which may vary in scope and specialization.
4.Risk Management and ComplianceSpecialize in ensuring legal compliance, and reducing the company’s risk of legal issues.Companies must manage compliance independently, which can be challenging due to evolving laws.
5.Integration and TechnologyOffer integrated HR technology platforms for streamlined processes.Relies on in-house or outsourced technology, which may lack seamless integration.
6.Scalability and FlexibilityEasily scale HR services according to business growth, adapting to changing needs.Requires internal adjustments, which can be time-consuming during periods of expansion or downsizing.
7.Control of HR functionsBusinesses using PEOs share control over HR functions.Companies retain full control over all HR functions, allowing them to tailor policies and practices to their specific needs.

Factors to consider while choosing the right PEO for your business 

There are plenty of options to choose from while selecting the right PEO for your business. However, there are certain factors that should be kept in mind while doing so. 

Here are they:

1. CPEO licensed

The Internal Revenue Service (IRS) designated a select few PEOs as Certified Professional Employer Organizations (CPEO) in 2017, setting a high standard for excellence. By working with a CPEO, which only 6% of PEOs in the U.S. achieve, you ensure you’re collaborating with a top-tier organization.

2. ESAC accredited

In 1995, the Employer Services Assurance Corporation (ESAC) was established as the official accrediting agency for professional employer organizations (PEOs). When you partner with ESAC-accredited PEOs, you’re choosing industry best practices and financial reliability – only 5% of all PEOs have earned this prestigious accreditation.

3. Location: National or Regional

When considering PEOs, you’ll find they fall into two main categories: national and regional. National PEOs operate nationwide, serving clients in multiple states, while regional PEOs may focus on specific states or regions.

4. Technology used

Since the rise of HR tech, keep in mind how updated the PEO is on the technology front. As an HR professional, you’ll appreciate that PEOs often provide technology solutions to simplify HR tasks. 

Here are some must-have technologies in your PEO:

  • Payroll processing software
  • HR management software
  • Time and attendance tracking software
  • Employee self-service portals

From managing payroll and benefits to tracking paid time off (PTO), these tools are accessible to both managers and employees, making HR administration more efficient.

5. Type of service model

When choosing a PEO, try to understand the service model they offer. Some PEOs provide a standard, one-size-fits-all approach, while others offer highly personalized solutions. 

Considering these differences can significantly impact your decision on which PEO to partner with, ensuring you find the right fit for your organization’s unique needs.

What are some questions to ask while selecting a PEO?

Here are 14 questions you can consider asking while you’re looking out for your PEO options.

  1. Are you officially certified by the IRS as a PEO?
  2. How is your pricing structured for the services you provide?
  3. Do you offer a service guarantee to ensure customer satisfaction?
  4. Will my company have dedicated support team members assigned to us?
  5. What measures do you take to safeguard my company from potential employee lawsuits?
  6. Is your health insurance and workers’ compensation insurance fully covered?
  7. Are the benefit premiums you present the final rates, or are there additional costs?
  8. How many different benefits carriers do you collaborate with?
  9. On average, how long do your clients typically stay with your services?
  10. What is the scope of your compliance services, and are there extra fees associated?
  11. How frequently do you update and improve your technology platform?
  12. Do you provide mobile access for worksite employees to manage their payroll, HR, and benefits information?
  13. What protocols do you have in place to ensure data security?
  14. Could you connect me with some of your current clients for references?

Challenges of a PEO: Potential Drawbacks

Although there seem to be several benefits of partnering with a PEO, as the organization grows, its drawbacks become more prominent. PEOs are not perfect for large-sized organizations without enough customizations. 

Let us have a look at the disadvantages of PEO in detail:

1. Imposing One-Size-Fits-All Approach

PEOs offer generic benefits and services that aren’t customized to meet the specific needs of your business and its employees. This means paying for services you don’t need and being unable to provide tailored benefits for a more impactful employee experience.

2. Paying More for Less

Despite the convenience, the one-stop-shop solution provided by PEOs often results in businesses paying more for fewer benefits. The lack of customization means you might end up with a package that doesn’t fully address your employees’ needs or preferences.

3. Inefficient Fee Structure

Many PEOs charge fees based on a straight percentage of your payroll expenses. While this might save money for smaller organizations initially, as your business grows, it can surpass the rates charged by non-PEO providers. Consequently, the cost-effectiveness diminishes over time and impacts your budget significantly.

4. Lack of Control Over Benefits Strategy

By relying on a PEO, you surrender control over your benefits strategy. PEOs often do not prioritize the nuances that differentiate your company as an employer. This lack of customization can affect your ability to offer unique and attractive benefits to your employees. It also hinders your ability to stand out in the competitive job market.

5. Financial Impact with Employee Raises

When your organization provides raises to employees, the PEO fees increase proportionally since they are structured as a percentage of payroll. This means that as you reward your employees’ performance and loyalty, the PEO’s share also rises, impacting your overall budget negatively

Cost Structure of PEO: Top Companies

Professional Employer Organizations (PEOs) typically charge businesses based on a flat monthly fee or a percentage of the payroll. The cost structure can vary widely depending on factors such as 

  • Size of the business
  • Number of employees
  • Services required
  • Specific needs of the business

The pricing ranges from INR 3000 to INR 5000 per month depending upon the above-mentioned factors and the quoting process. 

Quoting Process

The quoting process when opting for a PEO involves talking to the PEO representatives about your company’s needs. You share details like the number of employees and specific services you require. 

The PEO uses this information to create a customized quote, detailing the services and costs. You review the quote, negotiate if needed, and once you agree, you sign a contract, formalizing the partnership with the PEO.

The information that you need to share during the process has been mentioned in brief below:

1. Company Information

  • General details like FEIN number and office locations.
  • Current gross payroll by class code.
  • Details of the current Workers’ Comp policy, including experience modification rate and loss runs from past years.
  • Plan descriptions and latest invoices from existing insurance carriers.
  • Current year SUTA rates sheet from each state where your company operates.
  • Prior quarter’s payroll tax returns.
  • Disclosure of any ongoing claims against your company filed with organizations like DOL, EEOC, IDHR, or other human rights agencies.

2. Employee Information

  • Employee census
  • Workers’ comp class code
  • Annual salary
  • Employment status, etc. 

3. Your HR Needs

  • Frequency of onsite HR assistance required.
  • The preferred frequency for payroll processing.
  • Interest in specific employee benefits offerings.

 

Category Information 
Company Information 
FEIN Number [Your FEIN Number] 
Office Locations [List of office locations] 
Current Gross Payroll by Class Code [Provide details by class code] 
Workers’ Comp Policy Experience Modification Rate: [Your EMR]
Loss Runs: [Provide details from past years]
Plan Descriptions and Invoices [Details of existing insurance carriers, including plan descriptions and latest invoices] 
Current Year SUTA Rates Sheet [Provide rates for each state where your company operates] 
Prior Quarter’s Payroll Tax Returns [Attach or provide details from prior quarter returns] 
Ongoing Claims Disclosure [Disclose any ongoing claims filed with DOL, EEOC, IDHR, or other human rights agencies] 
Employee Information 
Employee Census [Provide census data including number of employees] 
Workers’ Comp Class Code [Specify Workers’ Comp class codes for employees] 
Annual Salary [Provide annual salary information for each employee] 
Employment Status [Indicate employment status for each employee] 
HR Needs 
Frequency of Onsite HR Assistance [Specify preferred frequency for onsite HR assistance] 
Preferred Payroll Processing Frequency [Indicate preferred frequency for payroll processing] 
Interest in Employee Benefits Offerings [List specific employee benefits offerings of interest] 

Top PEO Companies 

Here are the top 10 Companies in the PEO Indian Market according to Strait Research:

  1. NewHorizons Global Partners
  2. Global PEO Services LLC
  3. Sky Executive
  4. ADP TotalSource
  5. Papaya Global
  6. Velocity Global
  7. Paychex
  8. Synergy HR
  9. Insperity
  10. INS Global

Myths about Professional Employer Organizations

In spite of all the efficient ways you know a PEO may help you, there may still be some doubts regarding their use. Outsourcing your company’s HR activities may make you feel like you’re giving the power of managing your people to some external entity. But that’s not true. 

myths of peo

Let’s explore some myths about PEOs and how much truth they hold.

1. PEO negatively affects employees

HR professionals usually assume that outsourcing HR hurts employee experience, but it’s often the opposite. Co-employment with a PEO can offer enhanced benefits, secure employment practices, and peace of mind for workers.

2. HR loses control over a business

Some fear that partnering with a PEO means losing control, but that’s not true. Instead, it’s a strategic partnership that shares HR responsibilities, allowing business owners to focus on core activities without losing control.

3. The company is too small for a PEO

There’s a misconception that PEOs are only for specific business sizes. In reality, the right PEO can work with a variety of company sizes, offering tailored solutions.

4. Unnecessary expenses are being spent

Concerns about expensive, generic plans are common. However, it’s all about finding the right kind of PEO. It customizes plans to save money and enhance employee benefits, making it crucial to research and find the best fit.

5. PEOs are not cost-effective

Some believe PEOs are too expensive, but reports show they can actually save up to 35% on HR administration costs, contributing to increased revenue and efficiency.

6. There’s no need for an HR department when there’s a PEO

It’s not necessary to replace in-house HR teams with a PEO. Instead, PEOs can complement existing HR personnel, assisting with tasks and providing additional resources, especially in compliance issues.

7. The PEO transition is too much of a hassle

Switching to a PEO may seem daunting, but most PEOs have dedicated teams to help businesses transition smoothly. These professionals stay connected to address concerns and guide clients through various HR topics.

Wrapping Up

In the ever-evolving world of HR, where demands are increasing, relying on experts is a wise move. Bringing in a PEO not only simplifies operations but also ensures that your HR practices are both compliant and efficient in the face of evolving complexities.

Outsourcing your HR functions, especially through a Professional Employer Organization (PEO), is a smart choice for most businesses, especially those in expansion mode. Having a dedicated outsourced HR team means you can relax, knowing that seasoned professionals are effectively handling the complexities of HR. 

PEOs allow you to focus on your core business goals becoming an essential asset for continual growth and success. Furthermore, you can confidently navigate through the challenges of a dynamic business environment. 

Frequently Asked Questions

1. What is a PEO?

A Professional Employer Organization (PEO) is a company that partners with businesses to manage various HR functions, including payroll, benefits administration, compliance, and employee relations. By outsourcing these tasks to a PEO, companies can focus on their core activities, while the PEO handles the complexities of HR management.

2. What are the services PEO provides?

PEOs offer a wide range of services, including HR support, payroll processing, tax filings, employee benefits administration, risk management, and compliance assistance. They often provide access to advanced HR technologies, allowing businesses to streamline their processes and enhance employee experiences.

3. Can small businesses benefit from using a PEO?

Yes, small businesses can benefit significantly from partnering with a PEO. Small businesses usually have a limited budget and resources. Hence, outsourcing their HR activities through a PEO can prove to be cost-effective and efficient. 

4. What types of companies typically use PEO services?

Various companies, including startups, small and medium-sized enterprises (SMEs), and even larger corporations, use PEO services. Small and mid-sized businesses often find PEOs particularly valuable, as they lack the resources to maintain an in-house HR department but still require comprehensive HR solutions.

5. How does a PEO handle payroll processing and tax responsibilities?

PEOs handle payroll processing by calculating salaries, issuing paychecks, managing deductions, and ensuring timely payments. They also handle tax responsibilities, including withholding and depositing employment taxes, preparing and filing tax forms, and staying up-to-date with tax regulations, relieving businesses of these complex tasks.

6. What advantages do PEOs offer in terms of employee benefits?

PEOs leverage their collective bargaining power to provide employees with a range of benefits, including health insurance, retirement plans, and wellness programs. This allows businesses, especially smaller ones, to offer competitive benefits packages that can help attract and retain top talent in the job market.

7. What factors should a business consider when choosing a PEO?

Businesses should consider factors such as

  • Range of services offered
  • Pricing structure
  • Industry expertise
  • Customer reviews
  • Flexibility in customization
  • Level of support provided

Evaluating these aspects helps businesses select a PEO that aligns with their specific needs and budget.

8. Do businesses lose control over HR decisions when working with a PEO?

No, businesses do not lose control over their HR decision while working with a PEO. Business owners retain full control of their operations when partnering with a PEO. They maintain authority over their employees while receiving valuable assistance in managing the HR aspects of their business operations.

9. What is the cost structure of PEO?

PEOs usually impose a fee calculated as a percentage of your overall payroll expenses, ranging from 2% to 15%. As your payroll costs rise, your PEO expenses will increase in proportion. 

Table of Contents

    Meet the author

    Keka Editorial Team

    A bunch of inspired, creative and ambitious youngsters- that’s Keka’s editorial team for you. We have a thirst to learn new subjects and curate diverse pieces for our readers. Our deep understanding and knowledge of Human Resources has enabled us to answer almost every question pertaining to this department. If not seen finding ways to simplify the HR world, they can be found striking conversations with anyone and everyone , petting dogs, obsessing over gadgets, or baking cakes.

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