Summary Definition: A third-party organization that partners with businesses to streamline a range of employee management tasks, including benefits and payroll.
A professional employer organization (PEO) is an external firm that provides human resources and payroll services to businesses. This includes things like benefits administration and compliance support, which smaller organizations may not have specialty roles to fulfill.
Businesses will typically enter into a co-employment relationship with a PEO via a client services agreement (CSA). This allows the PEO to become the legal employer of the business’ workers and hire them under the PEO’s tax identification number(s). The business then keeps ownership of its daily operations, such as customer service and sales strategies.
Depending on the specifics of the CSA, a PEO could assume responsibility for multiple tasks, including:
The key difference between PEOs and other HR providers is the co-employment aspect of a PEO’s relationship with a business.
Other HR providers, such as payroll companies or temp agencies, support a business with its HR and payroll tasks, but the business is ultimately responsible for making sure everything is completed. This means it’s the business, not the third-party provider, who’s in charge of complying with employment and tax laws at the federal, state, and local levels.
PEOs, on the other hand, become "co-employers" with the business, not just partners or advisors. This means it's the PEO who's ultimately responsible for making sure all payroll tasks are completed. Similarly, it’s the PEO who’s in charge of complying with employment laws at the federal, state, and local levels.
In addition to the industry’s trade association (NAPEO), the Employer Services Assurance Corporation (ESAC) provides accreditation that vouches for a PEO’s reliability, ethical conduct, and financial stability.
Moreover, the Internal Revenue Service (IRS) administers a voluntary certification program that confirms a PEO’s legal and ethical operations. It also allows businesses to delegate tax responsibilities and liabilities (e.g., remitting withheld amounts or filing annual returns) to the Certified PEO (CPEO) in addition to standard employment and benefits responsibilities.
|PEOs sometimes have better benefits packages, or similar coverage at lower prices, which benefits both the business and its employees.
|There’s less flexibility in selecting benefits since businesses and employees must choose from the providers the PEO uses.
|Using a PEO gives a business more time and energy to focus on other operations and priorities.
|Partnering with a PEO is an added cost for a business. This can be calculated in different ways, such as a percentage of the business’s overall payroll or the number of employees.
|PEOs often have compliance experts on staff who can help businesses monitor their status and potential risks.
|The company’s workplace culture may suffer due to an external agency taking over tasks normally done by internal staff.