Last Updated: February 08, 2023

What is a PEO and How Does it Work? A Guide to Hiring a PEO Service message: Let us do the work for you. Answer a few short questions & get cost estimates for your needs from trusted employee leasing companies who service your area. Our service is 100% free!

A professional employer organization (PEO) helps small and mid-size businesses offer their employees the benefits and HR support found in a large organization. This helps smaller companies attract top talent with killer benefits packages that include 401(k), health and dental insurance, dependent care, and more. At the same time, the business gets to concentrate the bulk of its energies on its core functions, leading to greater profits and productivity.

What is a PEO?

PEOs are highly specialized in all things HR. This includes payroll, benefit programs, regulatory compliance, and recruitment. Many companies are now choosing to contract out their HR services to PEOs the way they do other highly specialized fields, such as graphic design and app development, or functions that are time-consuming but necessary and eat into productivity, such as facilities management.

Small businesses, or those that are still growing, often do not have the resources or knowledge required to run an effective HR department. With a PEO, companies enjoy the benefits and knowledge of a top-notch HR department despite not having an in-house human resources team. Your PEO helps you attract and retain the best talent while also managing HR costs more efficiently. It also shares some of the risks, particularly compliance.

Many companies contract out certain elements of their HR services, such as payroll, worker's comp, and benefits. A single PEO vendor handles all of these functions in one convenient, efficient package.

How Does it Work?

Once you choose a professional employer organization, you enter into a client service agreement (CSA) with the PEO, which is now a co-employer of your employees. You, as the client company, retain sole responsibility for managing all other aspects of your business, including product development, marketing, operations, sales, and production. However, you share employee responsibilities with the PEO (the level of sharing varies according to the CSA).

At a minimum, the PEO is typically responsible for issuing tax forms such as the W-2, paying salaries, managing withholdings, and collecting and depositing employment taxes. The PEO also usually provides complete benefit packages and regulatory compliance. Thanks to the organization's greater buying power, PEOs typically offer benefit programs that are far more generous than smaller organizations usually provide.

The day-to-day management of your employees remains with you. However, depending on the CSA, the PEO may handle the entire employee recruitment process, including posting job openings, conducting interviews, and hiring new talent. Again, the depth of the PEO's involvement in handling personnel issues depends on the CSA, but workflow management remains with you.

What is Co-Employment?

When you enter into an agreement with a PEO, you become co-employers, meaning you share responsibility over your employees. You are the Worksite Employer and continue to run your business as usual, including managing your employees in their day-to-day environment. The PEO becomes the employees' Employer of Record, handling all of the HR-related aspects of employment.

While you employ best practices in the management of your business, your co-employer applies best practices in managing HR-related tasks. This means that the PEO may require you to take certain actions before it enters into an agreement with you. For example, if your payroll is in arrears, the PEO will likely expect you to address this issue before entering into a CSA with you.

Who Uses Professional Employer Organizations?

Although the average company engaging a PEO employees 19 people, businesses of any size may benefit from this type of agreement. These organizations offer small organizations big company benefits, but they also partner with larger companies (defined as having at least 500 employees), working in partnership with the company's HR department.

There are also no limits to the industries working with PEOs, from tech to manufacturing to healthcare to sales and all points in between. If you have employees, you can partner with a PEO.

Things to Consider When Choosing a PEO

As with any other vendor, not all PEOs are created equal. Take the time to do some research and talk to multiple PEOs before signing a CSA with anyone. During your research, consider the following:

  • Accreditations: Look for a PEO accredited by the Employee Services Assurance Corporation (ESAC). You might also give extra credit to members of the National Association of Professional Employer Organizations (NAPEO).
  • Coverage start date: Ideally, participating employees enjoy benefit coverage from day one.
  • Funding and insurance: How does the PEO fund and insure its benefits programs?
  • References: Request both customer and professional references and then take the time to talk to these people. Many people skip this step, figuring the company would only provide references they feel confident about, but you can learn a lot about how a company operates by talking to current and former customers. Don't forget to search online reviews, as well.
  • Regulatory requirements: The PEO must meet all state and federal regulatory requirements
  • Risk: Do the employee risk pool and employer profile match?

You are trusting this organization with your employees' benefits and payroll, as well as your financials and credit. In addition, the PEO has access to everyone's data. Of course, these things are also true of an in-house HR team, but you still want to do your due diligence to ensure you hire a PEO worthy of this trust.

Joining a PEO

Once you choose a PEO, you enter an application process wherein the PEO assesses your company's liability. The two main items that the PEO checks are your organization's finances, including credit, and your workers' compensation history. If yours is a high-risk environment, rates are typically higher. The entire application process takes up to six weeks to complete.

As a co-employer, the PEO needs all of your employees' information, including I9s and W4s, and other demographic information. After you provide all information, the PEO begins its assessment process.

If you're looking to maximize employee benefits and significantly improve the efficiency of your HR services, PEOs offer a great alternative to staffing an in-house team. You get the expertise of a professional HR team plus the benefit package buying power of a large company.

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