professional employer organization

What is a PEO (Professional Employer Organization)?

PEOs are companies that help small- to medium-sized businesses with human resources, employee benefits, and payroll management. PEOs act as co-employers of the client company’s employees. The client company remains fully liable for all labor law compliance, including payment of wages and withholding taxes, but the client is relieved of most responsibility for benefits and human resources management.

How do PEOs work?

Typically, a PEO has a contract with a client company to provide the majority of day-to-day management services for all or part of the company’s workforce. For example, the client may only need help with payroll and benefits administration; this can be arranged by contract. The client company provides a list of employees and, hopefully, employment contracts to the PEO.

The PEO then manages those employees as if they were its own for tax purposes, payroll purposes and benefits administration purposes (e.g., workers’ compensation insurance). The client company continues to be liable for all obligations relating to employees, including payment of wages and all statutory obligations. The client company’s only obligation in a typical PEO arrangement is to provide a list of employees working in the client company’s business.

This type of arrangement allows small- and medium-sized businesses to outsource human resources operations that might otherwise represent a significant bottleneck or distraction, enabling these businesses to focus more of their efforts on the core business as opposed to administrative functions.

What are the benefits of a PEO?

Small and medium-sized businesses can benefit from many services provided by Professional Employer Organizations (PEOs). By hiring a PEO, your company will:

  • Reduce your overhead costs
  • Increase productivity by allowing your company to focus on its core business
  • Eliminate the headaches of endless paperwork and having to worry about the ever-changing legal requirements for employment law compliance.
  • Take advantage of expert advice on HR issues, without having to hire full time personnel or consultants with expertise in human resources management (e.g., labor law, employment claims).
  • Be able to offer your employees a “turnkey” solution that has the expertise in place to manage all of their benefits.

What are some common HR functions handled by PEOs?

PEOs provide many functions related to an employer’s human resources needs. Here are just a few:

Benefits Administration: PEOs help you with managing and administering employee benefit plans (e.g., health insurance, dental insurance). Usually, the employees are employees of the PEO; however, they remain employees of your company as well. The client company does not need to hire benefits specialists or consultants to handle this function for its employees.

Payroll Services: PEOs handle all of the payroll services, including data entry of employee time records, calculation and payment of wages, preparation of federal and state payroll tax returns, payment of employers’ liabilities, preparation of W-2 forms for employees at year end. The client company does not need to hire payroll specialists or consultants to handle this function for its employees.

HR Compliance: PEOs assist with all aspects of human resources management, including hiring, termination and organization-related compliance issues (e.g., policy creation and implementation). The client company does not need to hire HR specialists or consultants to handle these functions for its employees.

Employee Training: PEOs offer training for new employees, including orientation and on-going compliance training. The client company does not need to hire qualified trainers or consultants to provide these functions.

Safety & Regulatory Compliance: PEOs help you with managing regulatory compliance issues in the workplace (e.g., OSHA, workers’ compensation insurance). The client company does not need to hire safety and regulatory compliance experts or consultants to deal with these issues for its employees.

Corporate Compliance: PEOs assist with corporate compliance matters that involve employees (e.g., employment contracts, employee manuals). The client company does not need to become a subject matter expert in the legalities of human resources management.

How do you choose a PEO?

Choosing the right PEO to meet the needs of your company is very important, just like choosing any other key service provider for your company. The following are 6 tips to consider when choosing a PEO:

1) Make sure that they handle all employment-related human resources management functions, including compliance, benefits and payroll.

2) Make sure that they have experience working with a variety of different industries. The PEO you choose should have expertise in the industry your company is in – if not, they will need to rely on consultants for this type of knowledge and it will be an additional expense to you.

3) Make sure that the PEO has experience working with small to mid-size companies. Ideally, your PEO should have expertise in companies similar to yours – this will ensure that they understand the challenges your company faces and are able to apply their knowledge of best practices to provide you with helpful advice. It is also important for them to understand the unique situation that small companies are in with regard to human resources.

4) Make sure that their policies and processes are tailored to your company’s specific needs (e.g., labor law, HR compliance). A one-size-fits-all approach is not appropriate for most companies. Every company has different requirements (e.g., a company with a unionized workforce will likely have different HR compliance requirements than a non-unionized firm). Your PEO should be able to customize their services for your company, not just apply pre-set service levels.

5) Make sure that they manage all aspects of the employee life cycle – from recruitment and selection, on-boarding, training and development, employee performance management, benefits administration and compliance – all the way through termination.

6) Make sure that they understand your company’s culture and approach to HR management, as well as how it fits into the business strategy. Your PEO should be able to provide advice tailored for your specific needs and company goals.


In conclusion, taking over the human resources management function from your company should be a very carefully considered decision. However, there are many advantages to delegating these tasks to a qualified PEO. In light of the increased focus on compliance and regulatory requirements, outsourcing human resources management can have a positive effect on profitability and increase business efficiency for organizations of all sizes.

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