What is a PEO and Who Should Use One?

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Latest posts by Ewen Finser (see all)

If you’ve heard the term “PEO” come up in HR contexts, but aren’t quite sure what it means, this article is for you.

The rise of PEOs has largely mirrored the rise of remote work, flexible workforces, and cross-national (globally distributed) workforces.

There are MANY advantages to scaling with a PEO, which I’ll cover here. I’ll also go over some of the disadvantages of PEOs, or when NOT to use one.

Why Listen to Me? Prior to starting a remote Media & eCommerce company, I worked as a Senior Technical Recruiter for a mid-sized staffing company. I’ve seen both sides, working inside (what would now be called) a PEO, as well as using and evaluating PEO services as a business executive.

First, let’s cover the basics…

PEO Definition

Strictly speaking, a PEO is literally short for “Professional Employment Organization”.

What Does a PEO Actually do?

A PEO, or professional employer organization, is essentially a small and medium-sized business’s human resources division. They can manage payroll, benefits, and other HR-related tasks with its assistance.

They offer a wide range of services, including as hiring and onboarding, employee training, and labor law compliance, giving businesses more time to concentrate on their core offerings.

Domestically within the United States, PEOs can be helpful at the state level for companies to comply with state-level regulations. It’s a prime solution for companies who have just a handful of employees in certain high-regulatory states. Normally a company might choose between either having to dedicate (or hire) internal HR resources to manager OR just not work in certain states.

In recent years with the rise of remote teams, PEOs have also expanded to managing international labor pools. Specifically, ensuring that employees in different countries are in full compliance with local labor laws, reporting, and tax requirements.

PEO Video Explainer

This is a good summary of what a PEO is and who should consider it:

PEO Benefits Administration

Benefits are managed by a Professional Employer Organization (PEO) in a variety of ways.

Typically, they will be in charge of enrolling in and managing a range of benefits, including retirement plans, life insurance, dental and vision insurance, health insurance, and other employee benefits. They may also offer direction and counsel on benefit choices and legal compliance.

They are also in charge of addressing any employee benefit claims and questions, as well as gathering, filing, and remitting all due taxes and other payments to the relevant government bodies.

PEO Compliance Services

PEOs provide a range of compliance services to guarantee that employers are abiding by all relevant regulations.

This includes services such as staying up to date on changing labor laws, providing advice on payroll and tax compliance, administering employee benefits, and filing necessary paperwork with local, state, and federal agencies.

Additionally, PEOs provide employee handbooks and training materials to keep organizations compliant. They also provide background checks, drug testing, and safety compliance services. Finally, PEOs can provide audit and consulting services to ensure employers are compliant in all areas.

PEO Payroll Services

A PEO can also assist employers in managing their payroll responsibilities by assuring the accurate and timely submission of federal and state taxes.

On behalf of the company, they can manage absences and attendance as well as concerns relating to payroll compliance.

Finally, they can help employers manage their payroll operations by offering them resources and advice.

Different Types of PEOs

While most PEOs generally provide HR functional outsourcing, there are category specific PEOs as well. These PEOs might cater to one area of HR.

  1. Administrative Services Only (ASO)
  2. Regulator Compliance PEO
  3. Co–Employment Services
  4. Employee Leasing
  5. Human Resource Outsourcing (HRO)
  6. Payroll Services
  7. Staffing Solutions
  8. Workers’ Compensation Solutions

Of course, some of these functions bleed over and PEO services may define each in their own vernacular. In particular, the difference between a PEO vs Payroll Service, or even an PEO vs EOR, can sometimes be misleading (e.g. what was once a payroll service, now functions as a PEO, too).

Some general PEO services offer end-to-end services, but most have some level of specialization (e.g. remote workforce, international, benefits administration, etc…).

Advantages of Using a PEO

So let’s identify some of the key advantages of using a PEO service.

  • Access to comprehensive HR services (without needing an HR department)
  • Ability to outsource some or all HR functions
  • Easier to hire incrementally across state and national borders
  • Easier benefits admin, including group health insurance, workers’ comp, and retirement plans
  • Higher rates of employment law compliance
  • General cost savings through economies of scale (it’s the PEO’s core business, not yours)
  • Increased efficiency in HR functions
  • More time to focus on core business operations (not HR cost centers)

Disadvantages of Using a PEO

While the advantages tend to outweigh the disadvantages for most small to mid sized businesses, there ARE some important “cons” to at least consider (and potentially mitigate!).

  • Administrative fees (watch the fine print!), still generally better than a FTE HR staff
  • Limited control, companies lose some degree of control (usually a good thing, but only as good as the PEO quality)
  • Sometimes limited experience in certain jurisdictions, larger or specialized PEOs tend to be better than smaller outfits (they might not be any more experienced than YOU in certain countries / states)
  • Limited transparency, less control makes the process more opaque to the company
  • Risk of subpar services, particularly if you hire the “cheapest” budget option
  • Less personal e.g. you can’t go to “Tom” or “Janet” in your internal HR department to talk things through

What Types of Companies Should Consider a PEO?

Really ANY small to mid sized company can benefit from a PEO, but there are a few I can see as most beneficial for:

  • Companies with a handful of employees in different states.
  • Companies with small, on specialized HR departments
  • Companies with international, globally distributed workforces
  • Companies WITHOUT HR departments who still want to offer benefits and “perks”
  • Any company looking to save on HR cost

Final Thoughts & Next Steps

Clearly there are MANY reasons to consider using a PEO service.

While it’s not a decision to be undertaken lightly, my personal assessment is that most small to mid sized businesses should consider using a PEO before hiring any permanent HR staff internally.

Next steps, read out comprehensive guide to the best PEO services & companies worth considering first.

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