What Is a Professional Employer Organization (PEO)?

What is a professional employer organization?

PEOs partner with businesses to provide payroll, benefits and human resources support. They operate under a co-employment model, meaning you will still have control of all your employees, but they legally appear on the PEO’s books for tax and compliance purposes.

There are several advantages to working with a PEO, such as sustained growth and saved time. As your business expands and the demands of growth weigh on your day-to-day responsibilities, PEOs can take time-consuming, routine processes off your plate.

“Of the current clients we randomly surveyed, 98 percent said they’d recommend a PEO to another small business,” said Pat Cleary, president of NAPEO.

NAPEO – the National Association of Professional Employer Organizations – represents PEOs’ interests and studies the PEO industry. Its most recent white paper had some major findings for small business owners, including that SMBs that partner with PEOs are more profitable and grow faster.

Small business owners “worry about growth,” Cleary said. “Companies that use a PEO – 14 percent higher growth there.”

There are many reasons to consider working with a PEO, from improved payroll processes to more attractive perks. These companies can be a game-changer for an SMB, helping it attract new workers and grow as a business. Before you try to determine which PEO is right for your company, though, it’s important to understand what a PEO is and how it serves small businesses.

Editor’s note: Interested in learning more about a PEO for your business? Fill out the below questionnaire to be connected with vendors that can help.

What is the co-employment model?

The PEO industry is big – NAPEO says there are roughly 500 PEOs operating in the U.S. The backbone of all these organizations is the co-employment model. Under this model, your employees appear on the PEO’s books.

However, make no mistake – you have full managerial oversight of your employees and business. You decide whom to hire and fire, and you manage your employees’ day-to-day responsibilities. The PEO you partner with does not influence your workers’ pay, benefits access or day-to-day business decisions. Instead, it handles all the legal, compliance and HR policy tasks that you define.

Employees have to appear on the PEO’s books for compliance and tax reasons. Otherwise, the co-employment agreement likely won’t have any impact on your business.

“The PEO handles all the non-revenue-generating paperwork and other activities that prevent a small business owner from growing their business,” Cleary said.

What does a PEO provide?

PEOs provide a wide range of services. You can work with an organization that gives you a full bundle of services, which usually include HR, payroll, benefits, and risk and compliance services – or you can work with a PEO that will build a plan specific to your business. Most PEOs require you to enroll in their payroll services, at least.

PEOs usually don’t operate on long-term contracts. Generally, they require a 30-day written notice if you need to cancel services, and only some add on cancellation fees. If you’re interested in working with a PEO, you can usually find a flexible service that can give your business exactly what it needs.

Some services may vary by PEO, but all PEOs should offer some coverage in the four main areas: payroll, benefits, human resources and risk management. Here are the main features and services that the best PEOs services provide:

• HR management
• Benefits administration
• Insurance plans
• Section 125 plans
• Payroll administration and processing
• State unemployment insurance
• 401(k) retirement plans
• COBRA
• Workers’ compensation
• Safety programs (OSHA compliance)
• Training and development
• Recruiting and outplacement support
• Government compliance
• Tax compliance

[Read related article: PEO vs. Insurance Broker]

How could a PEO benefit your business?

The benefits of a PEO depends on your business’s needs. NAPEO researches small business needs to understand how PEOs are serving their clients. A study on the NAPEO website found that small businesses that partner with a PEO grow 7 percent to 9 percent faster. They also have lower turnover rates and are 50 percent less likely to go out of business.

In NAPEO’s research, according to Cleary, it has found that survival is one of the top concerns for small business owners in the U.S. Working with a PEO means partnering with an organization that can help you not only stay in business but grow.

“Any small business that honestly looks at what they’re paying now on all these services, by putting them all under one roof, they’re going to get efficiencies from that,” Cleary said.

Additionally, working with a PEO can save you money by helping you hire the right candidates. Poor hires can be extremely costly, so getting it right the first time is crucial. 

PEOs also help businesses streamline HR and administrative tasks and responsibilities, which allows you more time to focus on growing your business. Not only that, but they can ensure compliance with industry and payroll rules and regulations. This is crucial to avoiding penalties, fines and even legal trouble. 

Pros and cons of PEOs

If you’re still unsure whether to hire a PEO or HR professionals separately, these pros and cons can help you weigh the decision.

Pros of PEOs

• They are a convenient, one-stop shop. PEOs relieve you of all HR-related responsibilities, from finding retirement plans to managing employee paperwork, in compliance with government regulations.
• They can secure better rates on benefits. Since PEOs negotiate for benefits, such as medical insurance, on behalf of all their clients, they can bring down the price for you.
• They give you access to expert advice. PEOs have many experts at their disposal, including lawyers and HR professionals. This means that you’ll have broad access to experts who can answer questions essential to your business.

Cons of PEOs

• The pricing can be difficult to calculate. PEOs can be an affordable way to access valuable business services, but they can get expensive quickly, depending on how many employees you have and how many of the PEO services you want.
• They may limit your choice in insurance and benefit providers. PEOs are well-rounded organizations that come with options for insurance and retirement plans. However, the PEOs have long-standing relationships with these insurance and employee benefit vendors, which may impede your choices.
• They are not dedicated to your company. A PEO has multiple clients. This can impact how you and your employees get answers to pressing questions about paychecks, insurance and other HR issues.

[Read related article: What’s the Difference Between a PEO and an Employer of Record]

How much does a PEO cost?

PEOs structure their costs in two main ways: a percentage-of-payroll model or per-employee, per-month (PEPM) model.

Under the first model, the PEO charges a percentage of the amount of payroll it processes for your company in a pay period, including payroll taxes, workers’ comp and employment practices liability insurance. This percentage can range from 2 percent to 12 percent. An administrative fee is often added on top of this percentage. 

PEPM structures assign a flat fee per employee each month. This monthly per-employee fee ranges from $40 to $160. [Read related article: Part-Time Jobs With Benefits]

Best PEO service providers

Here are our picks for the best PEO service providers on the market.

Justworks

Justworks is a user-friendly PEO that offers scalable plans. In addition to handling standard HR features, Justworks also assists with payroll tasks, employee benefits, and risk and compliance. Many small businesses benefit from the PEO’s usability and 24/7 customer support. [Read our Justworks review.]

Rippling

Rippling is an efficient, cloud-based PEO service that offers various HR functions. In fact, according to Rippling, you can onboard a new employee and run payroll in less than two minutes. The service also ensures compliance for multistate organizations so you are adhering to business labor laws. [Learn more in our Rippling review.]

TriNet

TriNet is a customizable PEO that suits companies in various industries. With industry-specific features, TriNet promises specialized support and risk management for all types of businesses. The company also provides premium benefits and is accredited by major PEO accrediting agencies, including ESAC and the IRS. [See our TriNet review.]

ADP TotalSource

ADP TotalSource offers specialized support to those in need of HR help. As a user-friendly PEO, ADP TotalSource provides a wide range of comprehensive benefits options and dedicated customer support. With features like onboarding, payroll processing, compliance support and benefits administration, the platform can assist businesses that have a minimum of five employees. [Discover more in our ADP TotalSource review.]

Paychex Oasis

Paychex Oasis is a flexible and scalable PEO that’s great for startups and small businesses alike. The PEO provides dedicated HR support and customizable plans with comprehensive benefits options. Some specific features include HR administration, payroll processing, risk and compliance, and employee training and development. [Read more in our Paychex Oasis review.]

Insperity

Insperity is a comprehensive PEO with risk-mitigation tools, a la carte services and HR bundles. The company is also ESAC-accredited and IRS-certified. Not only that, but users can access a library of training and development resources. [See our Insperity review.]

Should you invest in a PEO?

All businesses can benefit from working with a PEO. While it might seem like a pricey investment, it can actually save you money to outsource your HR tasks to a professional firm. A co-employment arrangement has many benefits, from sustained control to expert assistance. 

If you’re deciding whether working with a PEO is right for your business, research and consider the various options on the market to see which ones best align with your HR needs. 

Sammi Caramela and Stella Morrison contributed to this article. ​​Source interviews were conducted for a previous version of this article.