What Does PEO Mean?

PEOs handle things like payroll, benefits administration, and compliance

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Professional Employer Organization
What is a Professional Employer Organization (PEO)? Find out below

Here's what you need to know:

  • PEO stands for Professional Employer Organization
  • PEOs handle things like payroll, benefits administration, and compliance
  • It's a company hired by small businesses to execute HR functions
  • PEOs are usually paid in 1 of 2 ways: The PEO takes a percentage of your payroll, or the PEO charges a fee per employee per month

PEO stands for Professional Employer Organization.

A professional employer organization (PEO) is an organization that provides comprehensive human resources services for small and medium-size businesses. PEOs process and pay employee wages and employment taxes and provide HR regulation compliance guidance. Businesses turn to PEOs as a way to help outsource their HR.

What does a PEO do?

PEOs manage payroll, taxes, employee benefits, compliance, and other administrative tasks so you can focus on growing your small business.

An important thing to note is that a PEO is different from using HR software services. The main point of difference is the amount of control you have. While using HR software certainly makes managing HR from a non-HR pro position easier, none of the liability is taken off of you. It’s still 100% your job to know, understand, and follow all local, state, and federal laws. However, with that responsibility comes control. You’re free to organize and carry out your HR processes as you see fit.

This becomes a different story if you go the PEO route.

How does a PEO work?

If you decide to work with a PEO, you’ll enter into what’s called a co-employment model. This means that the PEO you sign with will become the employer of record — you’ll likely file taxes under the PEO’s ID numbers. However, the PEO will also take on some of the legal liability.

Of course, with taking on that liability, there are rules. Many will want you to not only follow, but formally adopt, their policies and procedures. This can even go as far as using their employee handbook. The fine print usually says something about the PEO only assuming liability if you’ve used and followed their policies, procedures, and guidelines. This is obviously seceding control to an entity outside of yourself and your business.

The next thing to consider is PEO payment methods. Every PEO is different, but there are 2 common ways that they go about charging for their services. The first one is taking a percentage of your company’s payroll each pay period. This percentage is often based off of your total payroll as well as all taxes, workers compensation, and other liability insurances. There is also usually an additional administrative fee on top of this percentage.

The other way PEOs get paid is by taking a per-employee-per month fee. Rather than an administrative fee, this option usually includes a startup fee upfront. While this is certainly a fee you can negotiate, it often doesn’t include additional services like cutting extra checks or installing upgraded features.

What is the relationship between a PEO and employees like?

Naturally, any good small business owner will wonder what impact partnering with a PEO will have on their employees. In a co-employment situation, your employees will technically be employed by 2 companies: your business and the PEO.

However, you’ll retain control over the hiring and firing of your employees and other day-to-day business operation decisions just like you’ve always been, so it will probably feel like little has changed to your employees depending on the specifics of your situation.

How do I know if a PEO is right for me?

Like most small business decisions, the choice is yours and there’s no right or wrong answer for everyone and each individual PEO is different. You have to filter the pros and cons through your specific situation and make the choice that’s best for you.

Per TriNet, Here are the Advantages of a PEO:


Advantages of a PEO

  • PEOs Save time

    A professional employer organization (PEO) can provide technology, processes and HR professionals, freeing up time for employers to focus on their core business.

  • Access big-company benefits

    PEO companies can offer access to a variety of large group health insurance benefits that otherwise may not be available to small businesses including access to retirement plans and pet insurance.

  • Attract and retain top talent

    PEOs create a more engaged workforce. Research shows that employee turnover is 10 to 14% lower for PEO clients compared to other small businesses not using a PEO.1

  • Monetary savings

    A study conducted by the PEO trade association indicated that annual administrative costs are around $450 lower per employee for businesses that use a PEO.2

  • HR expertise

    Professional employment groups often have experts who guide clients on important and technical topics including employee relations, company benefits strategy or developing an employment handbook.

  • Risk mitigation

    The PEO has a vested interest in the risk and responsibility associated with employing a client’s employees. Some also deliver guidance, administration and reference resources to support compliance.

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