What is a Professional Employer Organization (PEO)?

A professional employer organization (PEO) is a single source provider of integrated services which allows business-owners to cost-effectively outsource the management of human resources (HR). A PEO assumes the administrative functions of an HR department, assisting businesses with managing complex employment tasks such as employee benefits & administration, payroll administration, HR compliance, risk/safety management and workers' compensations insurance. The PEO also provides an integrated HRIS system helping clients manage all of their employee data in one place.

How does this work?

The PEO model works through a co-employment relationship established between a PEO and client company. In this co-employment relationship, the PEO acts as the administrative employer of record for tax and insurance purposes, thereby assuming many of the responsibilities and liabilities of the client company. The client company remains the direct onsite employer in this relationship, and continues to make all day-to-day decisions with respect to employees.

Through this co-employment relationship, the client's employees are pooled with the employees of other PEO clients to give them large-group buying power with respect to employee group benefits, and workers' comp insurance. The PEO handles administrative HR tasks like payroll and taxes, HR compliance, risk management and can provide workers' comp and a employee benefits to help clients attract & retain the best employees. In this way, the co-employment relationship greatly reduces the work associated with transactional HR activities, and allows companies to focus on profit-generating areas of their business instead.

Your company's responsibilities before using a PEO

Pay Negotiation
Management Reports
HR Compliance Issues
Departmental Costs
Recruiting
Turnover
New Hire Screening
Employee Benefits Procurement
Benefit Administration & Compliance
Employee Evaluations
Termination
Warning Notices
Pay Computation
Payroll Checks
Account Reconciliation
Medicare Computation
Tax Lien and Garnishments
FICA
Federal Unemployment
941a
W-2s
W-4s
I-9s
IRS Audits
OSHA Compliance
Workers' Comp Insurance
New Hire Processing

Your company's responsibilities after using a PEO

Pay Negotiation
Warning Notices
Report Hours
Hiring and Firing
Staff Training

PEO Business Model

In a co-employment contract, the PEO becomes the employer of record for tax purposes, filing paperwork under its own identification number. The client company continues to direct the day-to-day activities of its employees. PEOs charge a service fee for taking over the human resources and payroll functions of the client company - typically 2-5% of total payroll. This fee is in addition to the normal employee overhead costs, such as the employer's share of FICA, Medicare, state unemployment taxes and workers' comp insurance.

One key service provided by a PEO is the securing of workers' compensation insurance coverage for client companies. Essentially, a PEO obtains workers' comp coverage for its' clients by negotiating insurance coverage for the both the PEO and its client companies. This is allowed because legally the PEO is the co-employer of the workers at its client companies. Economies of scale can come into play, allowing a PEO to obtain workers' compensation insurance at a lower cost than the individual client companies could obtain for themselves.

The PEO can also provide group health insurance and other employee benefits (dental, vision, life, std, ltd, 401k, etc.) for its client companies through their master plans. PEOs offer these benefits to their clients by obtaining large group rates based on the total population of their client base. In many cases, PEOs are able to reduce the overall costs associated with offering group benefits to employees. Likewise, the PEO takes over full administration and compliance of these plans, tremendously benefiting the client company and its employees.

Typically, small and medium-sized companies do not have the budget to hire a full-time HR professional to handle complex HR-related problems. However, these small and medium-sized companies are still expected to comply with the myriad of state and federal HR laws and regulations. In most cases, companies ask internal administrative employees to handle these complex HR functions in addition to their other duties, or perhaps the owner must take on these burdensome tasks, detracting from profit-generating activities. A PEO solves this problem by providing its clients with all of the outsourced HR services and guidance needed at a fraction of the cost of an in-house HR professional.

The value proposition to client companies is that the use of a PEO saves time and money required to handle payroll and benefit administration, HR compliance, risk management and workers' comp insurance. The client company may also be able to offer a better overall package of benefits, and thus attract more skilled employees. The PEO model is therefore attractive to small and mid-sized businesses, and PEO marketing is typically directed toward this segment