What is a PEO and How Does It Work?

What is a PEO and How Does It Work?

March 14, 2018 | By Tailored Solutions


More and more businesses are turning to PEO partnerships in order to gain the competitive edge in their market. Keep reading to find out how a PEO works and the benefits it can bring to your small business.

What is a PEO?

Professional employer organizations (PEOs) provide human resource services for their small business clients. PEO partnerships allow small businesses to cost-effectively outsource the management of human resources, employee benefits, payroll, and workers' compensation.

PEOs pay wages and taxes, often assisting with state and federal rules and regulations compliance. In addition, many PEOs also provide workers with access to benefits such as 401k plans, health, dental, and life insurance, dependent care, and other benefits not typically provided by small businesses.

What Types of Businesses are Best for a PEO?

Which businesses are a good fit for a PEO? The majority of businesses that partner with a PEO are small and mid-size businesses.

As many as 14% - 16% of small businesses with 10-99 employees utilize a PEO partnership for their HR and benefits needs.

PEOs provide services to between 156,000 and 180,000 small and mid-size businesses, employing between 2.7 and 3.4 million people.

PEO clients include a broad range of different types of businesses across a myriad of industries. Everyone from accounting to construction firms, doctors, retailers, mechanics, professional service providers, manufacturers and more can benefit from a PEO relationship.

While PEO benefits are highly desirable to small and mid-sized business owners, larger firms can also benefit from a PEO partnership. An increasing number of larger businesses are finding value in a PEO arrangement. PEOs can partner with companies that have 500 or more employees and work in conjunction with existing human resources departments.

Why Use a PEO?

PEO clients grow 7% - 9% faster, have 10% - 14% lower turnover, and are 50% less likely to go out of business than their non-PEO peers.

The business of managing employees can often take an incredible amount of time and resources from a small business. As businesses grow, most owners do not have the necessary human resource training, payroll, and accounting skills, the knowledge of regulatory compliance, or the backgrounds in risk management, insurance, and employee benefit programs to meet the demands of being an employer. In addition, many small business owners struggle to afford comprehensive and competitive benefits packages that can help attract and retain talented employees.

PEOs offer an affordable solution to both of these business challenges.

By taking over the business of employment, PEO arrangements allow business owners to focus on the business of their business. Time, talent, and resources can be focused on growth and productivity, while the PEO takes care of HR and administrative duties.

A PEO's economy of scale enables each client company to lower employment costs and increase the business's bottom line. The client can maintain a simple in-house HR infrastructure or none at all by relying on the PEO.

PEO professionals can provide critical assistance with employer compliance, which helps protect the client against liability. In addition, the PEO provides time savings by handling routine and redundant tasks for its clients. Employees are provided with professional human resource services, enhanced benefits, training, employee manuals, safety services, and improved communications.

Through a Professional Employer Organization, the employees of small businesses gain access to big-business employee benefits such as: 401(k) plans; health, dental, life, and other insurance; dependent care; and other benefits they might not typically receive as employees of a small company.

With a PEO partnership, small businesses can offer best-in-class benefits and ensures HR and administrative compliance. And the PEO uses an economy-of-scale model that provides all of these services and benefits at a cost that is highly desirable to small businesses.

How Does a PEO Work?

Once a client company contracts with a PEO, the client and the PEO form a co-employment relationship. The PEO and the client enter into a contractual agreement that outlines the shared responsibilities of each party.

Typically, the PEO remits wages and withholdings of the worksite employees and reports, collects and deposits employment taxes with local, state and federal authorities. The PEO also issues the Form W-2 for the compensation paid by it under its EIN. As a co-employer, the PEO will often provide a complete human resource and benefit package for worksite employees.

Because the PEO also may be responsible for providing access to workers' compensation coverage, many PEOs also focus on and provide assistance with safety and compliance.

The client company retains responsibility for and manages product development and production, business operations, marketing, sales, and service.

The PEO and the client will share certain responsibilities, as determined by their contractual agreement.

In general terms, the PEO will focus on employment-related issues, and the client will be responsible for the actual business operations.

How Satisfied are PEO Clients?

According to the National Association of Professional Employer Organizations (NAPEO), working with PEOs brings a broad range of positive effects on their clients.

An analysis by NAPEO revealed:

  • 98% of PEO clients would recommend a PEO to a small business colleague
  • 70% of PEO clients report increased revenues since becoming a PEO client
  • 66% of PEO clients report increased profitability since becoming a PEO client

PEO partnerships allow businesses to focus on what they do best, while offering their employees benefits and services that were traditionally only available at Fortune 500 companies. More and more businesses are turning to PEO partnerships to outsource the business of employment and are experiencing tangible benefits as a result.

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