What is a Professional Employer Organization (PEO)?

A professional employer organization (PEO) is a human resources outsourcing entity that partners with employers to co-employ staff. In this employment model, the PEO and the employer share liability for the workers they co-employ.

How does a PEO work?

Small- and medium-sized businesses may use professional employment organizations to minimize HR burdens and reduce risk. A PEO should not be confused with other HR outsourcing solutions, like employee leasing. What sets a PEO apart is that it serves as a co-employer alongside the company. 

In the U.S., some PEOs are certified according to the legal, financial, and reporting requirements of the Internal Revenue Service (IRS), and are known as Certified PEOs or CPEOs. Very few PEOs are IRS-certified. A certified professional employer organization may be more expensive, but offers greater trust, so companies looking for the best PEO may take this route.

While PEO companies are common in the United States, they are less frequent in other countries. This can make it difficult to find a global PEO. International coverage isn't a given with PEOs.

What does a PEO do?

A professional employment organization offers complete HR services, but the PEO and the business share liability for these tasks. PEO services may include:

• Payroll: A PEO may manage employee attendance, track hours worked, and process payroll. Payroll processing can include maintaining workers' compensation coverage and withholding Social Security taxes.
• Taxes: A PEO may file and pay local, state, and federal employment taxes. They may also help with tax compliance, protecting businesses against potential tax infringements and resulting repercussions from the IRS.
• Benefits administration: A PEO may manage employee benefits like life insurance, health insurance, dental and vision insurance, and COBRA. The PEO can help employees enroll in these benefits and process claims.
• Retirement planning: A PEO can also oversee retirement benefits, helping with things like 5500 filings and 401(k) enrollment.
• Human resources: Some PEOs offer total talent management, handling everything from recruitment to training and performance reviews.
• Compliance issues: A PEO can handle various compliance issues, such as adherence to labor laws, Occupational Safety and Health Administration (OSHA) rules, and Equal Employment Opportunity Commission (EEOC) legislation.

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PEO companies perform these duties on behalf of the business that contracts with them. That said, the exact definition of a PEO varies—no two are identical. While some may offer all-in services, including all the above, others may not be as far-reaching.

Who uses a PEO?

While larger companies may have a full-blown, in-house HR department, small- to medium-sized companies may not have these resources. They may thus outsource HR tasks to a PEO for small businesses. In some cases, PEOs can liaise with in-house HR teams. For example, a business may have its in-house HR team handle recruitment and hiring, but use a PEO for technicalities like benefits and payroll administration.

Many companies can benefit from partnering with PEOs, from health care services to law firms, real estate companies, consulting firms, and more. With a PEO handling HR, these companies can devote more time, energy, people, and resources to managing other business tasks.

Why might small businesses use a PEO?

There are several benefits to using a PEO, especially for a small- to medium-sized enterprises (SME) without a well-resourced HR department. By partnering with a PEO, these businesses can:

• Reduce liability: Employers collaborating with a PEO can minimize some risks associated with being an employer. For example, some PEOs offer legal defense benefits if an employee sues the employer (for example, for an allegation like discrimination).
• Minimize administrative burden: HR is a big job, covering everything from compliance to payroll. Smaller companies that don't have the staffing to do it all can rely on a PEO instead of trying to build up an HR team, which can be a tedious and time-consuming process.
• Fine-tune HR practices: An advanced PEO can go beyond basic HR administration to offer valuable talent recruitment and management insights. They can gather data to help employers determine if their market rates are competitive, for instance, or if their turnover is too high. This data can ultimately help improve retention.

How are PEOs paid?

Most professional employer organizations base their fees on payroll, simply taking a set percentage. However, others have fee structures based on the number of employees a business has. The exact costs may vary based on the business size and what services they expect the PEO to provide.

Is Oyster a PEO?

Oyster is not a professional employer organization and does not offer this service. However, Oyster can help you hire globally. Find out more about how Oyster works.

Disclaimer: This article and all information in it is provided for general informational purposes only. It does not and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.