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How Well Do You Know PEO?

Does employee paperwork distract you from strategic growth? Are you worried that your employee benefits aren’t competitive enough to attract and retain the top talent you need? Do HR compliance and risk management keep you up at night? If the answer to any of these questions is yes, a PEO partnership can help.

What is a PEO?

PEO stands for Professional Employer Organization. A PEO is an outsourcing firm that delivers cost-effective services for HR and technology, payroll, employee benefits, and risk management. These services typically focus on administrative HR tasks but often also include strategic HR support for recruiting, employee training, performance management, and more.

PEOs were created to provide HR support to businesses, enabling them to reach their goals and relieve employers from tedious, time-consuming HR tasks, and complex compliance considerations. According to the National Association of Professional Employer Organizations (NAPEO), working with a PEO results in 27.2% cost savings on average, increased employee satisfaction, decreased turnover, and faster business growth.

What is the relationship between a PEO and a client?

A PEO enters a contractual agreement with its clients. This agreement outlines the PEO’s scope of services that defines the level of support that the client will receive. While this scope differs based on each client’s needs, NAPEO defines this agreement as “a contractual allocation and sharing of certain employer responsibilities between the PEO and the client”.

Under this relationship, the PEO becomes the employer of record for tax purposes. In short, this means that the PEO files payroll taxes under its own tax identification numbers. Also, the PEO takes responsibility for withholding taxes, paying unemployment insurance taxes, and providing workers’ compensation coverage.

Other HR responsibilities, such as talent acquisition, may belong to either party or be shared depending on the agreement between the PEO and the client. In any case, the client maintains full control over key decisions around hiring, managing, and terminating employees. Also, all non-employee related aspects of the business, such as marketing, sales, and product development, are out of the PEO’s scope.

What are the benefits of a PEO?

Here are some key benefits of partnering with a PEO.

Time savings

Every employer knows that HR can be time-consuming. Small- and medium- businesses need their resources focused on strategic growth, and HR can be a distraction.

Some of the most tedious tasks a PEO can absorb include:

  • HR administration: answering employee queries, actioning employee requests, processing joiners, movers, and leavers.
  • Payroll and tax solutions: calculating payroll, processing payments, managing tax.
  • Employee benefits: selecting benefits providers, assisting employee enrollment, providing support.
  • HR risk and compliance management: identifying, assessing, and mitigating risks, ensuring compliance with state, local and federal legislation.

Cost savings

According to NAPEO, there are almost 500 PEOs in the U.S., working with 173,000 businesses with almost 4 million employees. Due to the size of their average client workforce, PEOs can obtain premium, cost-effective health insurance, workers’ compensation, and other benefits and perks, leveraging economies of scale, and allowing smaller employers to offer Fortune 500-level benefit plans.

Also, PEOs can use their expertise to achieve efficiencies when it comes to HR operations. Based on NAPEO, this can reduce administrative costs by approximately $450 per employee.

Risk management

Employment legal requirements are complex and change fast. To make things worse, HR compliance issues can result in hefty fines or major reputational damage. Businesses that work with PEOs can benefit from their HR expertise to prevent or fix these issues and have peace of mind.

Increased quality of HR services

Apart from being efficient, PEO experts can increase the quality of your HR services, too. Reputable PEOs operate using best-practice HR processes and state-of-the-art technology, allowing them to provide a high-end HR experience to your workforce. They can also become the single point of contact for everything employee-related, consolidating vendors, reducing friction, and boosting the employee experience.

Attracting and retaining talent

As the market continues to reopen after the pandemic, the war for talent is on. Every employer is looking to hire and retain top talent, but only employers of choice can. In today’s hyper-competitive market, employees evaluate their benefits and career development as critical components of their total compensation. Working with a PEO can help you stand out and build a talented workforce.

PEOs offer employees Fortune 500-level benefits, such as:

  • Healthcare benefits
  • Life, disability, dental, and vision plans
  • 401(k) and other saving plans
  • Voluntary benefits (commuter benefit plans, supplemental insurance, legal benefits, etc.)
  • Complimentary benefits (Employee Assistance Programs, entertainment and shopping discounts, etc.)

PEOs can also offer your workforce sophisticated learning and development solutions, including:

  • Learning management system
  • Online and virtual courses
  • Professional certifications

Which businesses can benefit from a PEO?

While any organization could benefit from an HR services provider, a PEO partnership is perfect for:

  • White-collar companies with 10-250 employees
  • High capital start-up businesses looking for a flexible HR solution
  • Smaller companies requiring comprehensive solutions from a single vendor partner
  • Lean HR teams needing HR administration and compliance support
  • Businesses who want configurability in a cost-effective HR solution

PEOs can work with your in-house team and boost their capacity. Urgent and important hiring needs due to strong growth? Your PEO partner can help. Complex payroll requirements due to expansion? PEO can be the solution. Sensitive issues with current or ex-employees? Working with a PEO helps you maintain compliance.

Medium-sized businesses

These businesses typically have more comprehensive internal HR functions that include recruiters, generalists, and HR tech specialists. However, HR requirements can be unpredictable due to seasonality, event-driven needs, and ad-hoc issues. In these cases, a PEO partner can help with time-consuming or complex tasks, empowering your HR team to deliver.

For example, managing employee surveys, bonus programs or employee engagement initiatives can be suitable activities for PEO support. A PEO could also help during a hiring spree or a reduction in force, as these exercises can be resource intensive. Lastly, employee benefits, payroll management, and HR compliance are other areas that qualify for outsourcing. Regardless of your needs, agile HR outsourcing providers are flexible and able provide the scope of support you need.

White-collar industries

While PEOs can be industry-agnostic, the service may be better suited to white-collar businesses, including:

  • Business services
  • Financial technology
  • Life sciences
  • Fashion designers
  • Consumer products
  • Healthcare organizations
  • Large medical practices
  • Marketing firms
  • Financial services
  • Media companies
  • Non-profit organizations
  • Professional services
  • Real estate and property management services
  • Private and charter schools
  • Specialty retailers
  • Specialty wholesalers
  • Technology companies
  • Special trade contractors
  • Light manufacturing
  • Startup businesses
  • And more

What services does a PEO offer? 

While each PEO offers a different scope of services, there are some common patterns.

HR services and technology

  • HR Management: This broad area includes the management of operational HR processes and systems, such as providing support and resolving employee queries. In addition, it can include employee relations matters, such as processing grievances or disciplinaries.
  • Payroll and Tax Solutions: Payroll can be complex, especially for employers operating in different states. PEO payroll services typically include processing payroll, managing local, state, and federal employment taxes, and more.
  • Performance Management: A key part of talent management, performance management is all about setting goals, evaluating progress, rewarding success, and planning development. However, the process can be complex, including cross-functional work and sophisticated HRIS technology tools. A PEO partner could make the process easier by taking some of the burdens off your shoulders.
  • Recruiting Services: Recruitment is one of the most crucial HR elements, as it defines the quality of your workforce. From building your employer brand and sourcing candidates, to assessing applicants or onboarding new hires, talent acquisition requires time and effort. PEOs have the expertise to support your recruitment efforts from strategy to execution.
  • Training and development: Training and development can boost talent attraction and retention and increase productivity. Continuously upskilling your workforce is a win-win and partnering with a PEO can provide you with the technology, the processes, and the people you need to elevate your game.
  • Scheduling: While it doesn’t apply to every job, scheduling can be an onerous task for HR. PEOs can absorb this responsibility, allowing your in-house HR team to focus on more important tasks.
  • Time and attendance: Absence management includes every activity around absenteeism. It is an admin-heavy area that requires rigorous tracking and maintenance.
  • Next-gen technology: Sophisticated HRIS technology can increase productivity, reduce costs, gain efficiencies, and improve overall employee satisfaction and HR fitness.

Employee Benefits

  • Designing a benefits strategy: Your employee benefits should be aligned with the needs of your workforce. A PEO can help you understand what your talent wants and helps to create a compelling strategy to boost attraction and retention.
  • Selecting the optimal provider: There are many employee benefits vendors, and their services may be vastly different. A PEO partner can compare all options on your behalf and select the one that best fits your needs. Also, they can use their bargaining power to negotiate a cost-effective solution for you.
  • Benefit administration: Benefit enrollment can be time-consuming, especially if your workforce is large. If your in-house HR team needs support, a PEO can help.
  • Processing ad-hoc requests: Your employees may have benefits-related questions or change requests. Outsourcing the employee benefits sub-function means that all these cases could be managed by your PEO.

Risk and Compliance Services

Being an employer comes with a wide array of responsibilities. The breadth, depth, and frequent changes of related legislation makes it difficult to ensure compliance and minimize risk. If you partner with a PEO, you can forget about employment legislation and focus on business growth. PEOs employee specialists who understand legal requirements and can design and help you execute related operations.

Some of the areas included under risk and compliance services are:

  • Employee lawsuits
  • Workers’ compensation management
  • Workplace safety improvements
  • Affordable Care Act (ACA) compliance
  • Leave of Absence management
  • I-9 verification
  • Occupational Safety and Health Administration (OSHA) support
  • Employee policies and notifications

What does a PEO not do?

After discussing the scope of PEO work, it’s time to outline what a PEO won’t do, as there is a lot of misinformation on the topic.

Replace your in-house HR team

A PEO doesn’t replace your in-house HR team. In fact, they do the opposite. When a PEO comes on board, they work with your HR team to support them with additional resources and expertise. Your internal HR team can boost their delivery using PEO support.

Control your business

When you hire a PEO, they only help you with activities you assign to them through your agreement. A PEO can’t and won’t control anything in your organization without your approval. Their role is to make your life easier so that you can run your business.

Cause disruption

Best-in-class PEOs understand your business and provide their services in a way aligned with your culture, values, and mission. Your PEO partner should ensure a hassle-free implementation and onboarding experience. Afterall, you’ve made the decision to partner with a PEO to simplify your HR, not complicate it.

How is a PEO different from other HR outsourcing options?

PEOs are not the only HR outsourcing option. With employers having several services to select from, it’s important to understand the differences between PEO and other alternatives.

Administrative Services Organizations (ASO) 

Administrative services organizations or ASO are outsourcing firms that help their clients with administrative work. While this may include some PEO tasks, ASOs don’t support their clients as employers of record. Thus, the HR support they offer is narrower in scope.

Human Resources Outsourcing (HRO)

HROs can also be an optimal solution, as they help their clients with a wide array of HR tasks from strategy to execution. However, they don’t support their clients as employers of record. HROs are better suited to large businesses.

Employee leasing firms

Employee leasing firms are different from PEOs. The former provides their own employees to clients, typically temporarily, while the latter offer HR and employment support. These leased employees return to the firm for reassignment after completion of their work with the client company.

How to select a PEO

While a PEO can be beneficial, it’s important to find the right partner for your business. Luckily, identifying a strong PEO can be easy if you use the below criteria.


You’ll want to look for a PEO that is accredited by the Employer Services Assurance Corporation (ESAC) and has been designated as a Certified Professional Employer Organization (CPEO) by the Internal Revenue Service. PEOs that have earned these accreditations have met rigorous financial, legal, and reporting requirements so working with them entails minimal risk.

Track record

If you are looking to minimize risk, it is imperative to select an established PEO with a strong track record of helping similar businesses. To assess providers, we suggest asking for references, speaking with current or previous clients, and reading client case studies.

Scope of services

As mentioned, each PEO offers a different scope of services. It is recommended to find a provider that can accommodate your unique requirements. To do this, we suggest requesting PEOs for a detailed proposal and asking all relevant questions to make sure your needs are covered.


How much does it cost to partner with a PEO?

Each PEO has their own pricing model. However, PEOs charge either a fixed cost per employee or a percentage of your workforce’s wages. The cost of partnering with a PEO depends on several factors, such as the scope of services, the quality, the size of your business, the industry, and the geography.

How does a PEO simplify being an employer?

A PEO can provide you with expertise to navigate the most complex and time-consuming employment issues. Some of the areas they can support you with include benefits, tax, labor law, workers’ compensation, and everything in between.

How did the PEO industry get started?

During the 1980s an influx of laws and regulations made HR complex and confusing for small- and medium-sized businesses. As business owners started looking for solutions, PEO emerged as an effective and efficient option. Since then, the PEO industry has grown significantly to help more and more businesses with their HR needs.

Will a PEO take control of your employees?

No. A PEO enters a contractual agreement with their clients and becomes the employer of record for tax purposes. Also, they will support you with other HR and employment tasks in relation to your employees. However, you always maintain control over your employees and can work with them to grow your business.

I am interested in a PEO partnership. How can I get started?

We would suggest starting by identifying areas where you may need support from your PEO. Then, look for providers and vet them using the criteria we’ve shared above.

ExtensisHR is a PEO industry leader in service. Everything we do is tailored to your success. Starting with our hassle-free implementation process designed to create a seamless onboarding experience, to our full-service account management and deep expertise across all aspects of HR, we’re here to guide you along every step of your HR journey. Click here to contact us and get started today.

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