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What is a PEO?

What is a PEO?

Published on May 25, 2021
A Professional Employer Organization, also commonly known as PEO, is a type of outsourcing firm that provides its services to small or medium-sized businesses. A PEO usually enters into a co-employment or relation with the employer (a business entity) by leasing the services offered by its employees. So, the PEO’s employees will be responsible for managing the business’s administrative tasks.

Services Offered by a PEO Companies

The main services offered by PEOs include:

    Employer payroll tax filling
    Safety and risk mitigation services
    Human resource consulting
    Health benefits
    Regulatory compliance assistance
    Payroll processing
    Workers’ compensation insurance Employer’s practice and liability insurance Training and development

What are the Benefits of Using PEO Companies?

Almost 98% of clients who deal with various businesses prefer those that work alongside PEOs. This is a clear indicator that there are lots of benefits that such firms offer. The most common ones include:

Risk Protection

PEO companies are local experts who can efficiently protect your business from certain risks. For instance, payroll mistakes can be quite expensive. Besides that, these firms are crucial in ensuring that you avoid fines and penalties that may be issued due to lack of business compliance.

HR Compliance

Employment laws are quite dynamic, complex, and constantly changing. On the other hand, the business environment is quite competitive. For business, keeping tabs on the ever-changing laws while still keeping focus on the efficient running of your business.

However, if you fail to apply current HR laws in your business, then this might cost you heavily. You definitely don’t want to get fined by federal agencies constantly.

Well, a PEO can help you avoid all these issues. They know the type of your business and specific HR compliance laws that apply to it. They are also able to implement the HR solutions on time, saving you from unnecessary fines.

Efficient Payroll Process

Such a firm can help you reduce the costs and time invested in processing payroll and other costs related to accounting. This is because an accredited PEO definitely has a modern payroll system that helps to ensure that the payroll process is automated.

Comprehensive Workers’ Compensation

Workers’ compensation is always a demanding task that’s time-consuming and costly. Business organizations end up spending lots of money and more time trying to implement them. From claims management to insurance premiums, you need to have a good support system to handle the compensation process.

As your co-employer, a PEO ensures that you provide your employees with an effective workers’ compensation plan through its own insurance program. Besides that, such a firm is in the best position to handle certifications, audits, compliance, and all paperwork related to the running of workers’ compensation programs.

Overall, PEOs are the right co-employers who ensure that you save your time and money while running your business efficiently. They are flexible to hire and the availability of a wide array of PEO companies means that you can always find a company that suits your needs.

What to Look for in a PEO

There are hundreds of PEO firms and therefore choosing one can be quite overwhelming. However, if you can consider the following factors, then the whole selection process can be straightforward.

Conduct a Background and Accreditation Check

You need to vet several PEOs in order to find one that suits your needs. Make sure that you check critical aspects of the company such as:

    Its history i.e. how long has it been operating?
    Experience and partnerships- who has the firm partnered with and what type of tasks have they handled?
    Qualifications and the client retention rate – is it an industry-accredited firm? What’s its ability to retain clients?

These factors are essential in ensuring that you are dealing with a reputable company. The good thing is that you can find most of this information online from Google, official website addresses, and social media sites among others.

This way, you can be able to tell what PEOs can effectively handle your needs.

Note: To determine the legality of the PEO, conduct an online search on the National Trade Association of the PEO industry (NAPEO).

Consider Your Needs

You need to assess what your business needs to ensure that it aligns with whatever firm you end up choosing.

Understand that the aim of hiring a PEO is to help your business grow in accordance with different regulatory measures. The facets of your business that you should consider first include:

Human Resource: how do you want to manage your HR responsibilities? Of course, outsourcing the services of a PEO can help to effectively manage how your business recruits employees, slots vacations, and other employee issues.
Payroll management: this is in relation to the payroll system as well as filing taxes. Your business needs to comply with the business laws and regulations. A good PEO should be able to provide you with a simplified but effective online payroll system.

Risk management: it’s not easy to effectively manage the risks and potential threats your business could be facing. Besides that, it’s costly and time-consuming. By assessing and understanding what your business needs, you will be able to determine the best PEO that can help you to manage your company’s risk by creating a safer work environment.

Firm’s Administrative Competence

You need to know if the company has the right expertise when it comes to business administration and management issues. What’s its competence? What experience does the firm’s internal staff have when it comes to handling different businesses in various niches? What are their qualifications including professional training? What position do they hold in the company?

The Contract Structure

Dealing with an external company requires the signing up of contracts and application of policies. Different companies have unique types of contracts and policies. However, your goal should be to find an ideal company that suits your budget.

Besides that, the firm should have functional policies that complement your business’s needs. This way, you can decide if you want a long-term or short-term contract. It’s also important for the PEO firm to clearly outline its license cancellation policy.


Who Uses a PEO?

Any small or medium-sized business can make use of a PEO. Data by NAPEO indicates that most small companies that make use of such organizations have an average of 22 employees.

Generally, PEOs are ideal for use in a broad range of industries, including retailers, small to medium-sized manufacturers, plumbers, and mechanics among others.

What is an Accredited PEO?

A verifiable accreditation simply means that a PEO company is operating in compliance with the stipulated government regulations and follows industry standards. This means that the PEO effectively demonstrates great business ethics, financial stability, in addition to adhering to the required operating standards and regulations.

You can check the ESAC website to determine if the firm you have chosen has accreditation.

What’s the Difference between PEOs and Employee Leasing?

PEOs simply supply businesses with services that are essential for their administrative and management work. The company already has its existing workforce and therefore, a PEO firm simply enters into a co- employment type of arrangement with the business. In case the contract is terminated or has come to an end, the employees will still work with their employer.

Meanwhile, employee leasing involves supplying a business with new workers. The contract can be temporary, long-term, or based on the type of available work. When the project is completed or the contract ends, the employees leave as well.

How Do Employees Benefit from PEO?

PEOs help employees get a safe working environment, good health insurance, financial security, as well as great opportunities for their retirement. Such a firm helps to ensure that working conditions are safe, there is an improvement in internal communication and professionalism in the delivery of human resource services.

Are PEO Agreements Common?

Their popularity has been rapidly increasing and at the moment, we can say that PEO agreements are very common. Data estimates indicate that almost 4 million Americans are now employed in PEO arrangements.

Between 2008 and 2017, PEO companies had a compounded annual growth rate of 8.3%. This is an extremely high level of growth that’s 14 times higher than the whole of the US’s rate of employment.

How Much Do You Need to Pay a PEO Firm?

The rates usually vary depending on the type of firm you choose. However, the general rate usually ranges between $900 and $1500 annually per employee.

In case the business owner decides to be charged based on the percentage of their overall payroll. In most cases, PEO firms usually charge 3-10% of the company’s overall payroll.


PEOs are important for the professional running of any business with employees. They have the necessary professionals and essential systems that help to ensure all your administrative tasks are handled. They help to effectively handle business tasks that are related to employment including essential taxes, payroll, and employee benefits.

Choosing a good PEO firm can help to ensure that your business grows significantly. This is because they are co-employees who help to reduce employment costs while ensuring that the business has good internal relations.