A professional employer organization (PEO) is a co-employment solution for small businesses seeking HR, payroll, and employee benefits. Acting as the employer of record (EoR) for payroll and taxes, the PEO handles tax filings, unemployment insurance, and worker’s compensation. However, you retain full control over daily business operations, such as marketing and customer service.
If you’re looking to get started with a PEO right away, consider partnering with Justworks. It provides payroll, tax processing, and HR compliance services. Its packages also include enterprise-level benefits options from top carriers and insurers. Best of all, its PEO plans are affordable and come with 24/7 support. Learn more about Justworks below.
How a PEO Works
A PEO provides comprehensive support for HR functions, allowing businesses to streamline operations while focusing on core activities. Because small businesses are pooled together in a PEO, it allows them to negotiate better rates on insurance (as PEOs have established partnerships with large insurance companies). This helps businesses offer better benefits plans for employees than they could on their own. PEOs can offer an extensive array of services at reasonable prices, such as commuter benefits, 401(k) plans, and workers’ compensation insurance.
Below is an outline of what a PEO does and doesn’t do:
- Co-employer: As a co-employer, a PEO works with you. It is very much like having your own HR, benefits, and payroll department, without the overhead cost of hiring an in-house HR specialist.
- Benefits negotiation: Because PEOs work as co-employers for hundreds of companies, they can negotiate group rates that save you money while offering employee benefits in multiple states.
- HR benefits: Typically, a PEO will provide:
- Payroll processing, including tax filing and compliance
- Medical, dental, and vision benefits
- New hire paperwork and employee onboarding
- Terminations and offboarding, including COBRA for benefits
- Retirement savings plans like 401(k)
- Legal compliance: A PEO provides tax and legal services, including:
- Compliance with state and federal employment law
- ACA-compliant health insurance plans at group rates
- Workers’ compensation
- Labor law posters
While a PEO manages many payroll and HR-related tasks, it doesn’t interfere with your core business operations. Here are some areas where a PEO does not get involved:
- Making business decisions
- Controlling daily operations
- Handling customer service
- Directing marketing strategies
Business Legal Compliance & PEOs
PEO services offer more than just back-office paperwork processing for HR and payroll. As a co-employer, a PEO ensures your company complies with state and federal labor laws and uses HR best practices.
That’s to your benefit—helping you and the PEO avoid risk. They’re certified in HR and have the tools and experience to maximize employee effectiveness while minimizing risk. They know HR laws, and their systems are programmed with tax tables and compliance tools to help you avoid legal mistakes or fines.
Since a PEO is co-employment, your business and the provider share the legal responsibility for your employees. However, anything that could raise HR-related legal issues—like safety, labor law compliance, or employee discrimination—is where a PEO will standardize procedures for you.
PEO Costs
PEO pricing varies based on headcount, as providers charge a percentage of each employee’s salary or a flat rate per employee. Given that, their charges can run from under $100 a month per employee to tens of thousands of dollars a year. Joining a PEO can start as low as $59 per employee monthly with a vendor like Justworks.
PEO membership fees depend primarily on the average compensation of your employees and other variables, like the number of employees and service offerings (whether you choose to offer or contribute to employee benefits and if self-service options are provided to your employees, for example).
Some of the other fees and pricing factors that may affect your PEO costs include:
- Setup fees
- Training and consulting fees
- Monthly service fees
- Workers’ compensation premiums
- Health insurance premium contributions
- Other company-sponsored benefits
Who a PEO is Best Suited For
PEOs are ideal for smaller businesses that don’t have in-house HR, benefits, or payroll expertise and those that want to offer benefits and reduce their employment risk and labor costs. By using a PEO, a small business can provide employees with all the perks larger employers offer.
Due to legal compliances, however, some providers will not work with high-risk industries, such as certain construction companies. Therefore, you would need to consult the PEO directly to see if you qualify.
Specifically, here are the kinds of businesses that may find a PEO serves them well:
- Startups that want to provide employees with full benefits
- Small businesses that want to keep their workers’ comp costs low
- Companies that want to improve their employee experience, employment brand, and ability to recruit top talent
- Any small business that wants to ensure accuracy without hiring HR and payroll experts
- Any company that wants to reduce compliance risks
What to Know When Joining a PEO
To join a PEO, you will go through an application process in which the provider will assess your company’s liability to make sure it wants to partner with you as a co-employer. The process of joining can take anywhere from three to six weeks.
There are a few qualifiers a professional employer organization will look for, including:
- The financial and credit situation of your business, such as your business credit score
- Whether you’ve had any workers’ compensation claims in the past (if you work in a high-risk environment, you’ll likely be charged a higher workers’ comp rate)
- The percent of employees likely to participate in benefits and any benefits usage trends
- Your current employment practices and how compliant they are. (You may have to provide documents and details from any prior legal notices, audits, or lawsuits you received.)
As a co-employer, the PEO will also need access to information about your employees. So expect to show them I-9s, W-4s, and W-9s for all your workers, as well as any other demographic and identifying information, such as the age of your workers, whether they’re hourly or salaried, and in what states they work.
Pros & Cons of a PEO
Using a PEO offers several advantages for businesses but also has some potential downsides. Here’s a closer look:
Top PEOs for Small Businesses
To learn more about PEOs and find out if they’re right for you, then a look at the best ones can help you decide. These are some of our top recommendations from our guide to the best PEO companies.
PEO | Best For | Pricing | Key Features |
|---|---|---|---|
Justworks | Small businesses needing a low-cost, high-functioning PEO | Starts at $59 per employee monthly |
|
Rippling | IT and tech-heavy businesses | Custom pricing |
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XcelHR | Companies wanting a unique benefits package | Custom pricing |
|
ADP TotalSource | Growing businesses or those that want the experience of a larger PEO | Custom pricing |
|
PEO Alternatives
If you are still unsure if a PEO is right for you, several alternatives offer tiered services to give you the HR, payroll, or benefits administration you need. You will remain the employer of record; however, you can outsource HR and payroll services to help with paperwork and compliance.
- HR software maintains employee files and assists with HR compliance. In addition, some offer payroll services and consulting for an additional fee. Check our best HR software guide for some options.
- Payroll software calculates paychecks but may not provide HR support and consulting services. You, as the employer, maintain employee files. Read through our roundup of the best payroll software to find one that fits your needs.
- Payroll services offer payroll processing and administer your employee data and compliance. Many also provide employee benefits and consulting. Our guide to the best payroll services has more information on providers that you might find helpful—or read our guide on how to choose the right payroll service for your needs.
- Administrative service only (ASO) provides businesses with administrative support such as payroll benefits and HR services, while the business remains the employer of record. Unlike a PEO, an ASO does not take on legal responsibilities for employees.
What is a PEO Frequently Asked Questions (FAQs)
A payroll company simply processes your payroll and handles payroll taxes for you. A PEO is a co-employer who facilitates payroll, taxes, HR, and benefits administration (such as healthcare and workers’ compensation) on your behalf.
Joining a PEO can streamline your processes but doesn’t directly change your company culture, as you retain control over daily operations and the workplace environment. The PEO supports administrative tasks, allowing you to focus on maintaining and shaping your culture.
A PEO can improve employee satisfaction by providing better benefits, timely payroll, and professional HR support, enhancing the overall employee experience. This allows employees to focus on their roles without worrying about administrative issues.
