Summary: Professional Employer Organizations (PEOs) are professional HR providers that manage employee benefits and pay through a co-employment relationship with client companies.

Most people who start companies do so because they have expertise in creating a product or providing a service. However, they don’t normally begin with the human resources experience that they quite quickly realize they need. While they can quickly hire HR experts to help them, a lot of small businesses and new startups lack the resources to do so.

While it would surely benefit from having a payroll expert, a talent manager, and an HR administrator on board, a small company with only ten employees couldn’t justify this kind of hiring. This is just one scenario in which outsourcing HR to a Professional Employer Organization (PEO) makes a lot of sense.

Let’s look into the things that PEOs do and how employers can work with them to gain lots of advantages.

What Is a PEO?

A Professional Employer Organization, also known as a Professional Employment Organization, is a type of HR outsourcing service provider that follows a co-employment model.

Companies that need help can engage PEOs to manage all aspects of HR from payroll to benefits administration. While not necessarily the case in all parts of the world, US PEOs usually act as co-employers with their clients. They pay the employees’ salaries and withhold and remit their taxes, becoming their employer for tax purposes.

However, the client company is still their main employer and manages their schedules and daily work tasks.

What Is an International PEO?

An international PEO plays a similar role to a domestic one but provides its services in a few or many different countries. Some international PEOs offer services in over 185 countries, essentially everywhere that employees can be hired.

Unlike Employer of Record (EOR) providers, which can fully hire employees internationally on their clients’ behalf, international PEOs only work with clients that already own entities in different countries.

These clients hire them to manage HR services for their workers in these countries instead of managing HR in-house. One client may centralize all of its HR needs in several countries under one PEO provider.

What Do PEOs Do?

When clients engage PEOs, they sign up for a wide range of services that can cover all aspects of HR. Not all PEOs offer all of these services, and many of them offer basic packages with their core services and then charge extra for additional add-ons. They can provide the following services:

Core Services

  • HR administration: PEOs generally handle all HR-based tasks for their clients, including administration, answering employee questions and concerns, and maintaining employee records. Most modern PEOs do this through cloud-based online platforms that centralize employee information and documents, and the PEO’s services.
  • Payroll: One of the most important functions of a PEO is to manage payroll for its clients. The PEO initially sets up each employee’s payroll calculation based on their salary, benefits, and tax obligations. It then needs to collect each employee’s time and attendance data for each pay period so it can use that data to process payroll. It automatically calculates each employee’s salary, overtime, other earnings, taxes, and deductions to arrive at net salaries. These payments are made directly to the employees once the client company has funded the payroll.
  • Taxes: In the US, PEOs can be considered employers for tax purposes, and as such, they often manage taxes for their clients. First, they calculate and withhold each employee’s pay-as-you-earn (PAYE) income taxes and remit these to the IRS and state tax authorities. They also calculate mandatory payroll taxes that must also be withheld, including the employee’s contributions to Social Security, Medicare, and, in some states, unemployment insurance. PEOs also calculate the employer’s obligations for these payroll taxes and remit the tax contributions from both sides to the appropriate authorities.
  • Mandatory benefits administration: PEOs pay strict attention to the benefits that employees are entitled to by federal and state laws, including Social Security, paid time off (PTO), health insurance, sick leave, maternity and paternity leave, and more. Since these benefits differ across states and countries, being able to leverage the PEO’s expert knowledge of required benefits is an essential advantage that clients gain when engaging them.
  • Compliance: Many clients engage PEOs to help them with compliance, especially when they work with employees in multiple states or if they don’t have their own HR expertise. PEOs use their expertise in local and state laws to ensure that contracts and working conditions are fully legal.

Other Services

  • Talent management: Some PEOs offer full talent management services. They help clients create hiring strategies and recruit the skilled workers they need.
  • Supplementary benefits administration: Many PEOs offer clients access to benefits programs for their employees, including health, dental, vision, and wellness insurance as well as retirement savings plans. Some PEOs administer their own 401(k) plans, for example.

    However, most act as brokers, connecting clients with plans from other providers. Because they can pool hundreds or thousands of workers, PEOs can normally access much better prices on benefits programs than their smaller client companies can on their own.
  • Risk reduction and workplace safety: Several PEOs offer risk management services to help their clients plan and avoid problems before they arise. They may also provide workplace health and safety training programs and materials in line with OSHA (Occupational Safety and Health Act) requirements.

Regulations and Accreditation

PEOs may or may not be regulated in countries around the world. In the US, states decide on how to regulate PEOs, and in more than half, PEOs are required to be registered. They often need to re-register every year, and must also carefully report each new employee hire and worker termination promptly.

The IRS certifies PEOs (then called CPEOs). This accreditation is voluntary and carries with it the responsibility to follow certain rules and regulations regarding taxes and reporting. PEOs may also become accredited by the industry body, the Employer Services Assurance Corporation (ESAC).

This organization monitors PEOs’ adherence to financial and operational standards and also provides clients with financial assurance when engaging its member providers.

How Do PEOs Bill Their Clients?

PEOs handle payroll, taxes, and benefits for their clients and therefore need to bill them to fund these financial obligations.

Typically, the payroll is estimated prior to payday, and all employee salaries and employer payroll taxes are calculated. The client is usually invoiced for all of these costs as well as the PEO’s regular fees, and these funds are used to pay salaries and contributions as necessary.

PEOs typically bill following two different models. They may assess their fees as a percentage of the total payroll or assess a set, usually monthly, fee per employee. If they perform extra services for their clients, they normally add these fees to each monthly bill.

Working With a PEO

When clients choose to work with PEOs, they normally follow this process:

  1. Finding workers: A client may already have workers they want to hire, or can partner with recruitment agencies or PEOs that offer talent-sourcing services to find them.
  2. Engaging a PEO: The client chooses a PEO that provides all the services it requires and normally engages it by entering into a service agreement.
  3. Hiring employees: The PEO will often take on the responsibility of generating legally compliant contracts for employees to sign with the client companies. It will also sign contracts with the workers if it works as their co-employer for tax purposes. 
  4. Onboarding: The PEO will normally take care of the administrative side of onboarding, including collecting employee documents and registering them with the IRS and Social Security. The client will need to provide orientation and job-specific training to get its new workers on board. 
  5. Managing payroll, taxes, and benefits: The client will need to collect time and attendance data and share it with the PEO, which uses this data to calculate salaries, taxes, and contributions to benefits programs. Typically, the PEO pays workers salaries, remits their taxes, and handles contributions to their benefit plans.
  6. Reporting and compliance: The PEO also reports to the tax and Social Security administrations as necessary. It monitors local, state, and federal laws and adapts to them as necessary to maintain constant compliance.

The Final Word on PEOs

Professional Employer Organizations work as co-employers with client companies to manage HR for their staff and often manage payroll taxes on their behalf. They offer full HR services, including payroll, PTO management, and benefits administration, using their legal expertise to ensure constant compliance with all relevant labor laws. This makes them valuable partners for many small and mid-sized businesses that lack their own HR resources.

FAQs

Both of these providers manage HR for their clients’ staff. However, an EOR can hire employees completely on behalf of its clients, while a PEO works as a co-employer. Thus, EORs can help clients hire in countries where they don’t own entities.

All PEOs manage compulsory benefits like paid holidays or Social Security coverage mandated by the government. Most also offer supplementary benefits administration services for things like health insurance and retirement savings plans.