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A Guide to PEOs and Employee Leasing

A Guide to PEOs and Employee Leasing
Credit: Zudy/Shutterstock

Looking for a professional employer organization (PEO) in 2017? Our guide gives you everything you need to know about what a PEO is, what it offers, the pros and cons, and how to choose one. If you already know what you're looking for, visit our best picks page to see which ones we recommend.

A PEO provides small and midsize businesses with a wide range of human resources services, including the following:

  1. HR management
  2. Benefits administration
  3. Insurance plans
  4. Section 125 plans
  5. Payroll administration and processing
  6. State unemployment insurance
  7. 401(k) retirement plans
  8. COBRA
  9. Workers' compensation
  10. Safety programs (OSHA)
  11. Training and development
  12. Recruiting and outplacement support
  13. Government compliance

The cost of a PEO varies greatly depending on the services you want, the number of employees you have and the type of business you operate. The cost structure also varies by PEO provider. Some PEO services charge on a per-employee basis. Under this structure, employers pay a set amount for each employee. Other providers base pricing on a percentage of gross payroll.

"A PEO is a partnership that creates a co-employment relationship between a small to midsize business and a provider," Lonny Ostrander, vice president of human resources services for Paychex, told Business News Daily. "This relationship results in the business's ability to gain access to benefits normally available only to Fortune 500 companies."

Editor's Note: Looking for information on PEOs? Use the questionnaire below, and our vendor partners will contact you to provide you with the information you need:

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1. Fewer administrative tasks: Companies don't have to spend time working on tasks such as payroll and benefits administration, because the PEO handles them.

"A PEO can take some of the critical work of managing a company off of a business owner's plate so that they can focus on building and maintaining their core business," said Sarah Grimstead, regional sales manager at Insperity.

2. Better benefits: PEOs allow small businesses to offer a robust benefits package. Working with one often gives companies access to better health, retirement and workers' compensation benefits for their employees, Grimstead said.

3. Cost savings: PEOs can negotiate lower group insurance costs, workers' compensation discounts and, in most cases, lower state unemployment insurance rates, Ostrander said. However, keep in mind that you are paying the PEO a fee for this benefit. To make sure you're coming out ahead, it's important for you to weigh the service fees against the added benefit cost savings.

4. Legal compliance: PEOs remove the burden of keeping up with the constantly changing human resources regulatory laws.

"It can be difficult for a business owner or an HR practitioner to keep up with the changes, develop policies in light of those changes, and train managers and employees on those changes," said Jacqueline Breslin, director of human capital services for TriNet. "A PEO helps their clients remain HR compliant. From producing employee handbooks to helping a business understand the Affordable Care Act (ACA), a PEO is a strong partner to help with these complexities."

5. Talent acquisition: Better benefits help small businesses not only hold on to their more valuable employees, but also bring in other top workers.

"Because they're able to offer competitive benefits through the PEO, companies are able to reduce turnover while attracting and retaining a higher-caliber workforce," Ostrander said.

6. Legal protections: Most PEOs provide civil defense and employment liability insurance in case a former employee sues the company for discrimination or wrongful termination.

1. Surrendering responsibilities: For small business owners who are used to having their hands in every aspect of the business, relinquishing control of human resources can be a tough adjustment.

"Some businesses might view a loss of control – whether it's significant or not – as being a drawback of joining a PEO," Ostrander said. "The truth, though, is if you find the right PEO partner, it becomes an extension of your business."

2. Health insurance changes: PEOs are always looking for the best deal on health care, so they may change insurance providers on a regular basis.

"While a PEO offers the ability to provide the most cost-effective and competitive health benefits, it also means the provider reserves the right to switch health providers," Ostrander said. "That can be frustrating for the business and its employees if an impending change is not fully communicated."

3. Impersonal: Companies that use a PEO can't always provide the same level of personalized HR service to their employees as businesses whose HR department is located down the hall can. The hope is that the PEO treats your employees like its own when they need information or need to file a claim, but that is not always the case. It's important to find a PEO that will provide the type of hands-on support that both you and your employees need.

4. Setup and transition: David McCullough, chief technology officer of Landrum HR, told Business News Daily that there may be a learning curve within your company when you begin to use a PEO service.

"Moving to any new system [or] routine is going to have a learning curve," McCullough said. "Transitions can be time-consuming and can be difficult on owners [and] employees."

Still not clear on what PEOs do? Here are some frequently asked questions about the processes and operations of a PEO.

Q. Are PEOs typically used by small businesses?

A. Yes, PEO services are geared toward smaller organizations that don't have a dedicated human resources staff. According to the National Association of Professional Employer Organizations (NAPEO), the average NAPEO member company has 19 employees.

There is also a wide variety of business types using PEO services. The NAPEO reports that businesses ranging from small manufacturers to high-tech companies use PEO services. In addition, an extensive number of professions – including doctors, retailers, mechanics, engineers and plumbers – use PEO services.

Q. What is the difference between using a PEO service and simply outsourcing your HR services?

A. The biggest difference is the co-employment model. When you outsource human resources services, there is no co-employment arrangement. So, although you are hiring a service to handle some or all of your HR needs, you are still responsible and liable for all of the outsourcing company's work.

Q. How does the co-employment arrangement work?

A. Co-employment, also referred to as employee leasing, allows small businesses to maintain the day-to-day control of employees. However, the PEO becomes the employer of record for tax purposes and is responsible for all of the HR-related tasks, such as paying the employees and providing the benefits.

"The biggest aspect of the arrangement is that the business maintains ownership of the employees when it comes to functions like wages and hours, but from a benefits sense, the PEO provider assumes all responsibility," Ostrander said.

Q. What type of liability does the PEO provider incur on behalf of its small business customers?

A. PEO services take on all of the liability as it relates to payroll and taxes.

"Submitting payroll taxes [in a] timely [manner] and distributing W-2s by the required due date are the PEO's responsibility," Breslin said. "These activities are taken away from the client, and the PEO is responsible and bears the burden of making sure they are compliant with important payroll-associated activities."

In addition, PEOs share in a business's employment-related risk. For example, coverage under employer practices liability insurance is frequently a part of the PEO services, Breslin said.

Q. Do you lose control of your business by using PEO services?

A. No. Even though you will be operating as a partner with your PEO provider, you are still in charge of your business and how it is run.

"The business still has the option to make the ultimate decisions regarding hiring, performance management, discipline and terminations," Breslin said. "The PEO is there to point out the risks the client may be taking by the employment decisions they are making, but the business can choose to follow or disregard that advice."

Q. What does it mean if a PEO is accredited?

A. The Employer Services Assurance Corporation (ESAC) is an independent nonprofit organization that is the official accrediting agency of the PEO industry. A board of directors that includes PEO industry attorneys, CPAs and independent directors representing more than 100 years of combined PEO industry regulatory experience manages the ESAC.

The accreditation process verifies a PEO's ongoing financial solvency and compliance with government regulations and industry standards. Earning accreditation demonstrates a PEO's financial stability, ethical business conduct, and adherence to operational standards and regulatory requirements.

You can see which PEOs have earned accreditation by visiting the ESAC website.

Q. Do you have any options for the health insurance plans you offer to employees? Or does a PEO offer only one plan?

A. The majority of PEOs offer a variety of plans that their customers can offer employees, including PPO and high-deductible options. However, you likely won't have a choice for the provider. Most PEOs typically use one health insurance provider and require all customers enrolled in its health care to use that specific carrier.

Now that you've got the basics, you might be ready to make some decisions on which PEO is right for you. If you're interested in a PEO, check out our best picks.

With the abundance of PEO providers, it can be hard for small business owners to know what they should be looking for when searching for one. We asked our experts to weigh in on the most important factors small business owners should consider when hiring a PEO.

  • As your business grows, will the PEO be able to grow with you? For example, will the offerings be a one-size-fits-all package, or will the provider tailor a program to your needs?
  • Does the PEO provide all of the services you currently want and may want in the future?
  • Will the PEO's team be trained to know federal, state and local labor laws that could impact you and your business?
  • What kind of user access does the PEO offer? Will your employees have online access to payroll and benefits administration? Does it have a mobile app to make it easier to see payroll stubs and other HR information?
  • What does the cost structure look like? Each PEO has its own method of billing and pricing.
  • Is the PEO financially stable and secure?
  • What kind of commitment does the PEO make to customer service? Will you have your own dedicated team of support members, or will you have to call a 1-800 number every time you need help?
  • Is the PEO certified by the IRS and accredited by ESAC?
  • Is the PEO properly licensed according to your state's regulations?
  • Does the PEO have positive referrals? Referrals help you look past a PEO's marketing and sales lingo to get the real story. Ask fellow business owners who have used PEOs whether they would recommend the service and why.

You should also consider the size of the PEO service, said McCullough. He advised thinking of PEOs like colleges to get an idea of what you'll get from small, midsized and large PEOs.

"With a large university, you will get a big campus and staff, [many amenities] … national recognition, etc.," McCullough said. "While you have access to many different opportunities, your experience as a client can leave you feeling like just a number, especially when it comes to the personal touch of the services provided to you and personal attention from PEO staff. At the other extreme, a small PEO firm has the equivalent to an 'independent study' college atmosphere. This setting would include lots of one-on-one time with the PEO firm owner."

McCullough stated that a midsize PEO might be best, as it marries the best technology with helpful customer service.

If you think a PEO is right for you, we encourage you to check out our roundup of best picks for various business types, our reasoning for picking each and our comprehensive list of PEO services.

Want to know more about choosing a PEO? Here's a breakdown of our full coverage:

Editor's Note: Looking for information on PEOs? Use the questionnaire below, and our vendor partners will contact you to provide you with the information you need:

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Additional reporting by Ashley Smith and Chad Brooks. Some source interviews were conducted for a previous version of this article.

Jill Bowers

Jill Bowers is a technical writer by day and a fantasy author by night. She has more than 10 years of writing experience for both B2C and B2B content, focusing on topics like travel writing, consumer finance, business marketing, social media marketing and other business categories. She spends an inordinate amount of time singing love songs to her dog, composes handbell music and writes YA fantasy novels.