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A Guide to HR Outsourcing and Employee Leasing

A Guide to HR Outsourcing and Employee Leasing
Credit: Zudy/Shutterstock

Looking for a professional employer association (PEO)? Here's everything you need to know about how to choose one. If you already know what you’re looking for or you’re in a hurry, visit our best picks page to see which ones we recommend.

Professional employer organizations (PEOs) provide HR-related services such as employee benefit administration, payroll, recruiting, employee training, worker's compensation administration, and safety and risk management. In other words, PEOs let you focus on your core business by outsourcing payroll and other employee-related tasks that can be tough for a small business to manage.

Sometimes this arrangement is referred to as employee leasing, co-employment or joint employment. Even though the PEO is the employer of record for tax purposes, both your company and the PEO have certain employer responsibilities. The PEO's job is to pay employees and handle all the administration of payroll and benefits. Your job is to manage your employees and make sure the information you provide to the PEO is accurate.

PEO services can vary greatly, so it is crucial for you to invest the time into researching and finding a PEO that is the right fit, and to negotiate a contract that works for you.

Editor's Note: If you're looking for information to help you choose the PEO that's right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free:


If you’ve read enough and you’re ready to choose a PEO, visit our best picks page. Or read on for more information on how to choose the right one.

PEOs make the most sense for small businesses that cannot afford to hire full-time human resources staff and/or don't have the time to dedicate to the administrative responsibilities of human resources. Generally, PEO’s are used by companies with fewer than 50 employees.

According to the National Association of Professional Employer Organizations, the average size of a company that uses a PEO is 19 employees. However, for larger businesses, PEOs can also provide employees to supplement internal human resources staff. For smaller companies, they can provide the accounting and tax reporting services you’re business is too small to handle.

PEOs are often confused with temporary staffing agencies. While the two share some slight similarities, the model is different. PEOs assign their own, existing employees to take over your human resources administrative tasks. The PEO is responsible for most of the behind-the-scenes human resources tasks, such as negotiating health insurance, benefits packages and retirement plans. PEOs deal with reporting wages to the IRS. Essentially, the PEO is handling all the business and administrative tasks related to employment.

Staffing agencies, on the other hand, typically provide companies with short-term or special-project employment. They provide the labor, but they do not handle behind-the-scenes administrative tasks like benefits negotiation and tax reporting. If you use a staffing agency to hire human resources employees, those administrative responsibilities will lie with your company.

So is a PEO right for you? Here's a list of pros and cons.

The benefits include:

  • Fewer administrative tasks. Companies don't have to spend time focusing on tasks like payroll and benefits administration, freeing up hours for you to focus on running and improving the business.
  • Fewer mistakes. For small businesses in particular, the rules and laws surrounding payroll, benefits and tax reporting are often outside their realm of expertise. PEOs specialize in human resources tasks, so they're less likely to make a costly or harmful mistake.
  • Legal protections. Most PEOs provide civil defense and employment liability insurance in case a former employee sues the company for discrimination or wrongful termination.
  • Cost savings, better benefits. Because PEOs are often large companies, they can negotiate better benefits packages and lower insurance costs than most small businesses. 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 benefits.

The drawbacks include:

  • Loss of control. 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 difficult adjustment.
  • Health care changes. PEOs are always looking for the best deal on health care, so they may change health care providers on a regular basis, which is frustrating for your employees. However, you can still use a PEO for administrative purposes and provide your own health insurance to employees.
  • Impersonal. Companies that use a PEO can't always provide the same level of personalized service to their employees. The hope is that the PEO treats your employees like its own when employees need information or need to file a claim, but that is not always the case.

Some PEOs charge a flat fee for their services, while others charge a la carte per service and/or per employee. It's important to know exactly what you're paying for when you work with a PEO.

As a percentage of payroll, fees can range anywhere from 2 percent to 10 percent or slightly more. If your average employee makes $50,000 per year, that works out to anywhere from $1,000 to $5,000 per employee per year. You're likely to pay on the high end of that if you have low-wage employees or if you're hiring a company to handle tasks beyond basic payroll and benefits administration such as recruiting and training. If your needs are more basic and/or you have high-wage employees, expect to pay on the lower end.

While one pricing structure is not necessarily better than another across the board, flat pricing is more predictable. Even if employee salaries increase, your fees will not. Even so, when you're shopping for a PEO, it is important to compare a number of companies and pricing plans to understand what makes the most financial sense for your company. The cheapest rate is not always the best deal, because it may come at the expense of service.

Beware of PEOs that try to hide fees or downplay the cost of services by focusing solely on the insurance and benefits savings they provide. Always ask for a complete breakdown of all fees and services — in writing — before you decide to work with a PEO. If the company is unwilling or seems dodgy, move on. You want to work with a company that is transparent. Also, consider using a company that allows you to choose the services you want, rather than one that requires you to pay for a bundled package of services that includes some you don't need or want.

PEOs are often confused with administrative services organizations, or ASOs. The two are similar, but there is one major difference. While ASOs also provide outsourced human resources services such as payroll, benefits administration and worker's compensation, they do not use a co-employment model. The ASO handles your human resources tasks and the filing of tax and insurance documents, but unlike PEOs, your company is the employer of record.

The ASO model gives businesses more control over human resources operations. Unlike PEOs, they typically don't dictate policies, disciplinary strategies and the like. They are there to offer support and advice, but ultimately your company makes all final decisions. The downside, however, is that you forgo the legal and liability protections PEOs provide.

There are about 700 PEOs in the United States alone — an overwhelming number for any business to weed through. So how do you go about finding the best one? We've vetted the market leaders for you with our best picks, but here are some additional tips for narrowing down the field. See our best PEO picks on our best picks page.

  • Assess your own needs. Before you approach a PEO to talk about a contract, assess your own needs to decide exactly what services and benefits are important. Do you need just basic payroll and benefits administration or complete HR services that include recruiting and training? Assessing your needs first will help the PEO better understand how best to help you, and it also helps you avoid being talked into added services that are not necessary.
  • Ask for referrals. Referrals are invaluable, because they 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. Ask specific questions. Was the PEO upfront about pricing? Was the company responsive when claims were filed or employees needed answers to questions? Check with a number of business owners, if possible — not just one or two.
  • Verify accreditation. Make sure the PEO is accredited by the Employer Services Assurance Corporation (ESAC), an independent nonprofit organization. A quick verification search is available on the organization's website, and you can also search for accredited PEOs within your state.
  • Verify licensing or registration. Some states require PEOs to be licensed, others require registration and others have no requirements. Find out what the rules are in your state and, if applicable, verify that the PEO is compliant.
  • Do background research. Beyond just accreditation, licensing and registration, do some further research into the company's background. How large is the organization, and how long has it been in business? Have complaints been filed with the Better Business Bureau? We can't stress enough how important it is to make sure the PEO is reputable.
  • Get detailed pricing and fee information. As we said above, it is crucial to ask for a specific breakdown of service fees in writing. You need to understand exactly how much you are being charged, and for what services. Requesting a detailed cost breakdown from multiple companies will help you compare pricing among services. Make sure you find out whether the fees are flat or based on a percentage of total payroll. Also, does the PEO reserve the right to tack on additional fees?
  • Negotiate. You don't have to accept the fee you're quoted; there's always room for negotiation. Small companies that are growing quickly have particularly good leverage. You can also ask a PEO you're considering if the company will match or beat a competitor's pricing.
  • Schedule an in-person meeting. You should always meet with a representative of a PEO face to face before signing a contract. If possible, ask to meet with the employees who will handle your HR. Ask detailed and specific questions. Is live customer service offered, and what are the hours? What are the background requirements for HR staff? Does the PEO offer a choice of medical plans, and are those plans insured?
  • Review the service contract. Chances are you wouldn't sign any other kind of business contract without reviewing it thoroughly, and that is no different with a PEO. Find out exactly what services are included in the cost and which are not. It is always wise to have an attorney review the service agreement and offer an opinion before you sign.

All of the above requires significant time and legwork, but it is worth the effort. The last thing you want to do is hire a PEO that is incompetent, inexperienced or on the brink of closure. Choosing a PEO is an important decision, and it shouldn't be made on a whim or without complete information.

Many PEOs are reputable and honest, but some try to sell their services by insisting that because they become the employee of record, your company has no liability. This is not correct. PEOs do assume much of the liability of an employer, including liability for taxes, payroll and benefits. However, your company remains liable for safety and compliance. It's important to ask the PEO for details on liability and/or consult an attorney.

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

Editor's Note: Looking for a PEO for your business? If you're looking for information to help you choose the one that's right for you, use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free: