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What Is a Professional Employer Organization (PEO)?

Matt D'Angelo
Matt D'Angelo

Professional employer organizations (PEOs) partner with small businesses to provide payroll, benefits and human resources support. They operate under a co-employment model where you will still have control of all your employees, but employees legally appear on the PEO's books for tax and compliance purposes. There are several advantages to working with a PEO, which range from sustained growth to saved time. As your business expands and the demands of growth weigh on your day-to-day responsibilities, PEOs can take time-consuming, routine processes off your plate.

"Of the current clients we randomly surveyed, 98 percent said they'd recommend a PEO to another small business," said Pat Cleary, president of NAPEO.

NAPEO is a national organization that represents PEO interests and studies the PEO industry. Its most recent white paper had some major findings for small business owners, including that SMBs that partner with PEOs are more profitable and grow faster.

Small business owners "worry about growth," Cleary said. "Companies that use a PEO – 14 percent higher growth there."

There are a lot of potential reasons to consider working with a PEO. From improved payroll processes to more attractive benefits, these companies can be a game changer for attracting new workers and growing your business. Before diving in to which PEO is right for you, it's important to understand what a PEO is and how it serves small businesses.

Editor's Note: Interested in learning more about a PEO for your business? Fill out the below questionnaire to be connected with vendors that can help.

The co-employment model

The PEO industry is big – NAPEO says there are roughly 900 PEOs operating in the U.S. Of those, about 250 are NAPEO members, which covers about 90 percent of the total market, according to Cleary. The backbone of all these organizations, however, is the co-employment model. Under this model, your employees appear on the PEO's books.

However, make no mistake – you have full control of your employees and business. You decide whom to hire and fire, and you manage your employees' day-to-day responsibilities. The PEO you partner with has no influence on your business decisions, workers' pay, benefits access or day-to-day business decisions. Instead, it will handle all the legal, compliance and HR-related policy tasks that you define. [Interested in PEO services? Check out our best picks on our sister site Business.com.]

Employees have to appear on the PEO's books for compliance and tax reasons. Otherwise, the co-employment agreement likely won't have any impact on your business.

"The PEO handles all the non-revenue generating paperwork and other activities that prevent a small business owner from growing their business," said Cleary.

What a PEO provides

PEOs provide a range of services. You can work with an organization that gives you a full bundle of services, which usually include HR, payroll, benefits, and risk and compliance services, or you can work with a PEO that will build a plan with features specific to your business. The majority of PEOs require you to enroll in the company's payroll offering at a minimum.

PEOs usually don't operate on long-term contracts. They usually require a 30-day written notice if you need to cancel services, and only some add on fees for cancellation. If you're interested in working with a PEO, you can usually find a company that is flexible and can provide your business with exactly what it needs.

As far as specific services go, here's a quick breakdown of the various features and services PEOs provide. Some services may vary from PEO to PEO, but all should offer some coverage in the four main areas: payroll, benefits, human resources and risk management.

  • HR management
  • Benefits administration
  • Insurance plans
  • Section 125 plans
  • Payroll administration and processing
  • State unemployment insurance
  • 401(k) retirement plans
  • Workers' compensation
  • Safety programs (OSHA compliance)
  • Training and development
  • Recruiting and outplacement support
  • Government compliance
  • Tax compliance

How a PEO could benefit your business

How a PEO can benefit your business depends on your business's needs. NAPEO researches small business needs to understand how PEOs are serving their clients. A recent study featured on the NAPEO website found that small businesses that partner with a PEO grow 7 to 9 percent faster. They also have a lower turnover rate and are 50 percent less likely to go out of business. Cleary said in the NAPEO's research, a trend has emerged that survival is one of the top concerns for small business owners in the U.S. Working with a PEO means partnering with an organization that can help you not only stay in business but grow.

"Any small business that honestly looks at what they're paying now on all these services, by putting them all under one roof, they're going to get efficiencies from that," Cleary said.

Image Credit: Boiko Y/Shutterstock
Matt D'Angelo
Matt D'Angelo,
Business News Daily Writer
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I'm a staff writer for Business.com and Business News Daily. I cover various small business topics, including technology, financing and marketing.