What Is A Professional Employer Organization (PEO)?

What is a PEO?

For the uninitiated, "What is a Professional Employer Organization (PEO)?" is a commonly asked question when they first hear about it. Simply, a PEO is a multi-service-providing vendor that allows companies to outsource the management of payroll and tax administration, employee benefit packages, workers’ comp insurance, and human resources all under one roof. The backbone of the PEO value proposition is the concept of co-employment.

What Is A Professional Employer Organization As It Relates to Coemployment?

Coemployment means the worksite employer and the employer of record both employ your employees, and the responsibilities of employing the workforce are shared between the two. The worksite employer continues to direct employees’ day-to-day duties and activities: hiring, training, managing, firing, etc. The employer of record is responsible for the back-office administrative duties such as processing payroll, administering & paying federal and state taxes on-time, managing employee benefits, handling workers comp and unemployment claims, etc. Through coemploying with all of its clients, the PEO essentially forms one large conglomerate, comprised of the sum of all of their clients’ employee. This allows them to take advantage of economies of scale and the law of large numbers, which decreases risk across the entire group; thereby stabilizing, and in many cases decreasing health and workers comp insurance premiums as well as state unemployment tax rates. Professional Employer Organizations provide discounts on many other cooperative purchases such as EPLI insurance, HRIS systems, employee discount programs, and much more. The ideal situation for a salesperson attempting to sell you PEO services is to save the company so much on cooperative purchases such as health insurance and workers comp insurance that it offsets all of their administration fees. Although this doesn’t always happen, a business owner should shop around thoroughly as all PEOs are not created equally. Now that we have a basic understanding of what a Professional Employer Organization is, lets get into detail with the specific services they offer and how they work. PEO Services 101.

External Resources

• NAPEO Definition for a PEO
• IRS Definition for a PEO