FAQ
PEO (Professional Employer Organization): What is it and how can it help your business?
Interested in outsourcing your HR with a PEO?
A PEO, or professional employer organization, is a type of full-service human resource outsourcing known for its co-employment feature. In this arrangement, the PEO performs various employee administrative tasks, such as payroll and benefits administration, on behalf of a business. Some PEOs also have strategic services, but no two are exactly alike, so it’s important to research providers and compare their capabilities.
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Explore Learn more about ADP’s PEO
Why do companies use a PEO?
As businesses face an increasingly unpredictable economic landscape, the traditional fragmented approach to HR management may pose challenges. The full-service PEO model, in contrast, can help simplify HR complexities through a partnership. It can adapt quickly to changing market conditions while supporting employment-related compliance and employee needs.
In addition to gaining resiliency in volatile business climates, organizations that partner with a PEO may experience the following advantages over similar companies without a PEO:
- Two times faster growth1
- 12% lower employee turnover1
- 12% higher business survival rate1
PEO for small business
Small- and mid-sized business owners often turn to PEOs for support with critical and strategic HR management so they can focus on their core competencies, including creating, enhancing and selling the products and services that made their names. Learn more about how a PEO can benefit small businesses.
PEOs may help reduce employer liability
By partnering with a PEO, employers may be able to mitigate some of the employment-related liabilities associated with being an employer. For instance, ADP TotalSource® provides unparalleled support during unforeseen employment circumstances and offers a legal defense benefit under its employment practice liability insurance (EPLI) coverage. This benefit applies if employers consult their HR business partners and follow their HR guidance before taking an adverse employment action, and an EPLI-covered claim is still filed (subject to terms and conditions).
What PEOs can and can’t do for a business
PEO adoption is soaring, according to the National Association of Professional Employer Organizations (NAPEO).2 Yet, misconceptions about what a PEO can and can’t do are still common. Understanding the full breadth of services available can help ensure companies don’t miss out on what could be a game-changing partnership benefiting their employees as much as their bottom line.
What PEOs do
With the support of a PEO, you may be able to grow your business and have peace of mind that you’re more protected while doing so. PEOs typically help with:
- Payroll and tax filing
PEOs process payroll and in some cases, can pay local, state and federal employment taxes. Many also integrate payroll with time and attendance, which helps reduce duplicate data entry and errors. - Benefits administration
A co-employment arrangement often comes with access to high-quality, cost-effective health insurance, as well as dental care, retirement benefits and other employee perks. The PEO will usually handle the employee enrollment for these benefits , including assisting with the open enrollment process. - Compliance
PEOs typically have HR compliance experts who can help you protect your business from fines and penalties. Their area of expertise may include payroll tax law and reporting requirements, unemployment insurance, workers’ compensation, hiring and general HR compliance. - Risk and safety
In addition to workers’ compensation insurance, PEOs sometimes provide safety reviews and training programs to help you limit claims. They may also assist with Occupational Safety and Health Administration (OSHA) inspections. - Human resource support
In many cases, a PEO has HR professionals who provide HR services and support. If you already have an in-house HR person or team, the PEO partners with them both strategically and administratively. - Talent management
Some PEOs offer end-to-end talent services, like recruiting and strategic hiring, employee training and engagement, and performance management.
ADP’s PEO offers all of these things and more, including the strategic guidance and partnership of a dedicated HR business partner.
Beyond HR administration
For an additional cost, some PEOs offer data analytics and benchmarking services that provide insights into a workforce. With the right data and HR expertise, employers may be able to better answer critical questions, such as:
- How much do you pay certain employees and how does it compare to the market?
- Which skill sets best match an available job opening?
- Which departments need more employees?
- How does your turnover compare to peer companies?
Information like this can help you realign your business practices to improve employee retention and reduce turnover.
What PEOs do not do
Although a PEO may handle HR administration, that doesn’t mean you cede ownership or complete control of your organization to them. A PEO will not:
- Make decisions regarding your business independently
- Help with marketing, sales or product distribution
- Dictate employee job functions and duties, pay rates, hours or work schedules
PEOs are good for your business
ADP’s PEO can handle all your HR needs, from benefits to payroll and tax filing, with HR support built in.
How PEOs work
In a co-employment relationship, both the business and the PEO share certain HR responsibilities. The PEO typically processes payroll, withholds and pays payroll taxes, maintains workers’ compensation coverage, administers employee benefits and provides human resources guidance. This allows employers to manage regular business operations, like providing products and services to customers, and making decisions about which employees to hire or terminate.
How to choose a professional employer organization
To choose the right PEO for your business, shop the co-employment market just as you would for any other strategic business need. Look for PEOs that:
- Have a strong track record and fiscal stability
- Can meet the unique needs of your business and employees
- Supply references from other clients in your particular industry
- Provide comprehensive support and compliance expertise
- Offer services and coverage where you do business.
- Are accredited by ESAC or certified by the IRS
ADP's PEO has both ESAC accreditation and IRS certification so employers can rest easy that their business is in good hands.
Busting myths about PEOs
Common misconceptions about PEOs sometimes keep businesses from experiencing the benefits of a full-service HR partnership. Here are some myths vs. realities:
Myth: PEOs take control away from business owners
Fact: A PEO doesn’t dictate business decisions or operational strategies. It acts as a full-service HR partner, assisting with behind-the-scenes, employment-related administrative tasks.
Myth: All PEOs are the same
Fact: Employers have no lack of choices when it comes to a PEO partnership, and they’re definitely not all the same. Consequently, evaluating potential providers is critical to selecting one that will meet immediate and long-term business needs.
Myth: Switching to a PEO is complicated
Fact: Change is never easy, but with the right team in place, implementation doesn’t have to be a headache. It’s usually well worth the effort considering the potential payoff of a PEO partnership.
Myth: PEOs can’t help with changing regulations and compliance.
Fact: PEOs have a vested interest in helping their clients manage HR-related issues. Some offer dedicated teams that monitor and interpret changing legislative rules that may impact a client from an employment perspective.
Myth: PEOs only process payroll.
Fact: While payroll processing is a significant part of the service, some PEOs provide full HR solutions. Benefits, retirement savings plans, risk management, HR compliance, and time and attendance may be available with the partnership.
Myth: Using a PEO will complicate the employee experience.
Fact: A PEO can help employers use benefits packages to show they care about their employees. And when people feel valued, engagement and productivity tend to improve.
Myth: PEOs offer limited employee benefits.
Fact: With a PEO, employers can offer industry-leading benefits from top carriers. PEOs may even be able to help employers choose plans that deliver what matters most to their people.
Myth: PEOs are only sustainable for certain industries.
Fact: PEOs offer services to meet various HR needs and cater to a range of industries, including manufacturing, professional services, health care, nonprofit organizations and skilled trades.
What kinds of businesses benefit from PEOs?
Small- and mid-sized businesses tend to be in co-employment arrangements the most, but larger organizations can also benefit. In fact, PEOs are a good fit for almost all industries, including, but not limited to:
- Real estate and property management
- Computer services and technology
- Securities brokers and dealers
- Engineering services
- Health services
- Legal services
- Management consulting services
- Business services
- Accounting, auditing and bookkeeping
- Manufacturing
- Plumbing, HVAC, electrical and other trades
- Insurance
- Wholesale
- Nonprofits
What do PEOs cost?
PEOs typically charge by a percentage of payroll, but some base their fee on the number of employees you have. When shopping for a PEO, you’ll often have to provide information about your workforce, as well as your existing or desired benefits to get a price estimate.
Consider the following when evaluating estimated PEO costs:
- Reputable providers usually include a cost analysis so you can see how your payments will be allocated to payroll, benefits, workers’ compensation, etc.
- You may pay more for in-depth services, like data insights or talent management, but these features could improve your return on investment.
- Your time is valuable. Managing HR on your own may take your focus away from business activities that generate revenue.
Types of PEOs
Although there is only one type of PEO, known for its co-employment feature, there remains some confusion among employers about the business model. This misconception is largely because employee leasing has been incorrectly used to describe PEOs and their services over the years. In fact, some state legislatures continue to refer to PEOs as a type of employee leasing in their statutes.
PEOs and other categories of outsourcing
PEOs are a type of HR outsourcing, but they’re also distinctly unique because of the co-employment arrangement. Other outsourcing services that are similar to or sometimes mistaken for PEOs include administrative services organizations (ASO), employer of record (EOR) and temporary staffing or staff leasing companies.
| Model | Who’s the employer? | Typical use case | Benefits access | Responsibility scope |
|---|---|---|---|---|
| PEO | Client and PEO share HR responsibilities, including employment taxes and benefits | Ongoing HR and employment-related compliance assistance | Yes (group access) | Shared responsibility (per the terms of the services contract) |
| ASO | Client | Admin assistance without co-employment | No | Client retains responsibility |
| EOR | EOR | International operations and mergers | Varies | EOR assumes responsibility |
| Staffing agency | Staffing agency | Temporary or contractual labor | N/A | Staffing agency |
Certified PEOs
Certified PEOs (CPEOs) have met the rigorous financial, legal and reporting requirements of the IRS. Working with one may afford businesses certain employment-related financial protections and tax benefits. For example, a CPEO processes and transmits federal employment taxes on the employer’s behalf. Businesses may also not be subject to the federal employment tax restart for employee wages, which could apply if they partner with a non-certified PEO.
What does working with a CPEO help ensure?
- Financial guarantee
The certification program requires a CPEO to post a bond each year guaranteeing payment of its federal employment tax liabilities. - Employment tax restart elimination
Partnering with a CPEO eliminates the wage-base “restart” for certain federal payroll tax purposes if employers join or leave a CPEO relationship midyear. - Trust
PEOs must renew their certification periodically, proving that they consistently meet critical standards and other requirements.
ESAC accredited professional employer organizations
In addition to IRS certification, PEOs may be recognized by the Employer Services Assurance Corporation (ESAC). Those with ESAC accreditation have demonstrated financial stability, ethical business conduct and adherence to operational standards and regulatory requirements.
Future trends in PEO services
Significant shifts in talent, compliance and technology pose new challenges for employers. Here are some of the latest trends and how a full-service PEO can help turn them into opportunities:
Trend #1: The employee experience and well-being remain ongoing business priorities
How a PEO can help: Access to broad, high-quality benefit choices and expert HR guidance in employee engagement strategies
Trend #2: Skills are emerging as a strong indicator of employee success
How a PEO can help: Assistance designing and deploying programs that equip employees with new skills and close potential talent gaps
Trend #3: Talent is becoming more geographically dispersed
How a PEO can help: Multi-state compliance expertise and remote workforce management tools
Trend #4: New legislation is guiding how AI may be developed and used in employment decisions
How a PEO can help: Regular updates on AI compliance requirements and delivery of AI-driven hiring tools that meet regulatory standards
Trend #5: Pay equity and pay transparency remain business priorities
How a PEO can help: Market compensation data and benchmarking, and compliance support for pay transparency regulations
Trend #6: Multiple wage-and-hour developments are giving employers pause
How a PEO can help: Automated time and attendance tracking, and multi-jurisdiction HR compliance monitoring
Trend #7: Companies are humanizing the employee experience with holistic benefits
How a PEO can help: Integrated well-being platforms and mental health support resources
Double-certified for your peace of mind
ADP is one of the few PEOs certified by the ESAC and IRS so you can rest easy knowing your business is in good hands.
PEO FAQs
See what other employers are asking about PEOs:
Who is the employer in a PEO?
In a co-employment arrangement, the PEO is the employer of record for tax purposes, but the client maintains full authority of its business and workforce.
What is the benefit of a PEO?
A PEO partners with employers so they don’t have to navigate HR, risk and employment-related compliance on their own, thereby helping them protect and grow their business.
What does PEO mean?
PEO means professional employer organization. They serve to help small and midsized businesses manage certain HR responsibilities and risks through co-employment.
How does a PEO make money?
PEOs make money by charging a fee for their services. This cost usually depends on the total number of employees you have and the breadth of services you purchase. For example, PEOs that only handle basic HR administration, like payroll and benefits, may be less expensive than those that offer a full set of services.
What is the difference between a PEO and a staffing company?
Staffing companies lease employees to other businesses and remain the sole employer for those workers. PEOs, on the other hand, don’t supply a workforce, but assume certain HR responsibilities that make them co-employers with their clients.
Does working with a PEO affect company culture?
A co-employment relationship will not necessarily affect your organization’s culture unless that is one of your desired goals. In which case, some PEOs can recommend strategies to shape your culture and brand in a way that represents how you want your business to be perceived by your employees today and in the future.
By partnering with a PEO, do I also become a co-employer of other companies’ employees?
No contractual relationship is ever created between all of a PEO’s clients. Therefore, you are not responsible for any employees other than your own.
What is the difference between a PEO and HR outsourcing?
In a co-employment relationship, employers share certain employer responsibilities with the PEO that cannot be achieved through typical HR outsourcing. For example, a PEO usually provides access to robust health insurance and other perks for employees, while an HR outsourcing firm may simply help administer the employer’s existing benefits, HR or payroll.
PEO vs. HRIS: What’s the difference?
A PEO is a full-service HR solution for businesses, handling all things HR, from onboarding and training to benefits administration and payroll. This extensive support allows existing HR and payroll teams to focus on more strategic initiatives.
Human resource information systems (HRIS) are software programs that automate tedious, time-consuming HR tasks. These solutions also provide a central repository for a wide variety of personnel-related data, such as contact information and work history.
Depending on business needs, an HRIS may be sufficient. However, many growing companies find that a PEO can provide a breadth of hands-on HR support not available with an HRIS.
PEO vs. EOR: What’s the difference?
PEOs share some employment-related responsibilities with their clients. Usually, the PEO handles HR administrative tasks, like payroll and benefits management, while the client retains control of most employment-related decisions. This relationship may be ideal for businesses with domestic operations in the United States.
An employer of record (EOR), in contrast, assumes full liability for the workforce. Clients are still responsible for day-to-day operations, but the EOR handles all employment-related tasks. Such a partnership is beneficial to companies expanding operations to a foreign country or merging with another organization across international borders.
To sum up, PEOs are not EORs. However, many have partnerships with EORs, meaning employers can have both a PEO for their US-based HR needs and leverage the EOR for global hiring needs.
Do PEOs provide employee benefits?
PEOs commonly provide medical, dental and vision insurance and will assist with open enrollment. Many also offer retirement savings plans, employee discount programs and commuter benefits. Watch this video to learn more about how a PEO can provide market-leading benefits.
How many businesses use a PEO?
There are more than 900 PEOs in the United States, representing more than 175,000 businesses and more than four million employees.3
How can a PEO help control HR costs?
PEOs can help businesses control long-term HR costs through better employee benefits, smarter workforce decision-making and HR compliance support. Here are some specific examples:
- Without a PEO, small and midsized businesses often don't have the purchasing power to negotiate with national benefits carriers for high-quality, cost-effective rates.
- The reporting capabilities and data analytics provided by PEOs can help employers limit excess overtime and improve employee retention.
- A PEO's HR compliance experts can help businesses manage complex employment laws that may impact their operations.
Ready to partner with a PEO?
ADP’s PEO delivers dedicated support and intuitive technology across all 50 states — and is built to scale with you as you grow.
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This article is intended to be used as a starting point in analyzing PEOs and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
1 September 2024 NAPEO Whitepaper: PEO Clients: Faster Growing, More Resilient Businesses with Lower Turnover Rates
3 NAPEO, What is a PEO, Industry Stats, 2020
