What is a PEO (Professional Employer Organization)?
A professional employer organization, also known as a PEO, allows companies to outsource certain employee management tasks through a co-employment agreement. A PEO partners with the employer to provide human resources, employee benefits, regulatory compliance, risk and safety, payroll administration and talent management strategy.
The co-employment agreement typically stipulates that the PEO contractually shares certain employer responsibilities, though the employer retains ultimate control over the employees. Decisions about whether to continue employing an individual, for example, or whether to adjust the employee’s salary, remain with the employer.
Many employers use a PEO to gain access to premium employee benefit and workers compensation plans at a competitive rate. A PEO also relieves employers of some responsibility for compliance oversight and provides the simplicity of having a single vendor across all HR needs.
According to a 2017 NAPEO (National Association of Professional Employer Organizations) study:
- 98% of business owners using a PEO would recommend a PEO to a small business colleague
- 70% report that their revenues have increased since becoming a PEO client; and
- 66% report that their profitability has increased since becoming a PEO client.1
Certified PEOs (CPEO)
The IRS offers a certification to PEOs that have met a set of rigorous background, financial, and reporting requirements. Certification ensures certain financial protections and tax benefits to clients of a CPEO.
Of the more than 900 PEOs in the United States, fewer than 7% are currently certified.2 3
ADP TotalSource is an example of a certified PEO. Note: The IRS does not endorse any particular certified professional employer organization.
ESAC Accredited PEOs
The Employer Services Assurance Corporation (ESAC) is an independent nonprofit corporation, and is the official accreditation and financial assurance organization for the PEO industry. Earning accreditation demonstrates a PEO’s financial stability, ethical business conduct and adherence to operational standards and regulatory requirements.1 Source: “PEOs: Good for Businesses and Their Employees” NAPEO, 2017