What Is a PEO? Professional Employer Organization Guide (2026)

What Does PEO Stand For?

PEO stands for Professional Employer Organization.

A PEO is a third-party service provider that partners with businesses to manage human resources functions through a legal arrangement called co-employment. The “professional” aspect refers to their HR expertise, the “employer” component relates to their role as legal employer for certain purposes, and “organization” indicates they’re a specialized company providing these services.

The concept emerged in the United States in the 1980s and has grown into a $236 billion industry serving over 4 million American workers across 175,000+ businesses.

How PEOs Work: The Co-Employment Model Explained

Understanding how PEOs operate requires understanding the three-party relationship they create:

The PEO Relationship Triangle

1. Your Company (Client Company)

• Retains full control over business operations
• Makes all hiring and firing decisions
• Manages employees’ daily work, performance, and assignments
• Determines compensation levels and job descriptions
• Controls workplace culture and company direction
• Responsible for business deliverables and client relationships

2. The PEO (Professional Employer Organization)

• Becomes legal employer of record for tax purposes
• Processes payroll and withholds employment taxes
• Administers employee benefits (health insurance, 401k, etc.)
• Handles workers’ compensation insurance
• Manages unemployment insurance claims
• Ensures compliance with labor laws and regulations
• Provides HR consulting and support
• Handles employment tax filings (W-2s, 1099s, quarterly reports)

3. Your Employees

• Work exclusively for your company doing the job you assign
• Report to your managers and follow your direction
• Receive paychecks from the PEO (showing PEO as employer)
• Receive benefits through the PEO’s master plans
• Are covered by the PEO’s workers’ compensation policy
• Remain “your” employees in every practical sense

The PEO Process: Step by Step

Initial Setup:

1. You sign a Client Service Agreement with the PEO
2. PEO conducts onboarding and compliance review
3. Existing employees transition to co-employment (receive new paperwork)
4. Payroll, benefits, and HR systems are set up
5. Workers’ compensation and insurance policies are established

Ongoing Operations:

1. You manage employees, assign work, evaluate performance
2. You submit payroll information to PEO (hours worked, commissions, bonuses)
3. PEO processes payroll, withholds taxes, pays employees
4. PEO handles benefits enrollment, claims, and administration
5. PEO files all employment tax returns and maintains compliance
6. PEO provides HR support for employee questions and issues
7. You receive consolidated invoicing (payroll + PEO fees + benefits costs)

Employee Experience:

• Receives job offer from your company
• Signs co-employment agreement acknowledging PEO relationship
• Completes benefits enrollment through PEO platform
• Gets paychecks from PEO with PEO name on pay stubs
• Works exclusively for your company under your direction
• Contacts PEO for benefits and payroll questions, contacts you for work matters
• Receives W-2 at year-end from PEO (not your company)

PEO vs EOR vs Direct Employment: Complete Comparison

Many people confuse PEOs with Employers of Record (EORs) or wonder how they differ from traditional employment. Here’s the definitive breakdown:

Quick Comparison Table

Feature	PEO	EOR	Direct Employment
Employment Model	Co-employment (shared)	Sole legal employer	Traditional employer
Primary Use Case	Domestic HR outsourcing	International hiring	Local direct hiring
Geographic Scope	Single country (usually U.S.)	Global/multi-country	Where company has entity
Legal Employer	Both PEO and client company	EOR only	Your company only
Day-to-Day Control	Client company	Client company	Your company
Compliance Responsibility	Shared (PEO handles admin)	EOR handles all	Your company
Benefits Provider	PEO’s master plans	EOR or local statutory	Your company’s plans
Requires Local Entity	Yes (client must exist)	No (that’s the point)	Yes (you are the entity)
Typical Company Size	5-500 employees	Any size	Any size
Termination Complexity	Moderate (contract terms)	Low to moderate	Low (internal process)
Cost Structure	2-12% of payroll	$300-$700/employee/month	Internal HR costs
Best For	Growing domestic companies	International expansion	Established local operations

When to Use Each Model

Use a PEO when:

• You’re a domestic U.S. company with 5-500 employees
• You want to outsource HR administration but keep employees
• You want access to better benefits at lower costs (by joining PEO’s pool)
• You need expertise in multi-state compliance
• You lack dedicated HR staff or want to avoid building HR department
• You want to reduce employment liability and risk

Use an EOR when:

• You’re hiring employees in countries where you have no legal entity
• You want to test international markets before establishing operations
• You need to hire 1-10 employees in a new country quickly
• You want someone else to handle international compliance completely
• You’re expanding globally without entity setup costs

Use direct employment when:

• You already have a legal entity in the country
• You have 50+ employees and can justify internal HR infrastructure
• You want complete control over all HR policies and benefits
• You have complex or unique benefits requirements
• You want to build strong company culture with direct employee relationships

Key Differences Explained

Employment relationship:

• PEO: You and the PEO are both legally considered employers (co-employment). Employees work for you, but PEO shares legal liability.
• EOR: The EOR is the sole legal employer. You’re the client directing work through a service agreement.
• Direct: You are the only employer with full control and liability.

Geographic operation:

• PEO: Operates domestically, typically within one country (most PEOs are U.S.-focused). Must be licensed in each state where they operate.
• EOR: Specializes in international operations, enabling hiring in multiple countries without local entities.
• Direct: Wherever you have a registered business entity.

Control and liability:

• PEO: Shared liability. PEO assumes certain employer liabilities (tax, workers’ comp), but you retain others (discrimination, wrongful termination).
• EOR: EOR assumes full employment liability while you maintain operational control via contract.
• Direct: You bear all employment liability and control all aspects.

Benefits administration:

• PEO: Employees join PEO’s master benefit plans, often getting better rates than small companies could negotiate independently.
• EOR: Provides statutory benefits required by local law, plus optional enhanced packages.
• Direct: You design, negotiate, and administer your own benefits plans.

Regulatory requirements:

• PEO: Must be licensed in each state, often certified by IRS as CPEO (Certified Professional Employer Organization) or accredited by ESAC.
• EOR: Must comply with employment laws in each country of operation, maintain local legal expertise.
• Direct: You’re responsible for understanding and complying with all laws where you operate.

Benefits of Using a PEO

1. Access to Better Benefits at Lower Costs

The advantage: Small businesses can offer enterprise-level benefits by joining the PEO’s large employee pool.

Real impact:

• Health insurance costs can be 15-30% lower through PEO master plans vs. small group policies
• Access to Fortune 500-level retirement plans (401k with institutional investment options)
• Better rates on dental, vision, life, and disability insurance
• Ability to compete with larger employers for talent

Example: A 25-person company might pay $850/month per employee for health insurance independently. Through a PEO’s 50,000-employee pool, the same coverage might cost $650/month - saving $5,000 per employee annually.

2. Significant Time Savings

The burden lifted:

• Average small business owner spends 8-12 hours per week on HR tasks
• Payroll processing, tax filing, benefits administration are fully outsourced
• No more tracking regulatory changes or updating employee handbook
• HR compliance audits handled by PEO

What you can focus on instead:

• Business development and sales
• Product development and innovation
• Customer service and satisfaction
• Strategic planning and growth

3. Reduced Compliance Risk

Protection provided:

• PEOs employ HR professionals, employment attorneys, and compliance experts
• Stay current on constantly changing employment laws (federal, state, local)
• Handle multi-state compliance if you have remote employees
• Manage workplace safety and OSHA compliance
• Reduce risk of costly employment lawsuits and penalties

The stakes: Employment lawsuits cost small businesses an average of $160,000 when lost. Non-compliance penalties can reach $10,000+ per violation. PEOs significantly reduce these risks.

4. Professional HR Expertise

Resources you gain:

• Access to HR professionals for employee relations issues
• Employee handbook templates and policy guidance
• Performance management systems and tools
• Recruiting and onboarding support
• Training and development programs
• Termination and separation assistance

Value: Hiring a single dedicated HR professional costs $60,000-$85,000 annually. A PEO provides an entire HR team for a fraction of that cost.

5. Workers’ Compensation Savings

How it works:

• PEO pools all client employees for workers’ comp insurance
• Larger pool = better rates and more stable pricing
• PEO handles all claims administration
• Access to safety programs and loss prevention

Savings potential: Workers’ comp rates can be 20-40% lower through PEO master policies vs. individual company policies, especially in high-risk industries.

6. Scalability and Flexibility

Growth enablers:

• Easily add employees without expanding HR infrastructure
• Scale up or down without hiring/firing HR staff
• Enter new states without establishing separate payroll/benefits
• Manage seasonal workforce fluctuations efficiently

Ideal for: Companies in growth mode (10-100 employees annually) or those with fluctuating workforce needs.

7. Better Employee Experience

What employees receive:

• Professional payroll processing (direct deposit, pay stubs, tax forms)
• Modern benefits enrollment and management portals
• Dedicated support for benefits questions
• Access to employee assistance programs (EAP)
• Financial wellness tools and resources

Retention impact: Better benefits and professional HR support lead to 27% lower turnover at PEO client companies vs. non-PEO companies.

Drawbacks and Limitations of PEOs

1. Cost Considerations

The expense:

• PEOs typically charge 2-12% of gross payroll
• Smaller companies (under 50 employees) pay higher percentages (8-12%)
• Larger companies (100+ employees) negotiate lower rates (2-4%)
• Alternative pricing: $500-$1,500 per employee per year

Real numbers:

• Company with 20 employees and $1.5M payroll at 10% = $150,000 annually
• Company with 100 employees and $8M payroll at 3% = $240,000 annually

When it’s worth it: If the PEO saves you more in benefits costs, HR salaries, and time than it charges, it’s a net positive. Many companies find the ROI positive at 15+ employees.

When it’s not: Very small companies (under 10 employees) often find PEO costs exceed benefits. Very large companies (500+) can often build more cost-effective internal HR.

2. Shared Control and Liability

Loss of autonomy:

• Must follow PEO’s HR policies and procedures (can’t create completely custom policies)
• Benefits choices limited to PEO’s available plans
• Termination processes must follow PEO’s requirements
• Some employment decisions require PEO approval

Shared liability concerns:

• You’re still liable for workplace discrimination and harassment
• You remain responsible for wage and hour violations
• PEO handles tax liability, but errors can affect your business
• If PEO fails to pay taxes, you can be held responsible (choose certified PEOs)

3. Less Direct Employee Relationship

Cultural considerations:

• Employees receive paychecks from PEO, not your company
• Benefits communications come from PEO
• Some employees feel like “second-class” citizens
• Harder to build strong company culture when PEO is employer of record

Managing perception:

• Clear communication about PEO relationship during hiring
• Emphasize better benefits as advantage of arrangement
• Maintain strong company culture through other means
• Keep PEO as “behind the scenes” as possible in daily operations

4. Long-Term Contracts and Switching Costs

Commitment required:

• Most PEO contracts are 1-3 years with auto-renewal
• Termination requires 30-90 days notice
• Early termination fees can be substantial ($5,000-$50,000)
• Switching PEOs or bringing HR in-house is complex and time-consuming

Transition challenges:

• Employees must re-enroll in new benefits
• Historical payroll data must be transferred
• Workers’ comp policies must be transitioned mid-year
• Tax records and employment history must be managed carefully

5. Domestic-Only Operation

Geographic limitation:

• Most PEOs operate only in the United States
• Cannot help with international hiring (use EOR instead)
• May not operate in all 50 states (especially Alaska, Hawaii)
• Limited to countries where PEO is licensed

Impact: If your growth strategy includes international expansion, a PEO won’t scale with you. You’ll need an EOR or local entities for overseas employees.

6. Service Quality Variability

Potential issues:

• PEO quality varies dramatically (from excellent to terrible)
• You’re dependent on PEO’s customer service responsiveness
• Payroll errors or benefits problems affect your employees
• If PEO goes out of business, you face major disruption
• Some PEOs oversell and underdeliver

Risk mitigation:

• Choose certified PEOs (IRS CPEO certification, ESAC accreditation)
• Check references from current clients
• Research PEO’s financial stability and longevity
• Review contract terms carefully before signing

7. One-Size-Fits-All Approach

Standardization limitations:

• PEO benefits packages are standardized across all clients
• Limited ability to customize benefits for your specific needs
• Company-specific perks may be harder to implement
• Innovative or unique HR programs may not be supported

When this matters: Companies with very specific benefits needs (e.g., unique equity structures, specialized insurance, niche perks) may find PEOs too constraining.

When to Use a PEO (and When Not To)

Perfect PEO Candidates

You should strongly consider a PEO if:

1. You’re in the “PEO sweet spot” (5-500 employees)

• Too large to handle HR manually, too small for dedicated HR department
• Experiencing growth and hiring regularly
• HR administration is consuming too much leadership time

2. You want better benefits than you can get independently

• Health insurance quotes are shockingly expensive for small group
• Employees are asking for better retirement plan options
• You’re losing talent to companies with better benefits packages

3. You operate in multiple states

• Managing multi-state payroll tax compliance is overwhelming
• You have remote employees across various states
• Each state has different employment laws and you can’t track them all

4. You lack HR expertise

• No one on your team has HR or employment law background
• You’re making it up as you go (dangerous)
• You’ve had close calls with compliance issues

5. Your industry is high-risk

• Workers’ compensation insurance is expensive
• Industry faces frequent employee lawsuits
• Regulatory compliance burden is heavy (healthcare, finance, construction)

6. You’re spending too much time on HR

• Founders are processing payroll and answering benefits questions
• HR administration is preventing focus on core business
• Employee issues are dominating leadership time

Poor PEO Candidates

A PEO is probably NOT right if:

1. You have very few employees (under 5)

• Cost per employee is too high to justify
• Can manage HR with payroll software and broker
• Better to use services like Gusto, Rippling, or Justworks (which are more like “payroll plus” than true PEOs)

2. You need complete control

• You want to design every aspect of HR policies yourself
• You have very specific or unique benefits requirements
• You want to maintain direct employer relationship with employees

3. You’re primarily hiring internationally

• PEOs are domestic-focused (use EOR like Deel or Remote instead)
• You need global expansion capabilities
• International compliance is your primary concern

4. You have very high employee turnover

• PEOs work best with stable workforces
• Very high churn makes PEO setup/teardown inefficient
• May not recoup setup costs if employees don’t stay long

5. You’re very large (500+ employees)

• Can build cost-effective internal HR at this scale
• PEO fees may exceed cost of dedicated HR team
• Want more control and customization than PEO offers

6. Your finances are tight

• Can’t afford 2-12% of payroll for PEO services
• Benefits costs through PEO might still be too high
• Better to use basic payroll service until more established

7. You’re a startup planning rapid growth/exit

• PEO contracts can complicate M&A transactions
• May limit your flexibility during rapid scaling
• Investors might prefer direct employment for cultural reasons

PEO Cost Structure: What You’ll Actually Pay

Understanding PEO pricing is crucial for budgeting and ROI analysis.

Pricing Models

1. Percentage of Payroll (Most Common)

• PEO charges 2-12% of total gross payroll
• Percentage decreases as company size increases
• Typical ranges:
  • Under 25 employees: 8-12%
  • 25-50 employees: 5-8%
  • 50-100 employees: 3-5%
  • 100-500 employees: 2-4%
  • 500+ employees: 2-3%

2. Per-Employee-Per-Month (PEPM)

• Flat fee of $500-$1,500 per employee per year
• Broken into monthly payments ($40-$125/employee/month)
• More predictable than percentage-based
• Common with smaller PEOs or specific service levels

3. Tiered Service Pricing

• Different pricing for different service levels
• Basic: Payroll + compliance only
• Standard: Above + benefits administration
• Premium: Above + dedicated HR support, strategic consulting
• Pricing increases with service tier

What’s Included vs. What’s Extra

Typically included in PEO fee:

• Payroll processing and tax filing
• Benefits administration (enrollment, communications, support)
• Workers’ compensation insurance administration
• Compliance support and guidance
• Basic HR consulting and employee handbook
• Employee self-service portal
• Tax form processing (W-2s, 1099s)
• Unemployment claims management

Typically charged separately:

• Health insurance premiums (you pay actual cost of coverage)
• 401k administration fees
• Workers’ compensation premiums (pooled rates, but you pay actual premium)
• Background checks and drug testing
• Recruiting and applicant tracking
• Advanced HR services (compensation consulting, organizational development)
• COBRA administration (sometimes)
• State unemployment insurance taxes

Real-World Cost Examples

Example 1: 15-Person Tech Startup

• Total annual payroll: $1,200,000
• PEO rate: 10%
• PEO fees: $120,000/year ($10,000/month)
• Health insurance: ~$8,000/month (covered by employee contributions + company)
• Workers’ comp: ~$2,000/month
• Total monthly cost: ~$20,000
• Cost per employee: $667/month

Example 2: 75-Person Manufacturing Company

• Total annual payroll: $3,600,000
• PEO rate: 4%
• PEO fees: $144,000/year ($12,000/month)
• Health insurance: ~$35,000/month
• Workers’ comp: ~$12,000/month (higher due to industry)
• Total monthly cost: ~$59,000
• Cost per employee: $787/month

Example 3: 200-Person Services Company

• Total annual payroll: $12,000,000
• PEO rate: 2.5%
• PEO fees: $300,000/year ($25,000/month)
• Health insurance: ~$95,000/month
• Workers’ comp: ~$8,000/month
• Total monthly cost: ~$128,000
• Cost per employee: $640/month

Calculating ROI: Is It Worth It?

Costs avoided with PEO:

• HR staff salaries: $60,000-$85,000 per HR person (need 1 per 50-75 employees)
• Benefits broker fees: $50-$150 per employee per year
• Payroll software: $1,500-$5,000/year
• Workers’ comp: 15-30% savings through pooled rates
• Health insurance: 15-25% savings through master plans
• Time savings: Leadership time valued at $150-$300/hour
• Compliance risk: Avoiding even one lawsuit can save $100,000+

Break-even calculation example:

• 30-person company, $2M payroll
• PEO cost: 8% = $160,000/year
• Savings:
  • Health insurance savings: $50,000
  • Workers’ comp savings: $15,000
  • No need for HR person: $70,000
  • Broker fees avoided: $4,500
  • Leadership time (10 hrs/wk × $200/hr): $104,000
  • Total value: $243,500
• Net benefit: $83,500 (or 4.2% of payroll)

Rule of thumb: PEOs typically provide positive ROI for companies with 15+ employees, especially if health insurance costs are high or multi-state compliance is complex.

Hidden Costs to Watch For

• Implementation fees: $2,000-$10,000 one-time setup charge
• Termination fees: $5,000-$50,000 if you leave contract early
• Per-employee setup fees: $100-$500 per employee added
• Technology fees: Some PEOs charge separately for portal access
• Compliance audits: Extra charges for wage and hour audits
• State registrations: Fees for registering in new states

Before signing: Get all-in pricing in writing, including every potential fee. Ask: “What could increase my costs beyond the quoted rate?”

How to Choose a PEO: Essential Criteria

With over 2,800 PEOs in the U.S., choosing the right one is critical.

Red Flags to Avoid

Walk away if:

• PEO refuses to show IRS CPEO certification or ESAC accreditation
• No current clients will provide references
• Pricing is vague or “we’ll figure it out later”
• Contract has automatic renewal without opt-out
• Termination fees exceed 3 months of service fees
• PEO has been in business less than 3 years
• Customer service is unresponsive during sales process (will only get worse)
• Technology platform looks outdated (built before 2015)
• Benefits options are extremely limited
• PEO pressures you to sign immediately without review period

Top Questions to Ask

1. “Are you IRS CPEO certified? Can I verify your certification number?”

   • CPEO certification means IRS has verified financial stability and tax compliance

2. “What is your client retention rate and average client tenure?”

   • Should be 85%+ retention, with clients staying 5+ years

3. “Can you provide 5 references from companies similar to ours in size and industry?”

   • Speak to references without PEO on the call

4. “What exactly is included in your quoted rate, and what costs extra?”

   • Get comprehensive list of included services and all potential additional fees

5. “Who will be my main point of contact and what’s your guaranteed response time?”

   • Understand service model (dedicated rep vs. general support)

6. “What happens if you make a payroll or tax filing error?”

   • Should have E&O insurance and clear error correction procedures

7. “What are your contract terms, notice requirements, and termination fees?”

   • Get this in writing before signing

8. “How do you handle annual benefits renewal and rate increases?”

   • Understand renewal process and typical rate increase patterns

9. “What technology do you use and can I see a demo?”

   • Test employee portal before committing

10. “How do you stay current on changing employment laws and regulations?”

    • Should have dedicated compliance team and legal counsel

PEO vs. Alternatives: Other HR Solutions

PEOs aren’t the only option for outsourcing HR functions.

Professional Employer Organization (PEO) vs. ASO (Administrative Services Organization)

ASO (Administrative Services Organization):

• No co-employment: You remain sole employer
• Services: Payroll, benefits administration, compliance consulting
• Control: You retain complete control and all liability
• Cost: Typically cheaper than PEO (1-3% of payroll)
• Best for: Companies that want HR services without sharing employer status

Key difference: ASO is a vendor providing services; PEO is a co-employer sharing liability and responsibilities.

When to choose ASO over PEO:

• You want to remain sole employer
• You have good benefits rates and don’t need PEO’s pool
• You want maximum control over HR policies
• Cost is primary concern

PEO vs. Payroll Service (like ADP, Paychex)

Payroll Service:

• Function: Processes paychecks and handles tax withholding
• Not an employer: Pure vendor relationship
• Limited scope: Payroll and tax filing only
• Cost: $40-$200 per month base + $2-$15 per employee per pay period
• Best for: Companies that only need payroll processing

Key difference: Payroll service just processes paychecks; PEO provides comprehensive HR, benefits, compliance, and assumes employer responsibilities.

When to choose payroll service over PEO:

• You only need payroll processing
• You have fewer than 10 employees
• You handle benefits and HR yourself
• Budget is very tight

PEO vs. HR Software (like Gusto, Rippling, BambooHR)

HR Software/Platform:

• Function: Software tools for payroll, benefits, HR administration
• Self-service: You do the work using their tools
• No co-employment: You’re the sole employer
• Cost: $40-$200 per month + $5-$25 per employee per month
• Best for: Tech-savvy companies comfortable managing HR with software assistance

Key difference: HR software gives you tools; PEO gives you a service team that does it for you.

When to choose HR software over PEO:

• You have HR expertise in-house
• You want to manage HR yourself with good tools
• You’re comfortable with technology
• You’re cost-conscious (much cheaper than PEO)

PEO vs. HR Consultant

HR Consultant:

• Function: Advisory services, policy development, problem-solving
• Project-based: Engaged for specific needs or ongoing retainer
• No operations: Advises but doesn’t process payroll or administer benefits
• Cost: $150-$400 per hour or $2,000-$10,000 per month retainer
• Best for: Companies needing strategic HR guidance, not administrative processing

Key difference: Consultant advises; PEO does the work.

When to choose HR consultant over PEO:

• You need strategic HR guidance, not administrative work
• You have operational HR handled but need expertise
• You’re facing a specific challenge (reorganization, compliance audit)
• You want to build internal HR capability

Combination Approaches

Many companies use hybrid solutions:

• Payroll software + HR consultant: Gusto for payroll + consultant for complex issues
• PEO + specialized consultants: PEO for core HR + compensation consultant for equity
• HR software + benefits broker: Rippling for payroll/HR + broker for benefits
• ASO + legal counsel: ASO for administration + employment attorney on retainer

The right mix depends on:

• Your company size and growth trajectory
• Your internal HR capability
• Your budget and priorities
• Your industry and complexity

Common PEO Questions and Concerns

”Will I lose control of my company?”

Short answer: No.

You retain complete control over:

• All hiring and firing decisions
• Day-to-day management and direction of employees
• Work assignments and performance standards
• Compensation levels and job descriptions
• Company strategy and business decisions
• Workplace culture and values

The PEO controls:

• How payroll is processed and taxes are filed
• Benefits plan options (though you choose which to offer)
• Compliance procedures and required policies
• HR administrative processes

Think of it as: You’re the coach calling plays; the PEO is the operations staff handling uniforms, equipment, and league paperwork.

”What if the PEO goes out of business?”

Risk level: Low but not zero.

Protection measures:

1. Choose CPEO-certified PEOs: IRS certification requires bonding and financial guarantees
2. Review financials: Ask to see audited financial statements
3. Check bonding: CPEO PEOs must maintain bonds guaranteeing tax payments
4. Verify insurance: PEO should carry E&O insurance and fiduciary liability coverage

What happens if PEO fails:

• Your employees are still employed by you (co-employment means you’re still employer)
• Reputable PEOs have contingency plans to transfer clients
• Accrued wages and benefits are typically protected by state law
• You may need to quickly transition to another PEO or bring HR in-house

Mitigation: Choosing established, certified PEOs with strong financials makes this extremely unlikely.

”Can I switch PEOs if I’m unhappy?”

Yes, but it’s complex.

Contract considerations:

• Review your contract’s termination clause
• Most require 30-90 days notice
• Early termination may incur fees
• Some contracts auto-renew unless you opt out in writing

Switching process:

1. Notify current PEO in writing per contract terms
2. Select and contract with new PEO
3. Coordinate transition date (often end of quarter or year)
4. Transfer employee data and historical records
5. Re-enroll employees in new benefits plans
6. Transition workers’ comp policies
7. Ensure seamless payroll processing

Timeline: Expect 60-90 days for clean transition.

Cost: Plan for overlap costs, possible early termination fees, new setup fees.

”How do employees react to co-employment?”

Common initial reactions:

• Confusion about who they actually work for
• Concern about changing benefits or paychecks
• Worry that they’re being “outsourced” or job is at risk

How to manage:

1. Communicate early and clearly: Explain PEO relationship before transition
2. Emphasize benefits: “This gives you access to better health insurance”
3. Reassure stability: “You’re still employed by us, working on the same team”
4. Transparent Q&A: Hold meeting to answer all questions
5. Written FAQs: Provide document explaining what changes (and what doesn’t)

What changes for employees:

• Paychecks come from PEO (same amount, different name)
• Benefits enrollment through PEO portal
• HR questions go to PEO support
• W-2 shows PEO as employer

What doesn’t change:

• Their job, role, responsibilities
• Their manager and who they report to
• Their workspace and daily work environment
• The company they identify with

Reality: After initial adjustment period, most employees appreciate better benefits and professional HR support. Turnover typically decreases with PEO transition.

”What industries work best with PEOs?”

PEO-friendly industries:

1. Professional services (consulting, marketing, creative agencies)

• Low physical risk, high HR administration burden
• Benefits expectations high
• Multi-state operations common

2. Technology and software companies

• Fast growth, limited HR infrastructure
• Competing for talent requires strong benefits
• Remote/distributed teams

3. Construction and trades

• High workers’ comp costs (PEO pooling helps significantly)
• Compliance complexity (OSHA, prevailing wage)
• Seasonal workforce fluctuations

4. Healthcare and medical practices

• Complex compliance requirements
• Limited administrative bandwidth
• Need professional HR for sensitive employee matters

5. Non-profits

• Limited budgets for HR infrastructure
• Need benefits to attract talent despite lower pay
• Multi-site operations

Industries that may struggle with PEOs:

• Very high-risk (extreme workers’ comp costs may exceed PEO pool rates)
• Highly unionized (PEO relationship can complicate union agreements)
• Requiring top-secret clearance (co-employment can complicate security clearances)
• International operations (PEOs are domestic)

Making the PEO Decision: Final Considerations

Decision Framework

Consider a PEO if you answer “yes” to most of these:

• ☐ We have 15+ U.S.-based employees
• ☐ HR administration takes 8+ hours per week
• ☐ We lack dedicated HR expertise
• ☐ Our health insurance quotes are expensive
• ☐ We’re growing and hiring regularly
• ☐ We operate in multiple states
• ☐ Employment compliance keeps us up at night
• ☐ We’re spending $500+ per employee on benefits but getting mediocre plans
• ☐ We want to focus on our business, not HR paperwork
• ☐ We can afford 2-8% of payroll for PEO services

Avoid a PEO if you answer “yes” to most of these:

• ☐ We have fewer than 10 employees
• ☐ We need complete control over every HR decision
• ☐ We’re primarily hiring internationally
• ☐ Our budget can’t accommodate PEO fees
• ☐ We have very unique benefits requirements
• ☐ We’re planning M&A activity in next 12 months
• ☐ We already have excellent HR infrastructure
• ☐ We’re primarily contractors, not employees

The Bottom Line

PEOs are ideal for:

• Growing domestic companies (15-500 employees) that want to scale without building massive HR infrastructure
• Companies seeking better benefits at lower costs through pooling
• Businesses operating in multiple states needing compliance expertise
• Organizations lacking HR expertise that want professional guidance

PEOs are NOT ideal for:

• Very small companies (under 10 employees) where cost per employee is too high
• International hiring needs (use EOR instead)
• Companies requiring absolute control over all HR functions
• Businesses with very unique or complex benefits needs

The key question: Will the PEO’s services, expertise, and benefits access provide more value than the cost? For most companies in the 15-500 employee range with complex HR needs, the answer is yes.

Next Steps

If you’re considering a PEO:

1. Calculate your current HR costs: Include staff time, benefits costs, payroll software, broker fees, and risk
2. Get quotes from 3-5 PEOs: Compare services, pricing, and contract terms
3. Check certifications: Verify IRS CPEO certification and ESAC accreditation
4. Call references: Speak to current clients about their experience
5. Review contracts carefully: Understand termination clauses and all fees
6. Run the ROI numbers: Ensure the value exceeds the cost for your specific situation

PEO vs EOR confusion? If you’re hiring internationally, you need an EOR (Employer of Record), not a PEO. Read our complete guide to understand the differences.

Want more on employment arrangements? Check out our comprehensive guide on EOR vs Contractor vs Employee to understand all your options for remote hiring.