PEO (Professional Employer Organization): What It Is
A company that provides comprehensive HR services through a co-employment arrangement, handling payroll, benefits, tax administration, and compliance while the client company retains day-to-day management of employees.
A Professional Employer Organization (PEO) is a company that partners with businesses through a co-employment arrangement to provide comprehensive HR services. In this model, the PEO becomes the employer of record for tax and insurance purposes, handling payroll, benefits administration, workers’ compensation, and regulatory compliance. However, the client company retains full control over day-to-day operations, employee management, and business decisions.
The key distinction between a PEO and an Employer of Record (EOR) is that PEOs operate primarily in domestic markets and establish a co-employment relationship, while EORs typically facilitate international hiring and act as the sole legal employer. PEOs are ideal for growing companies that want to outsource HR administration while maintaining direct employee relationships.
A Professional Employer Organization (PEO) is a third-party service provider that enters into a co-employment arrangement with client companies to deliver comprehensive human resources solutions. Under this arrangement, the PEO assumes certain employer responsibilities and liabilities, particularly around payroll processing, tax filing, benefits administration, workers’ compensation insurance, and regulatory compliance. The client company maintains control over core business operations, employee hiring and termination decisions, job assignments, and workplace management while the PEO handles the administrative and compliance aspects of employment.
- Co-employment model: PEO shares employer responsibilities with your company - they handle HR administration while you retain control over daily operations and business decisions
- Comprehensive HR services: Typically includes payroll processing, tax administration, benefits management, workers’ compensation, risk management, regulatory compliance, and HR consulting
- Cost structure: Most PEOs charge either a percentage of total payroll (typically 2-12%) or a flat per-employee-per-month fee, with costs varying based on company size and services included
- Better benefits access: Small and mid-sized companies can often secure enterprise-level health insurance and retirement plans at lower rates by joining the PEO’s larger employee pool
- Domestic focus: PEOs primarily operate within a single country (most commonly in the U.S.) and require employees to work in jurisdictions where the PEO is registered and licensed
PEO vs EOR
While both PEOs and Employers of Record (EORs) provide employment-related services, they serve different purposes and operate under distinct models:
Employment relationship: A PEO creates a co-employment arrangement where both the PEO and your company are employers. An EOR becomes the sole legal employer of your workers, though you direct the work.
Geographic scope: PEOs typically operate domestically within a single country and require local business presence. EORs specialize in international hiring, allowing you to employ workers in countries where you have no legal entity.
Control and liability: With a PEO, you share employment liability and responsibilities. With an EOR, they assume full employment liability while you maintain operational control through a service agreement.
Use cases: PEOs are best for established domestic companies seeking to outsource HR administration and access better benefits. EORs are ideal for companies expanding internationally or hiring remote workers in new countries without establishing a local presence.
Regulatory requirements: PEOs must be licensed in each state or jurisdiction where they operate and are often certified by industry organizations like the IRS (CPEO certification) or ESAC. EORs must comply with employment laws in each country where they employ workers on your behalf.
When to Use a PEO
A PEO makes sense in several business scenarios:
Growing domestic companies: If you’re scaling your U.S.-based workforce and find HR administration consuming too much time and resources, a PEO can handle compliance and paperwork while you focus on growth.
Access to better benefits: Small businesses that want to offer competitive health insurance, 401(k) plans, and other benefits comparable to larger companies can leverage the PEO’s group purchasing power.
Complex compliance requirements: Companies in highly regulated industries or those operating across multiple states can benefit from a PEO’s expertise in navigating varying employment laws and tax requirements.
Limited HR resources: Businesses without dedicated HR staff or those wanting to avoid the cost of building an internal HR department can outsource these functions to a PEO.
Risk management needs: Companies seeking to reduce employment-related liability and access professional HR guidance on best practices, employee relations, and workplace safety.
However, a PEO may not be appropriate if you’re primarily hiring internationally (where an EOR is better suited), if you have very few employees (where the cost may not justify the benefits), or if you prefer maintaining complete direct control over all employment functions.
Frequently Asked Questions
What's the difference between a PEO and payroll service?
A payroll service simply processes paychecks and handles tax withholdings, acting as a vendor. A PEO enters into a co-employment relationship and provides comprehensive HR services including benefits administration, workers' compensation, regulatory compliance, risk management, and HR consulting - not just payroll. The PEO also becomes a legal employer for certain purposes, while a payroll service provider does not.
Will my employees know they're co-employed by a PEO?
Yes, employees will be aware of the PEO relationship because their paychecks, W-2 forms, and benefits documentation will reflect the PEO as the employer of record for tax purposes. However, they'll still work exclusively for your company, and you'll retain control over their job duties, performance management, and day-to-day supervision. Many companies communicate this arrangement as a partnership that enables better benefits and HR support.
Can I switch PEOs or bring HR back in-house later?
Yes, you can transition away from a PEO, though it requires planning. Most PEO contracts are annual with specific termination clauses and notice requirements (typically 30-90 days). You'll need to manage the transition of payroll systems, benefits enrollment, workers' compensation policies, and employee records. Some PEOs charge termination fees, so review your contract carefully before making changes.
How much does a PEO typically cost?
PEO costs generally range from 2-12% of your total gross payroll or $500-$1,500 per employee per year, depending on company size, industry, services included, and geographic location. Smaller companies typically pay higher percentages (8-12%) while larger companies with more employees can negotiate lower rates (2-4%). Some PEOs charge flat per-employee-per-month fees instead of percentage-based pricing. Always request detailed pricing that includes all fees, not just the base rate.