What Is a PEO? A Guide to Its Benefits, Risks, and Alternatives

A PEO can help business owners and HR execs find and retain talent. Figure out if partnering with a PEO is right for your business with this guide.

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Professional Employer Organization (PEO) 🏢

It’s hard enough to run a small business without having to deal with the constant stress of finding and retaining top talent. In a 2022 PwC survey, 48% of executives called “talent acquisition and retention challenges” their biggest obstacle to growth. A PEO (Professional Employer Organization) can help business owners and HR execs overcome this hurdle. PEOs manage key human resources functions that keep employees engaged while protecting you from lapses in compliance.Keep reading to figure out if partnering with a PEO is right for your business.

What is a PEO? 🤔

A standard PEO is a human resources service provider. It doesn’t fully replace an in-house HR department, but you can partner with one to provide services where your HR team lacks expertise or resources.PEO services include tax and health insurance administration, regulatory compliance, and payroll. The exact number of services varies with the individual PEO provider.When you sign an agreement with a PEO, you become “co-employers” and share the responsibilities and risks associated with being an employer. Employer responsibilities might include outlining the company culture while the PEO handles the administrative tasks that help bring the culture to life. The agreement should specify exactly what this co-employment relationship will look like in practice and how both parties will share the risk.

What is a global PEO? 🌐

A global or international PEO is an organization that handles hiring and compliance regardless of employee location.The catch is you must first establish a business entity in the country or countries where you want to do business. Then the global PEO can take over. You’re still the legal employer of the worker. But as with a standard PEO, the global PEO can handle whichever HR tasks are country-specific. Parental leave policies, for example, might vary from country to country.You, the business owner, still have the power to hire, fire, and create a company culture, but all tax and employment-related interactions flow through the global PEO.Global PEOs are popular among businesses that engage in remote work but need an office where employees can meet as needed.

The benefits of hiring a PEO ✅

Enterprise-level companies have the luxury of hiring industry-leading personnel to manage most, if not all, human resources challenges internally. But for startups and small to medium-sized businesses, much of the heavy lifting often falls to the owner or lone HR employee. A PEO not only offers relief but also improves the employee experience with the right guidance.

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Better employee benefit packages

Excellent benefit packages attract and retain talent. Because PEOs often have a large roster of business clients, they have the negotiating power to secure better benefits at better rates. In many cases, a PEO provides more than medical, dental, and vision benefits. They often offer retirement plans, unemployment insurance, and online training resources, all of which help keep your workers happy and motivated and, ultimately, reduce employee turnover.

Reduced risk of litigation

As a co-employer, the PEO helps maintain compliance by keeping track of complex employment laws and offering risk management strategies. PEOs share the legal risks associated with maintaining compliance.For example, many PEOs provide workers’ compensation insurance coverage to offset any liability from worksite injuries. The PEO will address any claims or disputes relating to this coverage, not you.

Easier to scale the business domestically

PEOs help businesses scale by improving the hiring process without sacrificing compliance or employee satisfaction. If you’re busy running a business, it can be difficult to recruit, interview, and onboard at a pace that keeps up with your growth trajectory.With employee retention so critical to business success, you must provide thorough onboarding to each new hire and dedicate resources to ensure a good experience for your teams. Many PEOs help you keep employee handbooks and performance management criteria current, facilitating a smooth onboarding experience. They also post job openings, review job applications, and screen candidates before handing them off, ensuring you have a qualified team behind you that will support healthy growth.

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Risks associated with hiring a PEO ❌

While PEOs take time-consuming but critical tasks off your plate, they come with risks that can make them less attractive, depending on your management style.

Employee confusion

Employers shouldn’t assume that employees will understand the concept of “co-employment.” Dealing with two separate entities might create employee confusion because of conflicting experiences with each one. Whom to contact may also be a point of confusion for your employees. For example, when staff have questions about benefits, they might reach out to you instead of the PEO, taking some by surprise.PEOs may also affect your company’s culture, and your communication methods and management styles might clash. Suppose your PEO offers a self-service portal where employees can access their benefits and pay stubs at any time. Your employees might expect all human resources functions to be as seamless.

Location and headcount restrictions

Because PEOs are co-employers, your business must meet certain conditions in order to contract with one.Before you sign with a PEO, you must establish your business as a local legal entity. Employees covered by the PEO must reside in the state, region, or country where you’ve registered your company. If you anticipate international expansion, make sure your PEO has global capabilities.Hiring a PEO also usually requires you to have a minimum number of employees – usually five, although this number varies with the PEO. If you’re running a very small company, you might have trouble finding a provider that will work with you.

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Some loss of control over HR functions

Working with a PEO means handing them control over certain business-critical activities like compliance. For some business owners, not having as much of a say in key decisions can be a source of stress. When you become a PEO client, make sure your contract includes a shared communication strategy. Suppose your employees love their current healthcare provider, but the PEO wants to switch for financial reasons.You’ll have to manage any backlash that comes from the switch, so have the PEO give you enough notice to inform employees prior to the shift in providers. This advance notice gives you time to manage any possible fallout.

PEO alternatives ⚖️

PEOs are not the only option if you’re seeking assistance with HR services. Depending on your needs, growth trajectory, and desired level of control, ASOs, EORs, and HROs are available.

Administrative services offering (ASO)

An ASO is similar to a PEO in that it takes many HR tasks off your plate. The difference is that contracting with an ASO does not involve a “co-employment” relationship. Think of an ASO as a “middleman,” an organization that helps you negotiate and secure services without sponsoring them.For example, an ASO will handle your company’s payroll and tax filings, but the paperwork is filed under your company’s EIN number.Unlike a PEO, ASOs don’t sponsor employee benefit programs or workers’ compensation coverage. You’re the sponsor, but the ASO will connect you with providers that fit your business needs.For more information on the difference between a PEO and an ASO, check out Business News Daily’s PEO vs ASO.

Legal Disclaimer:

The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.

Human resources outsourcing (HRO)

An HRO resembles an ASO in that it doesn’t “co-employ” your workers. HROs offer services through a more “piecemeal” model, while PEOs and ASOs are more likely to bundle their services.Suppose you just want to outsource payroll services but maintain full control over benefit providers. An HRO might make more sense for your business. HROs generally assume less risk than PEOs. This means you trade some peace of mind for the increased flexibility HROs offer.For a side-by-side comparison between a PEO and HRO, please read PEO vs. HRO: What’s the Difference?

Employer of record (EOR)

An employer of record is the full legal employer — not the co-employer — of your workers. As a result, an EOR assumes all risks associated with hiring and maintaining your workforce.EORs let you hire and pay international employees without setting up a legal entity in those countries. This sets an EOR apart from a global PEO. Establishing a legal entity in another country usually takes months of work and costs thousands of dollars. EORs save you this time and expense, making them especially attractive to smaller companies with limited resources who want to hire abroad.Like a standard or global PEO, an EOR can administer benefits, onboard and offboard employees, file payroll taxes, and more.Take a look at our post, PEO vs EOR: What are the Differences and Which is Right for You? to compare the two different services.

The best PEO alternative? Consider Pilot 👍

PEOs can solve many of the human resources problems faced by businesses seeking to expand domestically. But for businesses seeking international expansion, alternative structures, such as EORs, may offer more advantages.For example, Pilot’s EOR services enable you to hire in 100+ countries worldwide – without having to set up your own legal entity in those countries. If an EOR makes more sense for your business, schedule a call with a Pilot expert today — or watch a video overview of our platform — to learn how we can help your business scale quickly.

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