What is a PEO?

PEO – Professional Employer Organization

A PEO is a single source integrated provider for a company’s employment needs.  PEOs provide the critical functions of human resources, workers’ compensation, payroll, risk management, and benefits that help companies reduce the costs, time, risks and liabilities of running a business.

Shifting the day to day administrative tasks of running employment related activities, allows the business to focus more on revenue generating activities. PEOs also provide fractional usage of a specialist without paying their full time salary. These specialists can help effectively manage the growing requirements from government regulations and better manage risk associated with employment activities.

Co-employment is a key concept in the PEO industry. Simply put, companies and PEOs share the employment responsibilities for employees (Company = execution, PEO = administrative). This allows the PEO to aggregate all of its clients under the PEO’s FEIN to gain leverage when going to the market to purchase benefits and workers’ compensation. The PEO can also use scale to handle employment related issues.

How are PEOs different from other outsourcing organizations?

PEOs derive significant cost savings and efficiencies with the co-employment relationship. PEOs provide payroll to all of its client’s employees under a single Federal Employer ID number (FEIN) which provides the following benefits:

  • PEOs combine all work site employees for payroll, tax payments and filings.  This creates operating efficiencies and reduces the number of tax returns for the client firms and the PEO.
  • PEOs combine the purchasing power of all of their clients to purchase a single master workers’ compensation insurance policy covering all of their client’s employees. Significant cost savings are then passed on to the client firms. This also eliminates workers’ compensation audits and deposits for the client firms.
  • PEOs are able to purchase master insurance policies for health insurance and other employee benefits which can provide better insurance rates and more options for its clients and their employees.
  • PEOs also combine the work site employees for state unemployment tax purposes. This eliminates separate state unemployment tax returns. It can also result in a lower tax rate for the client firm.
  • PEOs are better able to integrate the services and products they provide to their clients.  The client firm could have as many as 12 separate vendors providing the services a PEO provides.

Because other outsourcing organizations use each client’s individual FEIN to provide services, they cannot aggregate their clients to use their scale in the market like a PEO.