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What is a Professional Employer Organization (PEO)? — Understanding the Benefits of Co-Employment

Imagine an employee who receives their very first paycheck from their employer. Everything is to be expected, except one small discrepancy. To their confusion, the business listed on the check is not the name of their employer. What is the explanation? For the 15% of small businesses with 10 to 99 employees, the answer may be co-employment, according to the National Association of Professional Employer Organizations.

In co-employment, a Professional Employer Organization (PEO) becomes the professional employer of a business’s existing workforce, usually for small to medium-sized businesses of 10 to 5,000 employees. The business continues to fully control their organization and can outsource some or all of their HR burdens and liabilities, depending on their contract or client service agreement (CSA). These HR burdens can include payroll and tax filing, benefits administration, compliance, risk and safety management, human resources support and talent management.

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The following outlines what business leaders need to know about Professional Employer Organizations and when working with a PEO is appropriate. Several key considerations are the HR functions and outsourced employment responsibilities, questions to ask PEOs about capabilities and explaining PEOs to employees.

How to identify which functions can be outsourced

The first step for leaders in understanding PEOs is identifying where their business needs support. In many cases, small businesses choose to outsource the provision and administration of both employee benefits and payroll to a PEO. Because PEOs manage more than one business, they can give clients access to a wider range of benefit options, usually at better rates, than what businesses could access on their own.

This is because PEOs collectively represent a bigger group of employees than any one of those businesses on their own, granting PEOs the purchasing power to negotiate a lower rate. PEOs can provide a range of employee benefits including medical, dental and vision coverage, health care flexible spending accounts, retirement plans, life insurance and more. It is important to note, there is no agreement between the group of PEO clients, so employers are solely responsible for their own employees and do not take on the burden of the other businesses serviced by the same PEO. 

Leaders should also consider how PEOs could help save time and money through reducing administrative workload. Administrative HR duties like payroll processing can take up a significant amount of time for a business owner or an HR department. By outsourcing these duties, businesses can increase the productivity of their HR teams with the support of a PEO.

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How businesses can learn more about PEOs’ capabilities

Every PEO has a different approach to HR, making it imperative for leaders to choose a PEO that suits their needs best. Leaders need to understand the basics, like which services are included, what costs to expect, what technology or software the PEO uses and whether the PEO can provide professional development or employee benefits plans.

They also need to understand how their role will change regarding liability, taxes and regulations. PEOs mitigate a substantial amount of the risk and responsibility of being an employer. That includes the risks of handling payroll processing, HR administration and workers’ compensation. This reduced risk is one of the major benefits of working with PEOs, which usually have specialists on staff to monitor employer-related state and federal laws and regulations. PEOs should be able to clearly explain this transfer of risk and responsibilities.

Leaders often find it useful to compare several PEOs to one another and ask PEOs for references from businesses with a similar location, size and industry. If a PEO cannot share references, that might be a sign they lack experience or success in supporting small businesses. 

How to simplify PEOs for employees

Employees who have never worked with a Professional Employer Organization before may feel confused about the circumstances of their employment. Especially for businesses that transition to a PEO, there is a need to communicate carefully to avoid misunderstandings.

One of the most important factors to emphasize is that a Professional Employer Organization does not acquire or take over a business. Rather, the business remains in full control of its existing owners but outsources certain HR or employment duties, much in the same way some businesses outsource customer service support to a third party. It is also important to explain the benefits of PEOs for employees, including improved employee benefits, performance management support and greater access to training and development programs.

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The bottom line

Any business that begins working with a Professional Employer Organization should also collaborate with their service team on communications efforts. A town hall with management and a PEO representative will allow employees the chance to ask questions and gain knowledge.

Contracting with a capable PEO can improve their productivity, increase their access to employee benefit plans and simplify their operations.


Niki JorgensenNiki Jorgensen is a director of service operations with Insperity, a leading provider of human resources offering the most comprehensive suite of scalable HR solutions available in the marketplace. For more information about Insperity, call 800-465-3800 or visit