What is a PEO and when do you need one?

Managing the human resources (HR) aspects of your business can be a significant burden, particularly for small to mid-sized companies or those in the startup phase.

It’s tempting to wish for a third party to handle the more challenging HR tasks. Thankfully, there are numerous HR platforms and solutions designed to streamline these processes. For businesses with a local presence, a Professional Employer Organization (PEO) could be a viable option. On the other hand, if your company is looking to hire across borders, an Employer of Record (EOR) might be the better choice to navigate the complexities of international HR.

However, before you start searching for a PEO provider, it’s important to understand exactly what services they offer and what limitations they have.

This piece aims to demystify PEOs, detailing what they can and cannot do for your business. Additionally, for those considering international expansion, we will discuss the benefits of partnering with an EOR as an alternative.

Let’s delve into the specifics of PEOs and explore effective HR solutions that can alleviate your concerns.

Here is a short summary, PEOs and EORs streamline HR for businesses, offering tech-driven, global HR solutions amid market consolidation and innovation.

Lazy to read? Check out this video. It offers a clear explanation of how PEOs function and the benefits they can bring to your business, ideal for those seeking a quick and informative overview without delving into lengthy articles.

What is a PEO, and how does it work?

Consider a PEO as a comprehensive solution for outsourcing your HR needs.

For businesses of small to medium size, the burden of HR administrative tasks can become overwhelming, especially as the company grows. This is where a PEO comes into play, offering a way for businesses to offload complex HR and payroll responsibilities.

In the United States alone, there are an estimated 700 to 1,000 PEO companies available to assist businesses with various HR functions. These companies specialize in managing payroll, employee benefits, tax obligations, and compliance documentation, ensuring that your workforce is well taken care of without you having to manage every detail internally.

PEOs do more than just process payroll; they can also handle requests for time off, manage tax forms, and provide a range of other HR services, acting as a de facto HR department for your business. By partnering with a PEO, you can ensure that your HR operations are in expert hands, giving you the freedom to focus more on your core business activities.

What’s the difference between a PEO and a payroll company?

A Professional Employer Organization (PEO) serves as a comprehensive HR solution, entering into a co-employment relationship with businesses. This arrangement allows the PEO to handle payroll, tax compliance, employee benefits, and HR management tasks, while the client company retains control over business operations and employee management. The primary goal is to provide small and medium-sized businesses access to a wider range of benefits and services, often at a lower cost due to the PEO’s bargaining power.

PEOs differ from traditional payroll service providers by offering a broader spectrum of HR-related services. Beyond just handling payroll and ensuring compliance with local tax laws, PEOs manage a variety of employee benefits, including health insurance, retirement plans, and even pet insurance, leveraging their scale to secure more favorable terms than individual businesses might obtain on their own. This helps client companies attract and retain talent by offering competitive benefits packages typically available to larger corporations.

Businesses that partner with a PEO can see numerous benefits, such as reduced administrative costs—studies indicate savings of around $450 per employee annually. Moreover, these organizations provide expert guidance on HR best practices and compliance with labor laws, greatly benefiting companies without dedicated HR departments. PEOs also mitigate risks by sharing legal responsibilities associated with employment, thus standardizing procedures to avoid HR-related legal issues.

When selecting a PEO, businesses should consider several factors, including the PEO’s accreditation, the comprehensiveness of benefits, industry-specific expertise, and the level of support provided. Costs can vary significantly based on the services required and the company’s specific characteristics, such as credit rating and risk levels. Fees may include setup, training, monthly service fees, workers’ compensation premiums, and contributions to health insurance premiums. Transparent pricing models and a clear understanding of the services included are crucial for finding the right PEO partnership.

How a PEO works

PEOs (Professional Employer Organizations) and EORs (Employers of Record) provide distinct solutions for businesses looking to outsource HR functions, but they operate under different models with unique advantages.

PEO Overview:

A PEO enters into a co-employment arrangement with your company, sharing certain employment responsibilities. This setup allows your business to outsource HR tasks such as payroll, benefits administration, and compliance support, while still maintaining control over your employees’ day-to-day activities and job functions. PEOs are particularly beneficial for small and medium-sized businesses that have a legal entity in the country of operation and are looking to expand their workforce without setting up a full-fledged HR department. Companies partnering with PEOs often see growth, reduced turnover, and lower risk of going out of business. Costs for PEO services can vary, typically based on the number of employees or a percentage of payroll, and can include setup fees, monthly service fees, and premiums for workers’ compensation and health insurance.

EOR Overview:

An EOR, on the other hand, acts as the legal employer of your workforce for compliance and administrative purposes, ideal for companies looking to hire internationally without establishing a local legal entity. This model simplifies the complexities associated with international employment, including compliance with local labor laws, payroll, tax withholdings, and benefits administration. EORs fully assume the legal and compliance risks, offering a straightforward solution for businesses aiming to enter new markets or hire remote employees globally. The EOR takes care of all HR functions, allowing your business to focus on core operations and strategic growth without worrying about local employment regulations.

Choosing Between PEO and EOR:

The decision between a PEO and an EOR depends on your business’s specific needs, including your expansion plans, the legal structure of your company, and how much control you wish to retain over HR functions. If your business is established within a country and you’re looking to outsource HR tasks while maintaining a degree of control, a PEO might be the right choice. On the other hand, if you’re aiming to quickly expand internationally without the hassle of setting up foreign entities, an EOR provides a comprehensive solution to manage your global workforce.

What do PEOs do for businesses?

Larger organizations may have the financial resources to manage the complexities of global HR on their own, but smaller businesses often don’t.

PEOs take on a number of these employer responsibilities. By outsourcing to a PEO, companies that struggle with the day-to-day work of employee administration can provide a better experience for their teams in a variety of ways, such as the following:

Payroll

Nothing can doom a promising company like unhappy employees who don’t get paid on time.

PEOs provide reliable payroll services so that company leaders don’t have to stress about the details of deposits, bank accounts, and paperwork.

Most PEOs provide self-service options to employees, too, so workers can update their information and change their preferences on their own. This feature can greatly reduce friction and exposure to risk for the business.

Benefits

Different companies offer different employee benefits, but most benefits fall into the same basic categories of insurance, time off, reimbursements, etc.

PEOs can handle even the most unusual benefits of their client companies, so don’t be afraid to reach out if you aren’t sure whether your PEO can help.

In addition, PEOs usually have access to broader benefits networks than employers can find on their own. This can help companies access health insurance with more coverage and better rates, plus retirement plans with lower fees and more investment options for employees.

Taxes

With remote work becoming more common, more companies now have employees in multiple parts of the world.

Business owners need a full EOR to hire international workers, but if you have employees in certain locations, a PEO can ensure you don’t run into tax troubles.

For example, if you’re based in the US, you no longer need to worry about proper withholding rates for federal and state taxes, or about making your payroll tax payments on time. A PEO can handle that on your behalf.

Legal compliance

Tax compliance makes up a large part of a PEO’s responsibility, but taxes aren’t the only form of compliance small businesses must follow. There are other reporting requirements, too.

Not only do you have to file the proper documentation to classify your workers as employees or contractors, but you must also make sure you comply with local regulations relating to workers’ compensation, social responsibility programs such as unemployment, and other country-specific rules.

Misclassifying workers carries serious consequences, so if you aren’t sure whether you’re following the law, you may want to get some outside help.

PEOs don’t usually offer auditing services to double-check employee classification, but they do ensure you don’t get in trouble for filing the paperwork incorrectly.

What advantages do PEOs offer businesses?

Small- and medium-sized businesses may save money and hassle by leaning on a PEO to do the heavy HR lifting and take on a number of administrative functions.

As mentioned earlier, companies working with PEOs usually get access to a wider variety of insurance and financial products than the same companies could on their own.

Risk diversification

Because PEOs work with several businesses at once, they can spread risk across a larger pool of employees, making them more appealing to underwriters than small businesses with only a few dozen employees.

Ability to scale rapidly

Companies may also find it easier to scale more quickly when working with a PEO as opposed to keeping all HR tasks in-house. The more people you hire, the more time you must take to onboard workers and the more internal resources you must dedicate to providing a good experience for your teams.

Standardized, legally compliant processes

With a PEO, you can depend on a standardized, optimized experience that ensures all your workers are legally compliant and happily employed.

In a nutshell: PEOs provide solutions for important concerns like payroll, benefits, and compliance to help employers and employees focus less on the fine print, and more on the company’s goals.

Get your Checklist for Hiring International Employees

Work through this checklist to help you stay compliant when you’re employing across borders.

When should you consider an EOR instead?

Now let’s talk about expanding internationally and hiring foreign employees. That’s where EORs come in.

Businesses looking to expand internationally typically face a choice. One option is to establish themselves physically in other countries by setting up international entities. This can require considerable time and money, and is usually better suited to large, multinational businesses.

The alternative is to hire foreign team members through an EOR. Like a PEO, an EOR is a third-party organization that handles the legal and administrative responsibilities associated with employing personnel on behalf of their client.

The key difference is that EORs employ through their own legal entities in foreign countries. A good EOR partner should be intimately familiar with relevant HR procedures and labor laws in those countries.

An EOR should also manage key employment tasks on their customer’s behalf, such as hiring, payroll, tax compliance, benefits administration, and the maintenance of employment records.

This option is usually often faster, safer, and more cost-effective than opening a legal entity in multiple countries.

To be clear: if you’re expanding abroad but don’t establish an international entity in your new market, you can’t work with a PEO. This is because the co-employment relationship of a PEO requires a local entity on your company’s part. In situations such as this, an EOR is an ideal alternative.

To find out more about the differences between PEOs and EORs, take a look at our in-depth guide: Does your business need an EOR or a PEO?

And if you’re looking to hire someone in another country and don’t have a local entity there, find out when you should use an EOR — and how to choose one that’s right for your business.

Aspect	Details	Resources
PEO Definition	Outsourced HR department offering payroll, benefits, taxes, and compliance.	NAPEO Industry Info
EOR Definition	Acts as the legal employer for global hiring and compliance.	Remote’s EOR Guide
Market Trends	Technological integration, market consolidation, specialization.	PEO Trend Report Q2 2023
Global Expansion	EORs facilitate international employment without local entities.	Global EOR Market Report
Choosing a Partner	Consider expertise, tech capabilities, geographic coverage.	Best EOR Services 2023

FAQ: Understanding PEOs and Their Differences from HRIS

When should I use a PEO?

A PEO should be used when your business is looking to streamline HR operations, manage compliance with labor laws more efficiently, and offer competitive employee benefits without the administrative burden. Small to medium-sized businesses that do not have an extensive in-house HR department often find PEOs particularly beneficial.

For more details, visit [NAPEO’s “Why Use a PEO?”](https://www.napeo.org/what-is-a-peo/why-use-a-peo)

Why would you use a PEO?

You would use a PEO to:
– Reduce the time and costs associated with HR administration.
– Gain access to a broader range of employee benefits at more competitive rates.
– Ensure compliance with employment-related laws and regulations.
– Outsource the complexities of payroll, workers’ compensation, and benefits administration.

Check out [this guide by Fit Small Business on the benefits of using a PEO](https://fitsmallbusiness.com/what-is-a-peo/).

Why do we use PEO?

We use PEOs to leverage their expertise in HR to improve operational efficiency, access better employee benefits, manage compliance risk, and ultimately, to allow business owners to focus on core business activities. PEOs can also help businesses scale more quickly by streamlining the addition of new employees.

For an in-depth look, see [Forbes’ exploration of the value of PEOs](https://www.forbes.com/sites/theyec/2021/05/04/why-your-small-business-should-use-a-peo/).

What is the difference between HRIS and PEO?

HRIS (Human Resource Information System) is software or an online platform that helps manage HR activities and processes, including payroll, benefits administration, time and attendance, and more. It’s a tool used by businesses to automate HR tasks and store employee data securely.

A PEO (Professional Employer Organization), on the other hand, is a service that small and medium-sized businesses can partner with to outsource their HR tasks. A PEO also co-employs your staff, which means it shares legal responsibility for employees, helping manage aspects like payroll, tax compliance, and employee benefits.

While HRIS is a technological tool for managing HR tasks, a PEO provides both the technology and professional services to manage HR tasks on behalf of a company.

For a comparison, check out [ADP’s explanation of PEOs and HRIS](https://www.adp.com/resources/articles-and-insights/articles/p/peo-vs-hris.aspx).

These resources should give you a comprehensive understanding of when and why to use a PEO, and how it differs from an HRIS, enabling informed decisions for your business’s HR needs.

Summary

The article delineates the roles and benefits of Professional Employer Organizations (PEOs) and Employers of Record (EORs) for businesses, emphasizing their utility in managing human resources tasks. PEOs offer a co-employment model ideal for small to medium-sized enterprises aiming to streamline HR functions like payroll, benefits administration, and compliance without establishing a comprehensive HR department. They facilitate access to extensive employee benefits and mitigate employment-related risks by sharing legal responsibilities.

On the flip side, EORs serve as the legal employer on behalf of companies, particularly beneficial for businesses looking to hire internationally without the necessity of setting up local legal entities.

Resources Section: Understanding PEOs and HR Management

This section consolidates useful links and resources that provide in-depth insights into Professional Employer Organizations (PEOs), their benefits, when to use them, and how they compare to Human Resource Information Systems (HRIS). Whether you’re a small business owner, HR professional, or someone interested in efficient HR management solutions, these resources will guide you through understanding the full scope and utility of PEOs.

General PEO Information and Guides

National Association of Professional Employer Organizations (NAPEO): Offers a comprehensive overview of what PEOs are and why businesses should consider using them. [Visit NAPEO](https://www.napeo.org/what-is-a-peo/about-the-peo-industry)

Fit Small Business – What Is a PEO?:

Provides a detailed guide on PEOs, including how they work and their benefits for small businesses. [Read the Guide](https://fitsmallbusiness.com/what-is-a-peo/)

Forbes – Why Your Small Business Should Use a PEO:

Explores the advantages of partnering with a PEO for small businesses. [Explore Forbes Article](https://www.forbes.com/sites/theyec/2021/05/04/why-your-small-business-should-use-a-peo/)

When and Why Use a PEO

NAPEO – Why Use a PEO?: Discusses specific scenarios and benefits of using a PEO for your business. [Why Use a PEO?](https://www.napeo.org/what-is-a-peo/why-use-a-peo)

Comparison Between PEO and HRIS

ADP – PEO vs. HRIS: Offers a clear comparison between PEO services and HRIS tools, helping businesses decide which solution is best suited for their needs. [PEO vs. HRIS Comparison](https://www.adp.com/resources/articles-and-insights/articles/p/peo-vs-hris.aspx)

Additional HR Management Resources

SHRM (Society for Human Resource Management): Provides a plethora of resources for HR professionals, including best practices, compliance updates, and management tips. [Visit SHRM](https://www.shrm.org/)

TechRepublic – A Guide to HRIS:

An article discussing what HRIS is, its benefits, and how it can be implemented in an organization. [Read TechRepublic’s Guide](https://www.techrepublic.com/article/what-is-hris/)

These resources are intended to provide a foundational understanding of PEOs, illuminate their benefits, and help differentiate them from similar HR tools like HRIS. They are valuable for anyone considering PEO services or looking to enhance their knowledge of human resource management solutions.