Draft:Professional Employer Organization (PEO)

A professional employer organization (PEO) is a firm that enters into a co-employment arrangement with a client company to provide human resource services, payroll, benefits, risk management, and regulatory compliance support, while the client company retains control of day-to-day operations and employee supervision.

Definition and business model

Under the co-employment model, the PEO becomes the employer of record for certain administrative and legal functions (such as payroll tax withholdings, workers’ compensation insurance, and unemployment insurance filings), while the client company remains the employer for operational control, including hiring, directing work, and performance management.

The client typically pays a service fee (per-employee, per-payroll, or percentage of payroll) in addition to traditional employer costs.

Services provided

Services offered by PEOs often include:

• Payroll processing and employment tax filing.

• Employee benefits administration (health, dental, vision, retirement plans).

• Workers’ compensation insurance and risk management.

• Regulatory compliance assistance (employment law, tax, benefits).

• HR administration services (onboarding, training, technology platforms).

Advantages

PEOs can offer advantages for client companies, especially small and mid-sized firms, including:

• Access to higher-quality employee benefits (via pooled buying power).<

• Reduced administrative burden for HR, payroll, and compliance tasks.

• Potential cost savings through economies of scale (workers’ compensation, benefits, unemployment insurance rates).

Considerations and limitations

Client companies should be aware of the following when engaging a PEO:

• The co-employment model means shared employer responsibilities; the client must clearly understand which functions it retains and which the PEO handles.

• Fees and cost structures vary widely; clients should review pricing, services covered, and terms carefully.

• Changes in employee culture or internal HR processes may result from outsourcing HR administration.

• PEOs may not be equally suited for all businesses; for instance, firms with very simple HR/benefits needs or very large enterprises might find different models more appropriate.

Relationship with related models

PEOs differ from other HR outsourcing and employment-service models:

• Administrative Services Organization (ASO) – An ASO provides payroll and benefits administration, but the client remains the sole employer of record for tax and liability purposes.

• Employer of Record (EOR) – In many international contexts, an EOR takes full legal employer responsibility for a client’s workforce in a foreign jurisdiction, whereas a PEO typically involves a domestic co-employment model.

Regulation and accreditation

In the United States, PEOs are regulated via a combination of state laws (each state may have registration or licensing requirements) and federal tax-employment rules.

The Employer Services Assurance Corporation (ESAC) is a voluntary accreditation body that audits PEOs’ financial, operational, and ethical standards.

Federal tax guidance from the Internal Revenue Service treats certain PEOs as "third-party payers" under specified circumstances.

Market size and scope

The PEO industry in the United States primarily serves small to mid-sized businesses. Estimates indicate that more than 200,000 client companies engage PEOs, employing approximately 4.5 million workers.

Geographic reach

While the PEO model originated in the United States, similar arrangements exist internationally (often called "global PEO" or "international PEO"), which frequently include full employer-of-record services rather than domestic co-employment.

See also

• Human resources

• Employer of record

• Temporary staffing agency

• Business process outsourcing