What Exactly is a PEO?

October 10, 2019

Professional Employer Organizations are outsourcing firms that provide solutions for small and medium-sized businesses struggling with HR, payroll, benefits, workers’ comp, and compliance. Through the use of a contractual co-employment agreement, employers can focus on their day-to-day work while the PEO becomes the employer of record for tax purposes and handles their company’s back-end office assignments. By lumping together all of the employees of the companies they are working with into one group, professional employer organizations can offer smaller businesses improved resources, benefits, and insurance coverage that traditionally only large corporations could afford.

How Much do PEOs cost?

There are two main ways that PEOs charge their clients:

Percentage of payroll
- This payment option includes a percentage of your total payroll for each pay period, plus local, state, and federal taxes, workers’ comp, and employer practice liability insurance (EPLI). There is also an added administrative fee, which can vary depending on employees and changes throughout the year.
Per-employee-per-month (PEPM)
- This type of fee is negotiated directly with the PEO when you first sign the co-employment agreement. A separate setup fee will also be applied, which can be thousands of dollars depending on the services your business requires. This payment option can sometimes involve additional charges for adding supplementary features or running an off-cycle payroll.

What Services do PEOs typically offer?

human resource consulting
safety and risk mitigation services
payroll processing
employer payroll tax filing
workers’ compensation insurance
improved health benefits
employers’ practice and liability insurance (EPLI)
retirement vehicles such as a 401(k)
regulatory compliance assistance
workforce management technology
training and development

Some Facts About PEOs:

The PEO industry is growing at a rate 14 times higher than the US economy
- This means that PEOs employ roughly the same as the combined number of employees for Walmart (only US locations), Amazon, IBM, FedEx, Starbucks, AT&T, Wells Fargo, Apple, and Google PEOs currently provide services to over 175,000 small and mid-sized businesses, employing over 3.7 million people
A study by noted economists Laurie Bassi and Dan McMurrer found that businesses who use PEOs tend to:
- grow 7 to 9 percent faster
- have 10 to 14 percent lower employee turnover
- and are 50 percent less likely to go out of business when compared to businesses that are not using PEOs.
Annual revenue growth for companies using a PEO is double that of similar companies that do not use a PEO
In a survey of business owners using a PEO conducted by the National Association of Professional Employer Organizations:
- 98 percent would recommend a PEO to a small business colleague
- 70 percent reported that their revenues have increased since they started working with a PEO
- 66 percent reported that their profitability has increased since becoming a PEO client

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