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An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

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Professional Employer Organization (PEO)

What Is a PEO?

A Professional Employer Organization, or PEO, is a supplier of outsourced third-party human resources services. Organizations may use services a PEO provides to supplement or entirely replace those of an internal human resources department, either temporarily or permanently. PEOs offer various services, including:

  • Recruiting and hiring

  • Compensation

  • Compliance

  • Policy creation

  • Performance management

  • Payroll & payroll taxes

  • Benefits management and/or administration

  • Documentation & information storage

Why Do Companies Use a PEO?

There are a number of reasons to use a PEO to provide HR services; however, the decision is often driven by either financial or compliance concerns. Here are a few scenarios in which a company might look to a PEO for HR services:

The Startup

A company that’s only recently been established may not have the funding to hire the HR staff they need to handle their anticipated growth; even with enough budget, they may lack the experience that would tell them what HR services they need and how many people to hire. A PEO can act as consultant and service provider, offering advice on HR needs and the flexibility to provide only what’s necessary to get by until an HR department becomes feasible. 

The Seasonal Employer

A company that employs seasonal staff—like a summer camp or winter resort, for example—may have workforce management needs that rise and fall dramatically along with their staff numbers. A PEO is one way to handle large tasks like seasonal hiring, benefits management, and payroll processing without having to employ a full-time HR department that can handle what amounts to a temporary load. 

The Global Giant

HRs requirements are often dictated by local, regional, and national laws and regulations, not to mention cultural boundaries and customs. It may be impossible for a single HR department to ensure compliance for a company with multiple satellite headquarters across the nation or around the world, and it may not be feasible to hire HR staff for every location. A PEO can offer the international or multi-regional experience needed to ensure compliant and culturally fluent service in unfamiliar locations.     

What Are the Downsides of a PEO?

The most critical weaknesses of a PEO are physical and emotional distance. A third-party, contracted service provider can never replace the personal touch of a dedicated in-house HR department. A PEO is a viable solution for large transactional tasks and even for person-to-person functions such as recruiting and hiring, when the benefit of on-demand service outweighs any loss resulting from cultural misalignment. But compared to an HR department with actual “boots on the ground” in an organization, a PEO would be hard pressed to establish or maintain any form of company culture without significant help from emotionally invested, physically present HR staff. 

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