Glossary of Human Resources Management and Employee Benefit Terms
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
Payroll & payroll taxes
Benefits management and/or administration
Documentation & information storage
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:
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.
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.
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.
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.