Professional Employer Organization (PEO)
What does PEO stand for?
A professional employer organization (PEO) is a third-party company that gives organizations the option to outsource their HR functions so they can focus more on core business operations.
What is a PEO?
A PEO supplies outsourced human resources services. Organizations may use PEO services to supplement or entirely replace those of an internal human resources department, either temporarily or permanently.
The National Association of Professional Employer Organizations (NAPEO) reports that over 200,000 small and mid-sized businesses in the US work with PEOs.
What are the most common PEO services?
PEOs offer various services, including:
- Recruiting and hiring
- Compensation
- Compliance
- Policy creation
- Performance management
- Payroll and payroll taxes
- Benefits management and/or administration
- Documentation and information storage
PEO payroll
Also known as co-employment payroll, PEO payroll is a service where the PEO becomes the employer of record for the client's employees. The PEO handles various HR responsibilities, including payroll administration. It also assumes the responsibility for processing pay checks, calculating and withholding taxes, managing employee benefits, and ensuring compliance with employment regulations.
PEO payroll is a common practice that has gained significant popularity among businesses of all sizes. By partnering with a PEO for payroll services, businesses can offload administrative burdens, reduce HR-related costs, and gain access to advanced payroll systems and expertise.
PEO insurance
PEO insurance refers to the insurance coverage provided by a PEO to its client companies and their employees. It usually refers to employee health insurance but could be any kind of insurance that benefits employees. For example, PEOs typically offer a range of insurance options, including workers' compensation, general liability, employment practices liability, and employee benefits like health insurance and retirement plans.
This insurance coverage helps protect both the PEO client and their employees from potential risks and liabilities associated with their workforce. By leveraging the collective buying power of multiple client companies, PEOs can often secure more competitive rates and comprehensive insurance solutions than a small business negotiating on its own.
Why do some companies use a PEO?
There are several reasons why a company may decide to use a PEO to provide HR services. This can include:
Lack of time to manage HR teams
Managing HR tasks like payroll, benefits, and compliance can be time-consuming. When PEOs take on these responsibilities, staff have more time to focus on other areas that can contribute to business growth.
Limited budget or staffing constraints
PEOs can be valuable for small businesses with limited operating budgets or staff numbers, as it enables them to outsource HR services at a potentially lower cost of hiring their own.
Expert advice and support
PEO services can offer small businesses expert advice and support. As specialists in HR and employment law, PEOs can help ensure you’re compliant with all necessary regulation. Not only can this offer added peace of mind, but it can also help you avoid legal risks and penalties.
Neutral party
PEO companies can offer your business objective guidance for handling sensitive employee issues, such as disputes, disciplinary procedures and performance management. Having a neutral party can lead to fairer outcomes, reduce bias and conflict, and help you manage employee relations more professionally.
The benefits of a PEO for startups
A new company may not have the funding to hire the HR staff it needs to handle its anticipated growth. Even with enough budget, entrepreneurs may lack the experience to know what HR services they need and how many people to hire. A PEO can act as a consultant and service provider, offering advice with your company’s unique HR needs in mind.
PEOs can help startups offer an increased portfolio of HR services. However, by outsourcing HR tasks, startups may lose some control and flexibility over how HR services are administered. This can result in them incurring greater costs than if they’d hired an internal employee or utilized HR-focused software.
Why seasonal employers use PEO services
A company that employs seasonal staff—like a summer camp or winter resort—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 and benefits administration, without having to employ a full-time HR department to handle a temporary load.
By partnering with a PEO, companies can effectively manage their seasonal workforce without the burden of maintaining a year-round HR department. The PEO can efficiently handle large-scale tasks and ensure HR-related compliance, allowing the company to focus on delivering an exceptional seasonal experience.
Why large companies may still use PEOs
HR requirements are often dictated by local, regional, and national laws and regulations, not to mention cultural boundaries and customs. It may be challenging for a single HR department to ensure compliance for a company with multiple satellite headquarters across the nation or world, and it may not be feasible to hire HR staff for every location.
A PEO can offer compliant and culturally fluent HR services in unfamiliar locations, helping the company maintain legal compliance, adapt to local practices, and effectively manage its workforce across different regions.
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 a HR department with actual “boots on the ground” in an organization, a PEO would be hard-pressed to establish or maintain company culture without significant help from an emotionally invested, physically present HR staff.
Is BambooHR a PEO?
No, BambooHR is not PEO. BambooHR is a cloud-based human resources software company that provides HR management solutions.
Our software includes features like employee onboarding, time tracking, performance management, and HR reporting—all designed to simplify HR tasks and improve efficiency for HR teams of all sizes.
Through the BambooHR Marketplace, we partner with PEO companies so you can seamlessly integrate your people data with your PEO provider if you choose to.