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4 min read

How Does a PEO Work?

How does a PEO work?

Article roundup

  • A PEO handles hiring and onboarding new employees, payroll processing, employee tax and deductions, employee benefits administration, labor compliance, and employee offboarding.
  • PEOs can reduce paperwork for a company and allow the workforce to grow with less administrative burden.
  • A PEO is a Professional Employer Organization. Employees work for the PEO for administrative purposes, but all other aspects of the employee relationship are handled directly by the primary company.
  • A PEO does not make business management decisions, handle sales and marketing, or any other responsibilities outside of its limited scope.
  • A PEO can be established by a group of companies with similar needs, allowing them to save by sharing the resources a PEO provides.

A PEO or Professional Employer Organization handles human resources tasks for clients. Businesses and PEOs enter into what is called a co-employment relationship; the PEO acts as the “administrative employer”, while the client business is the worksite employer and supervisor. While workers are technically employed by the PEO, all hiring and firing decisions, business management, and all other operational concerns are handled exclusively by the client. Many small to medium-sized business use PEO services, especially those in the manufacturing, construction, transportation, agriculture, retail, and wholesale industries.

PEOs can be very useful for companies that wish to focus on their primary business objectives by outsourcing time-consuming administrative work. To determine whether a PEO can help your business, you’ll need to become acquainted with a PEO does and does not do, and decide if it is the right choice for your company.

What Does a PEO Do?

1. Hire and Onboard Employees

A PEO might be involved in recruitment. It might write and post job ads, track the recruiting process, and present shortlisted candidates for interviews. In other cases, hiring decisions are made by the client company. In either case, the PEO will onboard new employees; setting up and reporting all necessary payroll, tax, and benefits documentation.  Some PEOs can help with new employee training as well.

2. Payroll Processing

PEOs generally handle all payroll processing. This allows companies to grow more quickly and devote fewer internal resources to administrative work. A PEO can also make sure that the client company is in line with all local regulations and reporting requirements.

3. Tax and Deductions

Employee taxes and deductions are handled automatically by the PEO, who assumes liability for all governmental reporting and payments as part of their co-employment agreement.

4. Benefits Administration

PEOs can often access better benefits programs than a small or medium-sized employer would be able to on their own, allowing the company to increase its competitiveness in the labor market. Benefits administered by a PEO can include health, dental, vision, retirement plans, life insurance, disability insurance, educational assistance, and commuter benefits.

5. Ongoing Compliance

PEOs can reduce the worksite employer’s exposure to risk by ensuring correct employee tax reporting and payment, verifying I-9 requirements for employee eligibility, ensuring and reporting EEO-1 equal employment opportunity compliance, and ensuring compliance with other local and industry-specific labor requirements.  

6. Termination/Offboarding

Many PEOs are able to help track and assess employee performance. If you do need to terminate or lay off some of your workforce, the PEO will help oversee unemployment and other offboarding-related paperwork. They can also process notices from the state unemployment agency and handle claims.

What does a PEO Not Do?

A PEO can reduce much of the load on a company’s human resources and accounting divisions. A PEO, however, is not a fully outsourced human resources department. A PEO does not determine scheduling or base pay rates, for instance. An employer may also still need internal human resources to help develop and enhance employees’ and departments’ core skills, reorganize departments, and integrate technology solutions that enhance employee communication and efficiency.

A PEO does not make any independent business decisions, management is still free to grow their business as they see fit. The PEO will follow their lead on ensuring compliance, reporting, and building up or downsizing the workforce as needed.

PEOs are not involved with supply chain management, marketing, or sales.

Video — How Does a PEO Work?

Is a PEO the Right Choice For Your Company?

Working with a PEO can help a small or mid-sized company grow quickly by handling the paperwork that could easily slow down a small team or cause compliance issues due to human error. On the other hand, a well-established company with an experienced HR and accounting team, however, may see fewer advantages to working with a PEO.

Sometimes a group of companies with similar needs may create a jointly-owned PEO, which becomes a co-employer to all companies in the group. This reduces the need for separate departments engaging in the same work, and cuts costs for all. Click here to learn more in-depth about the process of creating a PEO and the legal landscape involved.


By ensuring compliance with local labor and reporting regulations, handling payroll, benefits, tax reporting, and much of the hiring process, a PEO can provide many benefits to a company. A large company with a well-established HR department may not need or desire to hand these processes to a third party. However, a small company with limited administrative resources or a group of companies that wish to share resources, however, may benefit by working with or creating a PEO.


A PEO is a contracted partner and a co-employer. PEOs are independent companies that do not own a share in or make crucial business decisions for their clients. In the US, employees work directly for the PEO under their Federal Employer Identification Number (FEIN). The cost of a PEO generally includes an administration fee as well as fees per client service rendered.

Working with a PEO can save time and resources on developing internal HR capabilities, ensure compliance with local regulations, and offer greater benefits packages than they would have access to otherwise. This allows a company to focus on growing core business activities rather than supportive administrative ones.

Article By
Travis is a global business development advisor. He has spent the last 14 years supporting business establishment and development in North America, Southeast Asia, and throughout the world. With multiple degrees from the University of Oregon, Travis currently splits his time between the US, and Bali, Indonesia. At RemotePad, Travis writes about remote work, hiring internationally and PEO/EOR business models.

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