- PEOs provide a range of different services in HR, payroll, compliance, and in relation to other duties of the employer.
- In an HR context, a PEO a PEO provides draft labor/employment contracts, benefits administration and onboarding services.
- In a payroll context, a PEO takes care of the entire payroll process, including employee payments and deductions.
If you’re in the market for a human resources and payroll provider, you’ve probably come across the term “PEO.” But what does PEO stand for? And what should you look for when choosing a PEO provider? In this blog post, we’ll break down everything you need to know about PEOs, including what they are, what services they offer, and how to choose the right one for your business.
What does a PEO do?
A professional employer organization (PEO) is a company that provides human resources and payroll services to businesses. PEOs typically offer a suite of HR services, including employee payments, benefits administration, employee onboarding, and tax withholding, all while ensuring full compliance with applicable labor and tax laws. Usually, the PEO act as the ‘Employer of Record’, becoming the legal employer of workers in the eyes of the Internal Revenue Service (IRS) and other government authorities,
Ultimately, the precise scope of a PEO’s services will be set out in the engagement agreement entered into between the client company and the PEO that serves them.
What does PEO stand for in HR?
In human resources, PEO stands for professional employer organization. As we mentioned above, a PEO is a company that provides human resources and payroll services to businesses.
Specific HR services provided by PEOs typically include:
- Contract provision. PEOs provide legally-compliant employment or labor contracts
- Onboarding services. This means setting up new employees administrative, so that they are ready to work in the client business.
- Benefits administration. This includes dealing with employee health insurance, 401k/pension contributions, workers compensation, leave management and more.
- Offboarding. This means ensuring that any employees leaving the company due to termination, resignation or redundancy are transitioned out of the workplace in a compliant and appropriate manner.
There are a range of other HR services that a PEO may, but does not always provide, including:
- Recruitment assistance. In addition to the recruiting process, this could include background checks and drug tests.
- Employee training and wellness plans. This could include Employee Assistance Plans’.
- Performance management. This usually includes collaborating with the client business to ensure that any employer responses, such as written warnings, are handled appropriately
What does PEO stand for in payroll?
Payroll services cover all matters within the organization relating to employee payment. A PEO can take over these services for a client business including:
- Calculating and processing employee wage and salary payments
- Withholding employee income tax, payroll taxes, unemployment taxes and other applicable taxes
- Making deductions for pension contributions, health insurance and workers’ compensation, where applicable
- Making deductions as required by court orders for wage garnishment or child support
- Reimbursing employee expenses
- Filing and paying employment and payroll taxes on behalf of the business
- Maintaining records of employee compensation.
What does PEO stand for in benefits administration?
Benefits administration encompasses all the processes and procedures necessary to manage those parts of an employee’s entitlements that don’t relate to wages or salary. PEOs that offer this service may provide:
- Coordination of health, dental and vision insurance. Whether or not this applies, depends largely on whether the business has a type of insurance in place.
- Assistance with open enrollment periods. This is the period for employees in the US when they can enroll in a health insurance plan for the next year.
- Life insurance programs
- Short- and long-term disability plans
- Flexible spending accounts (FSAs). This arrangement with an employer lets individuals pay for out-of-pocket medical expenses, using tax-free entitlements. This might include insurance copayments and deductibles, prescribed medicines and medical devices.
- 401(k) retirement savings plans. These are company-sponsored retirement/pension plans where both the employee and the employer make contributions.
- Leave management. Paid annual leave/vacation leave.
What does PEO stand for in insurance?
PEOs that offer insurance services may provide the following for employees:
- Health insurance, including co-employment health and wellness plans.
- Workers’ compensation insurance. This is a type of insurance that provides compensation to employees who are injured or become ill as a result of their job.
- Disability insurance. This is additional cover for disability that may or may not have occurred as a result of a workplace incident.
- Income protection insurance. This covers employees with a certain amount of income if they lose their job.
- Unemployment insurance. Similar to the above, but only in cases of unemployment,
In addition, as part of the agreement between the PEO and the client company, the PEO may provide the following types of insurance in relation to its own activity.
- Liability insurance. This protects the PEO and its client companies against any legal claims that might arise from the PEO’s negligence.
- Professional liability insurance. Also known as errors and omissions insurance, this protects the PEO against any legal claims that might arise from its professional advice or services.
- Surety bonds. These are designed to protect the client company from any financial loss that might occur if the PEO fails to meet its obligations under the terms of an agreement.
What variations of PEO are there?
There is no specific set of services that every PEO must, or does, provide. It depends on the country or state in which the PEO operates, and which functions the client company would like to transfer to a PEO. The varieties of PEO include:
1. Co-Employment PEO
In this arrangement, the client company and the PEO divide employer responsibilities. Usually, the PEO becomes the ‘Employer of Record’ or EOR for tax and insurance purposes. Performing this role, the PEO is also sometimes known as the ‘administrative employer’.
However, the client company still remains an employer (hence the term ‘co-employment PEO‘). They remain responsible for day-to-day supervision of employees, as well as having liability under a range of labor laws and regulations, such as occupational safety and health. Note also that, as the IRS does not recognize ‘co-employment’ per se, the PEO may still be liable for tax withholding as a ‘common law employer‘.
2. Joint Employment PEO
Joint Employment PEOs, not to be confused with Co-Employment PEOs, share liability with the client company for employment matters. A joint employment PEO is often created, not by the intention of the PEO and client company, but by a failure to properly clarify responsibilities in the PEO agreement. In a Joint Employment PEO, both parties can have the same responsibility to employees, rather than those responsibilities being split as they are in co-employment.
Often courts and regulators will look to the actual powers and activities of both parties to determine that they are both employers. For example, if the PEO and the client company are found to be joint employers under the National Labor Relations Act, this can mean:
- The joint employer’s liability for unfair labor practice (ULP) charges brought by employees
- Both parties being required to collectively bargain under that Act
- An increased likelihood that unions are able to picket both employers.
For more information on Joint Employment in the PEO and employee leasing context check out Employee leasing: Is it “a safe harbor”?
2. Umbrella company (UK)
An umbrella company is a third party organization that legally employs workers who are then contracted to work for client companies. The workers are employees of the umbrella company, and the umbrella company is responsible for their pay, taxes and national insurance contributions.
In the UK, an umbrella company arrangement is common for those who work in the gig economy, such as taxi drivers, delivery drivers and platform-based workers. But it is also popular with independent professionals (e.g., IT consultants) and remote workers.
Umbrella companies allow individuals to legally work for a company on a contract or project basis, without the need to set up their own limited company (which can be time-consuming and expensive).
3. Labor leasing company
There are two distinct types of professional services firm that may be referred to as a “labor leasing”, “employee leasing” or “staff leasing” company, depending on the country and context.
In Germany, a labor leasing company (known as a Arbeitnehmerüberlassung – ANÜ) operates much like a traditional Employer of Record, but can only hire employees for a fixed period of time (the standard maximum is 18 months).
In other countries, labor or employee leasing refers to professional services firms that employ workers themselves, but then contract out and supply workers to carry out specific tasks or projects. Employee leasing arrangements may be short-term, but they need not be. A company that focuses exclusively on short-term arrangements is usually referred to as a ‘temp agency’.
Employee leasing arrangements were most popular from the 1970s to the 1990s. In the 2020s, employee leasing and PEO are often used interchangeably, and some state legislation recognizes this equivalence.
4. Financial intermediaries/Fiscal intermediaries
Financial intermediaries or fiscal intermediaries, are a purpose-specific Employer of Record structure, created in the US to allow individual carers for disabled people to be easily paid and administered benefits, without the need for an employer.
They are a registered entity, sometimes a quasi-governmental body, which acts as a ‘go between’ for the government regulators who fund home care, and carers to ensure that they are paid in full compliance with the law.
A legal framework for fiscal intermediaries is established in several states, including California (where they are known as a ‘Public Authority’, Oregon, Washington (where they are known as a ‘Consumer-Directed Employer’) and Connecticut.
5. Pass-Through Agencies
“Pass-through agency” is a term used for any entity that acts as a ‘go between’ for payments of funds, usually for tax or compliance purposes. For example, the term is used in university administration for entities that are allowed to ‘pass through’ federal funds to other bodies.
When used in a PEO context, it means a ‘bare bones’ PEO, that handles billing, and issues W-2 forms for individuals who would otherwise be an independent contractor. The individual retains complete control of their pay, projects and working conditions, hence the name — invoices are simply ‘passed through’ the agency who then completes the necessary administrative and compliance tasks for employment.
6. Global PEOs
A global PEO is a PEO that operates in multiple countries. They are often used by companies who are expanding internationally, or who have employees working in more than one country. Global PEOs can help companies to navigate the complexities of employment law in different countries, and also offer support with things like payroll, benefits and visas.
7. Payroll companies
A payroll company is a firm that specializes in administering payroll and employee benefits. They can either be standalone companies, or part of a larger PEO. These are commonly known as outsourced payroll solutions.
Payroll companies usually offer a range of payment-related services, including:
- Calculating and processing payroll
- Issuing pay stubs/payslips
- Filing taxes
- Administering deductions and employee benefits.
Payroll companies do not traditionally provide Employer of Record solutions. In that sense, they are not a ‘full service PEO’. Note, however, that there are companies that act both as a payroll company and a PEO.
Payroll companies are often used by larger enterprises that have a full HR function in place, but consider it more efficient to outsource payroll administration and processing.
What a PEO means for your business — ADP's take
Choose the PEO that suits your business
PEOs can be a useful solution for businesses of all sizes, from small startups to large multinationals. They can help with everything from payroll and benefits administration, to employment law compliance and visa processing.
If you are thinking of using a PEO, it is important to choose the right type of firm for your needs, and one that complies with the laws that apply in your state or country: For example, an umbrella company arrangement would be more suitable for UK companies, and an AUG for German companies. If your company is smaller, a co-employment PEO will often be a good solution. For larger companies, a payroll company or payroll outsourcing firm may make more sense. For companies looking to expand internationally, a global PEO is a good solution.
PEO stands for Professional Employer Organization. A PEO is a company that provides HR, payroll, and employee benefits administration to client businesses, often on a 'co-employment' basis.
There are many reasons why businesses use PEOs, but the most common reasons are to save time and money on HR administration, payroll and employee benefits administration, and to reduce the risk of employment law compliance issues.