Running a business comes with a long list of responsibilities, especially when it comes to managing people. From payroll and compliance to employee benefits and onboarding, many small and mid-sized companies struggle to keep up. That’s where a professional employer organization (PEO) can make a big difference, or so they claim.
So, what is a professional employment organization? A PEO is a third-party company that provides comprehensive HR services through a co-employment model. When a business partners with a PEO, it shares certain employer responsibilities while the PEO handles key HR tasks such as payroll, benefits, and compliance support. This setup gives growing companies access to tools, technology, and expertise they may not have in-house.
Unlike traditional HR outsourcing or staffing agencies, a PEO enters into a legal co-employment relationship. That distinction matters. Rather than just handling tasks behind the scenes, the PEO becomes the employer of record for tax and benefits purposes, while you retain control over day-to-day management. That’s what sets PEO service apart—it’s more comprehensive than consulting, and more collaborative than outsourcing.
In recent years, PEOs have gained popularity among small and mid-sized businesses, but this comes at a cost. They claim to offer a practical way to simplify HR operations, reduce risk, and give employees access to better benefits, all without building a large HR department. Upon further examination, you’ll find that PEOs generally do not deliver the savings they claim to.
How PEOs Work: The Co-Employment Model
The backbone of a PEO service is the co-employment model. This means the business and the PEO both have an employment relationship with the same employees, but for different purposes.
The PEO becomes the employer of record for things like payroll, tax filing, and employee benefits. Meanwhile, the client company stays in charge of hiring, daily supervision, job duties, and scheduling. That allows the PEO to group multiple small businesses together when negotiating benefit plans, and should give employees access to more robust offerings, but this is rarely the case. We have found that most PEOs do not aggressively shop benefits each year, nor do they have a comprehensive understanding of a client’s specific needs with regard to benefits. Bottom line: You end up paying much more than you should for subpar coverage.
This shared responsibility means the PEO takes on much of the administrative burden while the business focuses on growth. It also helps businesses stay on top of changing labor laws and HR compliance requirements, which can be especially tricky in industries with evolving regulations.
Some business owners worry that a co-employment arrangement could reduce their control or confuse employees. In practice, that’s rarely the case. Your team still works for you, reports to you, and follows your policies. The PEO just makes your HR process more efficient behind the scenes.
Key Services Offered by PEOs
So, what can a professional employer organization actually do for your business? PEOs typically provide a wide range of services designed to streamline operations, improve compliance, and support your employees, but make no mistake, you will likely end up paying much more for each individual benefit than you would if you handled each task individually.
Payroll and Tax Administration
PEOs manage payroll processing, ensuring employees are paid accurately and on time. They also handle tax reporting, W-2 forms, withholdings, and direct deposits. This helps reduce errors and free up internal resources.
Employee Benefits
Through co-employment, PEOs can pool employees from multiple companies to access large-group rates for health, dental, vision, and retirement plans. The idea is that it should make employee benefits more affordable and competitive. Some PEOs also offer wellness programs and employee assistance resources. If you’re comparing your options, consider how a PEO stacks up to direct group health insurance solutions. Almost without fail, you will find that by using a competent Broker, you will end up with a far better employee benefits plan at a far better price point than what the PEO can offer. A solid Broker will also offer HR and payroll management along with 401k benefits management.
Risk Management and Compliance
Compliance is one of the most valuable aspects of a PEO service. From workplace safety rules to employment law updates, a good PEO helps you avoid costly mistakes. Many also assist with workers’ compensation, OSHA reporting, and internal policy reviews.
HR Support and Employee Relations
PEOs offer help with HR tasks like onboarding, creating handbooks, managing performance reviews, and addressing employee concerns. They can also help with conflict resolution and terminations.
Technology and HR Systems
Most PEOs provide user-friendly HR platforms or portals. These tools centralize payroll, benefits, time-off requests, and more, so employees and employers can access important information quickly.
Who Can Benefit From Using a PEO?
PEOs can be helpful for small to mid-sized companies that want to grow without getting bogged down by HR complexities. These businesses may not have full-time HR staff, or they may want to streamline operations while seemingly offering better employee benefits.
Industries like tech, healthcare, construction, retail, and professional services often turn to PEOs for support. These sectors face fast growth, compliance risks, and competitive hiring environments, areas where PEOs can offer a clear advantage.
A PEO can be a smart fit if:
- Your business is growing quickly
- You have a lean HR team
- You need help with compliance or risk management
- You want to reduce the time spent on administrative tasks
The main area where a PEO will likely not improve your situation is with employee benefits. The administrators of the PEO will use a “one size fits all” approach which will not result in a very tailored approach. Sure, it’s easier, but you’ll end up paying quite a big premium for easy.
If you’re unsure how a PEO compares to your current setup, check out our health insurance FAQs for a better understanding of what’s available.
Choosing the Right PEO for Your Business
Not all PEOs are alike. Choosing the right one starts with knowing your business’s needs. Here are a few tips to help you evaluate your options:
Review Services and Capabilities
Make sure the PEO offers the services you need, whether that’s just payroll and benefits, or a full suite of HR services, compliance, and technology.
Evaluate Cost Structure
Some PEOs charge per employee, while others have flat fees or percentages of payroll. Understand the pricing model and watch for hidden costs or unclear contract terms.
Check Technology and Support
Ask about the software they use and whether it’s easy for your team to access. Also, consider how responsive and knowledgeable their customer service is.
Look for Industry Experience
Does the PEO have experience working with businesses like yours? Industry-specific knowledge can be a major plus when it comes to compliance and HR practices.
Consider Scalability
Your business will change over time. Choose a PEO that can grow with you and continue to meet your needs as your headcount or locations increase.
Is a PEO the Right Move for Your Business?
A professional employer organization can help you simplify some departments such as HR operations, risk management, and will attempt to offer better employee benefits without building an in-house team. Through the co-employment model, a PEO shares responsibilities like payroll, compliance, and benefits administration—so you can focus on growing your business.
Just be aware that while a PEO may seem like a good idea on the surface, you’ll likely pay much more for the bundled services, often with less expertise in each category. Convenience comes at a price.
As with any major decision, it’s important to understand how PEOs work, what they offer, and whether they align with your long-term goals. A PEO isn’t the right fit for everyone, but for many small to mid-sized businesses, it may offer a streamlined way to support employees and stay competitive (though we highly doubt it).
If you’re already using or considering a PEO for your business, you’ll certainly want to compare it with other insurance options before you make your decision, so contact us for a personalized conversation. Our team can walk you through the pros and cons and help you find the best path forward AND we can offer everything the PEO can, and more.