Industry Article


“What’s a PEO and How Can It Help My Business?”

A professional employer organization, or PEO, is a company that serves as an outsourced human resources department for small and midsize businesses, providing vital employment services such as payroll and benefits administration, HR management, and assistance with compliance on employer-related laws.

As businesses grow, most owners just don’t have the necessary human resource training, payroll and accounting skills, the knowledge of regulatory compliance, or the backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an employer. PEOs give small and midsize businesses access to expertise and competitive employee benefits that they wouldn’t otherwise have.

A PEO can handle the management and administration of human resources. As a strategic partner, a PEO can take on some shared employer risks.

In a nutshell, a PEO can help:

  • Attract and retain talent
  • Contain rising HR costs
  • Create efficiencies
  • Minimize your liability and exposure to risk

What's more, this comprehensive solution is integrated through a single vendor, which keeps things simple for business owners. Now your company isn’t managing multiple vendors—one for payroll, another for workers’ compensation, yet another for benefits―anymore. You're getting everything HR from one source, which saves you more time and enables you to focus more on your business.

Co-Employment―The Sharing Relationship

When working with a PEO, your company enters into a shared employment relationship. The PEO becomes the “Employer of Record” and is responsible for payroll and payroll tax compliance, benefits administration, workers’ compensation, processing unemployment claims, and other HR-related administrative tasks. Your company remains the “Worksite Employer” and continues to retain day-to-day control and direction of your worksite employees.

This is what sharing looks like:

Customer Service Agreement diagram

Importantly, this shared relationship allows your company to transfer many of the time-consuming administrative tasks to the PEO, and more importantly, allows you more time to focus on making core business decisions.

Who is Minding the PEOs?

Formed in 1984, the National Association of Professional Employer Organizations (NAPEO) is the national trade association for the PEO industry. NAPEO promotes a Code of Ethics and a number of best practices to its member companies. There is also the Employer Services Assurance Corporation (ESAC) which accredits select PEOs. ESAC accreditation verifies a PEO's financial solvency, compliance with regulations and other important industry standards.

Additionally, the Tax Increase Prevention Act of 2014 established a new IRS voluntary PEO certification program. Although the program is still under development, the IRS began accepting applications for the program in July of 2016. Upon full implementation of the program, the IRS’s PEO certification program will include:

  • A comprehensive review of the PEO’s formation, financial and credit checks, and tax compliance history
  • Verification that the PEO has an active and approved surety bond
  • A validation that the PEO abides by its service agreement and satisfies review      requirements of their financials and user fee collection
  • A public listing of PEOs whose IRS certification has been suspended or revoked.

When Considering a PEO

Selecting the right PEO is a critical decision for your business. Here are some things to consider when deciding which one is right for you:

  • Check their customer and professional references
  • Ask whether the PEO is a member of National Association of Professional Employer Organizations (NAPEO) and accredited by the Employee Services Assurance Corporation (ESAC)
  • Understand how the employee benefits are funded and insured
  • Verify that the employee risk pool matches the employer’s profile
  • Confirm that participating employees can receive first-day coverage for benefits
  • Ensure that the service provider meets all state regulatory requirements

Why TriNet?

As a leading PEO for more than two decades, TriNet serves thousands of companies. Our bundled HR products allow small to midsize businesses to operate more efficiently and cost-effectively.

PEO Services and HR Bundled Products

Best Questions When Choosing a PEO

We are a non-profit organization. Can we sign up with a PEO?

Yes. There are many non-profits that utilize our PEO services. There are some differences, however. Non-profits are authorized to use either a 403(b) or a 401(k) retirement plan. If a non-profit has been self-funding unemployment claims, it will switch to becoming part of the unemployment tax pool with regular deductions charged for unemployment taxes as part of PEO services.

What is the difference between employee leasing and a PEO?

A PEO does not supply labor to worksites. PEOs supply services and benefits to a small to medium-size business client and its existing workforce. PEOs enter into a co-employment arrangement typically involving all of the client's existing worksite employees and sponsor benefit plans for the workers and provide human resources services to the worksite employer. By comparison, a leasing or staffing service supplies new workers, usually on a temporary or project-specific basis. These leased employees return to the staffing service for reassignment after completion of their work with the client company.

How does a professional employer organization (PEO) charge?

The way PEOs charge depends on the PEO. There are two common fee arrangements: 1. flat service fee (per employee per month), and 2. percentage of payroll fee.

Should I consider a professional employer organization's (PEO's) client portfolio before I choose one?

Selecting the right PEO is an important business decision. Reviewing the client portfolio is a helpful due diligence step as it reveals quality and industry expertise. It's important to use a PEO that's experienced in HR for your industry.

Who is responsible for workers' compensation?

Many states recognize the PEO as the employer of worksite employees for purposes of providing workers' compensation coverage.