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PEO (Professional Employer Organization)

Updated: 01 November 2024

6 min read

Written by Anastasia Stefanuk

PEO (Professional Employer Organization)

A Brief History of PEO Services
How the PEO Company Model Works
Services PEO Providers Offer
Size of the Professional Employer Organization Industry in the World
An Overview of the PEO Advantages and Challenges
Advantages
Challenges
Companies That Successfully Use PEO Software and Services
PEO Services Cost
See Also
References

PEO has been a buzzword in recent years, but what is PEO? The Professional Employer Organization or PEO definition is defined as an outsourcing firm that offers services to small and medium-sized businesses. These services exist to assist businesses to successfully execute functions such as payroll taxes, human resources duties, and other administrative tasks necessary to run a business smoothly. Responsibilities are typically shared between the business owner and the PEO.

Table Of Contents

A Brief History of PEO Services
How the PEO Company Model Works
Services PEO Providers Offer
Size of the Professional Employer Organization Industry in the World
An Overview of the PEO Advantages and Challenges
Advantages
Challenges
Companies That Successfully Use PEO Software and Services
PEO Services Cost
See Also
References

A Brief History of PEO Services

What exactly is the PEO meaning? It can be seen as a form of employment leasing ^[1]which involves companies hiring employees for short-term projects to assist businesses with certain tasks. PEOs were established in the 1960s ^[2]in the United States when people realized there was a need for assistance on short-term work overload or special projects. This need arose when smaller businesses could no longer compete against larger firms due to fewer funds and a shortage of experienced staff. They would hire the employees directly in a process called co-employment. As a result of the small business market growing, the PEO model became highly popular. Today, more than 800 PEOs exist in the United States alone and they offer a variety of solutions to between 156,000 and 180,000 businesses ^[3]. Businesses are specifically attracted to the cost-saving opportunity PEOs offer, especially on health-care and workers’ compensation ^[4], so they can use the capital to grow their ventures.

How the PEO Company Model Works

The PEO model works on the principle of co-employment and emphasizes occupational performance. This means that a business (The client) will employ workers (Employees) from a PEO company (The employer) to assist with certain functions. The three parts work together using the PEO’s resources to complete core tasks. Resources may include software, networks and connections. The three parts work dependently and are affected by each other. The overlapping area of the three parts shape occupational performance effectively. By partnering with PEO providers, businesses can continue to focus on growing other parts of the company, while the PEO cover all the details related to admin and employment.

Services PEO Providers Offer

PEOs may specialize more in one specific field, however, most major PEOs offer the following services:

Payroll admin. This includes the processing of payroll, record maintenance and payroll compliance solutions.
Sourcing custom employee benefits. This involves PEOs finding benefits suited to businesses in specific industries and may include medical insurance and educational support.
Help with compliance assistance. PEOs often have access to the best professionals in the field to offer advice on labor laws and employment regulations.
Assistance with HR administration. PEOs can support a business with a range of HR services, including recruiting and hiring, managing employer liabilities, termination assistance, leave administration and more.
Training and upskilling of staff. Some PEOs may assist businesses to train and upskill their employees. This may include finding training programs and enrolling staff members.

PEOs typically offer a wide range of services, but most PEOs allow businesses to select only the services they require, which makes the partnership much more affordable.

Size of the Professional Employer Organization Industry in the World

The demand for PEO services is increasing dramatically as more small to medium-sized businesses open their doors. In 2019, the global PEO market size was 198.8 billion USD ^[5] and it is expected to grow with a CAGR of 6.1% year-by-year. North America has been dominating the market, while the Asia-Pacific region is expected to see significant growth ^[6] in the next five years due to the growing number of small and medium businesses in the region. Industries that will see a rise in the use of PEOs includes finance, retail, real estate, legal and healthcare.

An Overview of the PEO Advantages and Challenges

There are significant advantages of using PEO for small business and large corporates, especially for small businesses that have limited resources. However, there are also professional employer organization problems businesses should consider before hiring a PEO. Here are the professional employer organization pros and cons:

Advantages

Saving money.

Businesses can save valuable money by using PEOs instead of hiring their own in-house teams.

Saving time.

PEOs take care of time-consuming administrative tasks, allowing owners and managers to focus to save on valuable time.

Improving employee experience.

PEOs handle much of the human resources functions, allowing businesses to focus on culture and employee management for better employee experience.

Better benefits for employees.

PEOs are often able to negotiate better benefits, such as healthcare, for employees.

Smooth processes.

When using PEOs, businesses can look forward to more effective administration and HR processes.

Challenges

Loss of control of certain processes.

PEOs often take over entire processes which may lead

An outside company’s influence on your culture.

Loss of internal HR department.

When hiring PEOs, businesses’ HR department loses a lot of value. Once the PEO is no longer employed, this may lead to complications.

Lack of security over employee paperwork.

Businesses that make use of PEOs typically have to share most of their employee paperwork. This may lead to security concerns.

Companies That Successfully Use PEO Software and Services

In recent years, more businesses ^[7] have realized the advantages of using PEO solutions and PEO software. This allows them to not only save valuable time and money but by outsourcing certain tasks to PEOs, they also ensure that their payroll, admin and HR processes are effective. Examples of companies that have use PEO solutions successfully include car-rental company Avis, professional services firm The Golden Key Group, developer of microbiome-based products Evolve Biosystems and healthcare firm Vynamic. From this, it is evident that PEO solutions can be used in almost any industry.

PEO Services Cost

The cost of PEO solutions in the professional employer organization industry varies largely from country to country. The main reason for this is the different living costs in countries and the salary rate of the needed specialists. Here is a comparison of the PEO services in six major countries from Payscale: