What is a PEO? A guide on a Professional Employer Organisation

A Professional Employer Organisation (PEO) supplies businesses with full-service outsourced HR functions.

But unlike other external HR services, a PEO becomes the employer of record for their client’s employees, also known as a co-employment arrangement.

Under this arrangement, they can perform all HR administrative and strategic services if required.

A business could use a Professional Employer Organisation to supplement or entirely replace an HR department either on a temporary or permanent basis (although they tend to be longer-term commitments).

The goal of a Professional Employer Organisation is to handle the complexities of human resource management on behalf of their client, so the business owner can focus on their core operations.

Common HR services provided include:

• Talent acquisition and onboarding
• Salary and benefits
• Compliance
• Development of policies
• Employee performance evaluation
• Handling payroll and tax responsibilities
• Storage of documentation and information.

In this article, we highlight the benefits of businesses using PEOs, what they do, and how they work.

Here’s what we cover:

• Why is it beneficial for a business to use a PEO?
• The role of a PEO in small and medium-sized businesses
• How do PEOs work?
• Which types of businesses can benefit from a PEO?
• Which types of businesses won’t benefit from a PEO?
• Final thoughts on Professional Employer Organisations
• FAQs

Why is it beneficial for a business to use a PEO?

Time savings

PEOs can give back precious time to their clients by handling time-consuming HR admin tasks, such as payroll processing, benefits administration and tax compliance.

This allows business owners and their employees to redirect their time and resources towards core operations and strategic initiatives.

Cost savings

By pooling together multiple clients, PEOs can offer more cost-effective employee benefits, insurance plans and other HR services to their clients.

Small businesses in particular can benefit from lower rates that would be difficult for them to secure independently.

Compliance

Keeping up with the ever-evolving landscape of employment law and tax regulations can be complex and time-consuming for businesses.

By partnering with a PEO, a business can rely on the PEO’s technical HR expertise to ensure they comply with relevant regulations, reducing the risk of legal issues and penalties.

Enhanced employee benefits

PEOs often offer competitive benefits packages, including private health insurance and pension schemes, helping businesses attract and retain top talent.

This can be particularly important for businesses looking to compete with larger companies in the job market.

Improved employee relations

PEOs contribute to fostering a positive workplace environment by providing support in areas such as conflict resolution, employee engagement, and performance management.

PEOs have the expertise and structures in place to be able to support employees and prioritise employee satisfaction and engagement.

Scalability

As businesses grow or experience fluctuations in their workforce, PEOs can adapt their services accordingly.

This flexibility allows businesses to adjust their level of engagement with the PEO as required, so they can continue a long-term partnership with an HR support system that matches their needs.

The role of a PEO in small and medium-sized businesses

PEOs carry out a pivotal role in supporting small and medium-sized businesses by taking charge of comprehensive HR services.

This means small businesses can provide their employees with the same quality of HR services they would enjoy at a large company with an in-house HR department, including:

• Career development
• Health and wellness programmes
• Conflict resolution.

A large area of HR involves managing admin tasks such as payroll processing, benefits management, and onboarding paperwork.

A co-employment arrangement alleviates the burden on small and medium-sized business owners, so they can concentrate on their core business.

And for businesses with growth ambitions, PEO services can scale with them, so when the business needs change they can adjust their level of engagement.

As we mentioned earlier, partnering with a PEO allows small businesses to benefit from cost savings through pooled resources.

Another significant advantage offered by PEOs is their ability to enhance the employee benefits packages that small and medium-sized businesses can offer.

This includes competitive training and development programmes, Employee Assistance Programmes (EAPs), and other benefits to attract and retain top talent.

PEOs also play a crucial role in risk management and compliance.

Small businesses without extensive in-house legal or HR departments often lack specialised expertise, so it’s important they can rely on PEOs to stay ahead of complex employment law and regulation changes.

How do PEOs work?

In a PEO arrangement, a co-employment relationship is established between the PEO, the client company (employer), and the employees.

The PEO becomes employer of record for the client’s staff and then assumes certain employment responsibilities on behalf of the client.

However, that doesn’t mean the business hands over complete control to the PEO.

A PEO doesn’t make any decisions on pay rates or schedules, and doesn’t help with business operations such as sales or marketing.

PEO fees are typically based on a percentage of payroll, but some charge by the number of employees.

These are typical HR services that PEOs can provide:

Administrative services

PEOs can provide a range of administrative services and can leverage the latest HR software and expertise to streamline these processes for their client.

PEO payroll or co-employment payroll is a common service, which includes processing pay runs and paying PAYE and National Insurance.

Employee benefits administration

PEOs can manage benefit schemes, including health insurance, pension schemes, and other perks, on behalf of the client.

PEOs often work with multiple client companies, pooling their employees together. This allows smaller businesses to access better and more cost-effective employee benefits.

Risk management and compliance

PEOs can take on responsibilities related to HR compliance and risk management.

So they must stay informed on changes in employment laws and regulations to ensure that client companies remain compliant with the latest requirements.

Employee relations support

PEOs can assist in managing employee relations, addressing HR enquiries, and providing support in areas such as conflict resolution and performance management.

Onboarding and offboarding support

PEOs can offer support with recruitment, hiring processes, onboarding of new employees, as well as offboarding support.

This may include background checks, orientation programmes, and exit interviews.

Which types of businesses can benefit from a PEO?

There are a number of types of businesses that can benefit from a PEO and includes most industries – from property to health services, manufacturing and even non-profits.

Startups

A new business may face challenges in securing the funding for an in-house HR team capable of managing its expected growth.

Startups often grow rapidly and need robust HR processes in place to handle a high volume of hiring and onboarding responsibilities, including writing contracts and filing paperwork.

Partnering with a PEO can provide this support as well as access to a broader range of HR services than a startup would typically be able to afford.

A PEO can serve as both a consultant and service provider, offering guidance on HR needs until it becomes feasible for the business to set up a dedicated HR department.

However, the trade-off involves relinquishing some control and flexibility when outsourcing HR responsibilities to a PEO.

Seasonal employers

For businesses employing seasonal staff, such as summer or winter resorts, people management requirements can significantly fluctuate across the year with varying staff numbers.

Engaging a PEO provides a solution for addressing temporary surges in hiring and payroll processing without the necessity of maintaining a full-time HR department.

Multinational businesses

It may not be feasible for a company with multiple offices around the world to hire HR staff in every location.

But at the same time, it can be difficult for a centralised HR department to cover all areas and ensure they are compliant with local regulations.

In this case, a PEO can offer HR services across multiple locations, allowing the company to navigate legal requirements, align with local practices, and efficiently oversee its staff across various regions.

Which types of businesses won’t benefit from a PEO?

While PEOs offer valuable services for many businesses, there are certain types of businesses and situations where engaging with a PEO may not be as beneficial.

Large corporations with extensive in-house HR departments

Large corporations with well-established HR departments already have the capacity to handle various HR functions, so the additional services provided by a PEO may not be necessary and outsourcing likely won’t provide any cost benefits.

Businesses with unique or highly specialised workforce needs

Businesses in niche industries or with employees with very specific skill sets may find that the standardised HR services offered by a PEO are too limited, and they require their own specialised HR team.

Companies with a strong focus on retaining full control

Some business owners prefer to retain full control over all aspects of their company, including HR functions.

So engaging in a co-employment relationship where HR responsibilities are shared would not be suitable in this case.

By forming their own in-house HR department, these businesses can maintain complete autonomy and flexibility around their own policies.

Startups with limited financial resources

While PEOs can offer cost savings, startups with extremely limited financial resources may find it challenging to afford the fees associated with PEO services.

In the early stages, businesses may need to prioritise allocating funds to core operations.

Short-term or project-specific needs

Businesses operating short term projects won’t generally align with the medium to long-term commitment that benefits a PEO arrangement.

In this case, other HR outsourcing models or temporary staffing solutions may be more suitable.

Final thoughts on Professional Employer Organisations

Using a PEO offers business owners a strategic approach to managing their HR functions.

The co-employment model allows employees to focus on core activities while benefiting from the expertise and support of PEOs in dealing with the complexities of managing a growing team.

For small and medium-sized businesses, partnering with a PEO means they can offer the same level and quality of HR services as large companies.

This can be especially attractive for growing businesses in a competitive job market.

FAQs

What is a PEO?

A Professional Employer Organisation (PEO) is a third-party outsourcing firm that provides comprehensive HR services to businesses.

It often handles tasks such as payroll processing, benefits administration, and compliance management.

Does the PEO become the employer in this arrangement?

While the PEO becomes the employer of record for certain purposes, the client company retains control over day-to-day operations, management, and the direction of the business.

The co-employment structure is designed to distribute HR responsibilities effectively.

What is the difference between a PEO and HR outsourcing?

PEOs establish a co-employment relationship, while HR outsourcing typically involves outsourcing specific HR functions without a co-employment structure, allowing the client company to retain its status as the sole employer.

Deciding between PEO and HR outsourcing depends on the level of involvement desired by the client and the specific HR functions being outsourced.

How does employee insurance work with a PEO?

PEOs often offer access to better and more cost-effective employee benefits, including health and dental insurance.

The PEO typically manages the administration of these benefits on behalf of the client.

How do PEO fees work?

PEOs often charge a fee based on a percentage of the client’s payroll.

This fee structure helps businesses budget for HR services, and it may include costs for services such as payroll processing, managing benefits and HR support.

What is the difference between a PEO and a staffing company?

Staffing companies specialise in short-term arrangements, supplying temporary workers to fill specific roles or projects.

Staffing companies only act as the employer of record for the temporary staff they provide, managing their payroll and benefits, while the client retains employer responsibilities for its core employees.

The choice between a PEO and a staffing company depends on whether a business seeks ongoing HR support or immediate staffing solutions for specific needs.