Professional Employer Organization (PEO)

What Does PEO Stand For?

PEO stands for Professional Employer Organization. This third-party company offers organizations the option to outsource their HR functions, allowing them to focus on core business operations.

What Is a PEO?

A PEO supplies outsourced human resources services. Organizations may use services a PEO provides to supplement or entirely replace those of an internal human resources department, either temporarily or permanently.

The National Association of Professional Employer Organizations (NAPEO) reports that approximately 173,000 small and mid-sized businesses in the United States utilize the services of PEOs, and 15.3% of all businesses with 10-99 employees use one.

What Are the Most Common PEO Services?

PEOs offer various services, including:

• Recruiting and hiring
• Compensation
• Compliance
• Policy creation
• Performance management
• Payroll & payroll taxes
• Benefits management and/or administration
• Documentation & information storage

PEO Payroll

Also known as co-employment payroll, PEO payroll is a service where the PEO becomes the employer of record for the client's employees, handling various HR responsibilities, including payroll administration. The PEO assumes the responsibility for processing paychecks, calculating and withholding taxes, managing employee benefits, and ensuring compliance with employment regulations.

PEO payroll is a common practice that has gained significant popularity among businesses of all sizes, with the entire PEO industry growing at a rate of 7.6% annually. By partnering with a PEO for payroll services, businesses can offload administrative burdens, reduce HR-related costs, and gain access to advanced payroll systems and expertise.

PEO Insurance

PEO insurance refers to the insurance coverage provided by a PEO to its client companies and their employees. It usually refers to employee health insurance but could be any kind of insurance that benefits employees. For example, PEOs typically offer a range of insurance options, including workers' compensation, general liability, employment practices liability, and employee benefits like health insurance and retirement plans.

This insurance coverage helps protect both the PEO client and their employees from potential risks and liabilities associated with their workforce. By leveraging the collective buying power of multiple client companies, PEOs can often secure more competitive rates and comprehensive insurance solutions than a small business negotiating on its own.

Why Do Companies Use a PEO?

There are a number of reasons to use a PEO to provide HR services; however, the decision is often driven by either financial or compliance concerns. Here are a few scenarios in which a company might look to a PEO for HR services:

The Benefits of a PEO for Startups

A new company may not have the funding to hire the HR staff it needs to handle its anticipated growth; even with enough budget, entrepreneurs may lack the experience to know what HR services they need and how many people to hire. A PEO can act as a consultant and service provider, offering advice on HR needs and the flexibility to provide only what’s necessary to get by until an HR department becomes feasible.

PEOs can help startups offer more HR services than they normally would be able to provide. On the downside, by outsourcing HR tasks to a PEO, startups can lose some control and flexibility over how HR services are administered, implement unique policies, and sometimes incur greater costs than they would by hiring an internal employee or utilizing HR-focused software.

Why Seasonal Employers Use PEO Services

A company that employs seasonal staff—like a summer camp or winter resort—may have workforce management needs that rise and fall dramatically along with their staff numbers. A PEO is one way to handle large tasks like seasonal hiring, benefits management, and payroll processing without having to employ a full-time HR department to handle a temporary load.

By partnering with a PEO, companies can effectively manage their seasonal workforce without the burden of maintaining a year-round HR department. The PEO can efficiently handle large-scale tasks and ensure HR-related compliance, allowing the company to focus on delivering an exceptional seasonal experience.

Do Large Companies Still Use PEO Services?

HR requirements are often dictated by local, regional, and national laws and regulations, not to mention cultural boundaries and customs. It may be impossible for a single HR department to ensure compliance—especially when it comes to payroll—for a company with multiple satellite headquarters across the nation or around the world, and it may not be feasible to hire HR staff for every location.

A PEO can offer compliant and culturally fluent HR services in unfamiliar locations, helping the company maintain legal compliance, adapt to local practices, and effectively manage its workforce across different regions.

What Are the Downsides of a PEO?

The most critical weaknesses of a PEO are physical and emotional distance. A third-party, contracted service provider can never replace the personal touch of a dedicated in-house HR department.

A PEO is a viable solution for large transactional tasks and even for person-to-person functions such as recruiting and hiring, when the benefit of on-demand service outweighs any loss resulting from cultural misalignment.

But compared to an HR department with actual “boots on the ground” in an organization, a PEO would be hard-pressed to establish or maintain any form of company culture without significant help from emotionally invested, physically present HR staff.

Is BambooHR a PEO?

No, BambooHR is not PEO. BambooHR is a cloud-based human resources software company that provides HR management solutions. While it offers various HR tools and features to streamline HR processes, it does not offer the full suite of comprehensive HR services typically provided by PEOs.

BambooHR focuses on providing HR software solutions rather than functioning as a PEO. Our software includes features like employee onboarding, time tracking, performance management, and HR reporting—all designed to simplify HR tasks and improve efficiency within organizations.

Through the BambooHR Marketplace, we partner with PEO companies so you can seamlessly integrate your people data with your PEO provider.

Want to learn more about how you can unlock the full potential of your HR department with BambooHR's comprehensive platform? Learn more today.