What Is a Professional Employer Organization? (With FAQs)

By Indeed Editorial Team

Updated June 16, 2022

Published December 1, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

As a company grows, the leadership decides how to best support its employees with payroll, benefits, and other human resources functions. Instead of having an internal HR department, one alternative is hiring a professional employer organization (PEO). Learning about what a PEO offers can help you better understand if this is a service you can use in business. In this article, we discuss the definition of a professional employer organization, identify what a PEO means to employees, review the advantages and disadvantages of using PEO services, and answer a few frequently asked questions about the topic.

What is a professional employer organization?

A professional employer organization is a company that provides the outsourcing of human resources services to other businesses. As a business, they work with small and medium-sized companies to offer administrative HR functions, such as payroll services, employee benefits administration, workers' compensation, and other compliance responsibilities. Also called co-employment, a PEO is a fantastic option for companies with no HR department to facilitate these duties.

What a PEO means to employees

A business may use a PEO if they don't have a specific human resources department or payroll representative. Instead of expanding the business to include these roles, the company contracts the services of a PEO to handle its administrative functions. As an employee in these circumstances, you technically have two employers. The first employer is the company you work for, which represents the work-site employer. The second employer is the PEO company, which manages all the HR, administrative, and payroll functions.

While the main company operates the employee's day-to-day activities, the PEO handles the administrative responsibilities of employment, such as insurance, payroll, and health benefits. For example, if you have questions about your payroll deductions, how to process a benefits claim, or how to report an injury at work, the PEO handles this as part of your contractual co-employment arrangement.

Service offerings of a PEO

A PEO company can offer various services to small and medium-sized businesses, including:

Payroll administration

One benefit of using a PEO is that it provides payroll processing. For example, a company can use a PEO's payroll software for employee time and attendance management. This includes tracking of vacation, sick days, and personal time off. In addition, most PEOs offer direct deposit options for payroll and online pay statements for employees, minimizing the primary employer's paperwork.

A PEO also completes payroll deductions and remittances to the government for taxes and benefits. Other payroll administration tasks include preparing records of employment (ROEs), T4 preparation at year-end, and filing employer taxes. Depending on the organization, the PEO may accommodate contracting employees, short-term or temporary employees, or out-of-province employees or contractors.

Related: Hourly vs. Salary Pay: Differences, Benefits, and Drawbacks

Employee benefits

Offering employee health benefits can be costly for small or medium-sized businesses. Using a PEO minimizes the cost of benefits, as the PEO often pools all of their client's employees into one group. As a result, they may offer health and medical benefits at a lower cost than the primary employer.

PEOs may also offer access to health spending accounts, disability insurance, and employee assistance programs. With employee benefits administration, a PEO oversees the management of the benefits package, helps employees with disability claims, provides consultation services on benefit plans, and helps coordinate leave support services, such as maternity and paternity leave.

Related: Workers Perks and Benefits: 20 Most Common and Explanation

Group retirement savings plans

Similar to employee benefits, many PEOs offer companies the opportunity to pool their staff into a larger group to provide group retirement savings plans, or RSPs, at a better cost to the company. As a result, there are lower investment fees because of volume discounts. Depending on the PEO, they may also offer registered and non-registered savings plans or tax-free savings accounts.

Workers' compensation administration

All companies with employees have provincial workers' compensation coverage. Managing workers' compensation benefits and administration is time-consuming and complex. There are often regular updates to regulations and work-site requirements. A PEO manages this process for companies by remitting premiums and providing reports on employee earnings. It can also help create modified work programs for injured employees and manage workers' compensation files.

Recruitment and hiring processes

Some PEO companies offer recruitment and hiring services for companies as an additional feature to their other offerings. For example, they can help post job openings on various internet job boards and use advertisements to recruit new talent. Depending on the company's needs, a PEO can also screen job applicants, complete reference checks, and provide new hire orientation and onboarding.

Related: Guide to the Process of Recruitment (With Tips)

Advantages of using a PEO

Here's a list of the benefits you can consider when deciding to use a PEO and enter a co-employment contract:

Saves administrative time

Using a PEO allows small and medium-sized businesses to save critical time on administrative tasks. For example, hiring a PEO eliminates the need for hiring someone to take care of payroll and human resources functions. As a result, this frees administrative time for more essential duties that can bring revenue into a business.

Current information on regulations and requirements

Because a PEO company focuses exclusively on human resources administrative functions, they become experts in their field. Their body of knowledge is extensive and they stay up-to-date on all human resources regulations, taxation requirements, and labour standards. As a result, they can provide valuable information to businesses with supportive advice on minimizing risks and liabilities. For example, if the labour standard changes within a province, they can advise the business owner of how it may affect their operations.

Related: How to Begin Your Career in Human Resources

Compliance and safety support

Depending on the services offered, a PEO can also help with compliance standards and occupational health and safety support. For example, if a business doesn't currently have an employee handbook or standard operating procedures, a PEO may provide this information or assist in the creation of these essential business documents. In addition, some PEOs offer occupational health and safety consulting. They can work with an existing occupational health and safety team, help create one, or perform the functions as part of their service contract.

Operational costs

Based on the services chosen, using a PEO can reduce the operational costs for a business. For example, the company can pay for a cost-effective solution instead of hiring staff to maintain payroll and benefits administration. In addition, the charges for offering benefits to company employees become more manageable. PEOs typically receive a volume discount for insurance benefits, which they then pass on to their customers. Sometimes, there can also be a tax benefit for small and medium-sized companies using a PEO, as the fees may be eligible for tax deductions or credits.

Disadvantages of using a PEO

There are several disadvantages to be aware of when using a PEO, including:

Outside influence on company culture

Because the company enters a co-employment relationship with the PEO, there's a certain amount of outside influence on the company's inner culture. While the primary company maintains daily operations and work-site direction of their employees, the PEO directly impacts human resources functions and administrative processes. Employees essentially have two employers, which can cause resistance or confusion. It's critical for the company to provide a clear outline of its employees' reporting structure and work processes to minimize potential misunderstandings.

Lack of control over employee paperwork

As the PEO is in direct control of all human resources functions, the primary company is no longer in charge of employee paperwork. The PEO holds all personnel files, including sensitive and confidential information. As a result, business owners have minimal exposure to employee records and data, which may affect decision-making processes, such as analysis of industry wages or strategic planning for future hiring.

Potential security or compliance issues

Using a PEO to complete payroll and human resources administration functions means the company trusts the PEO's processes to remain secure and compliant. There's some risk involved in using an independent service, as it may not uphold the same level of standards. For example, there may be opportunities for confidential information to leak or tax remittance to happen incorrectly. When mistakes happen, the primary employer remains partially responsible for the errors.

Frequently asked questions about PEOs

Here are a couple of FAQs about professional employer organizations:

How does a PEO make money?

PEO companies typically make money in one of three ways:

  • They may charge the primary employer a percentage of the payroll amount each pay period.

  • They may offer a flat fee per employee.

  • They may structure their service payments as a minimum flat fee per pay period.

Is a PEO the same as a staffing agency?

As its name suggests, a staffing agency differs from a PEO. In a staffing agency, the employees work directly for the agency. The agency leases the employees out to various businesses needing help with a workforce, but the sole employer remains the staffing company. In a PEO, the employment of the staff is shared with the primary employer.

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