What Is a Professional Employer Organization (PEO)? Everything You Need To Know

Providing comprehensive HR services is a struggle for many businesses. This is especially true for small businesses and companies looking to hire international talent. Staying compliant and up-to-date with employment laws and regulations in other countries can be difficult. That’s why many companies turn to professional employer organizations (PEOs) for help.

PEOs offer a variety of outsourced HR and payroll services that are useful for businesses that don’t have the time or expertise to perform these services independently. To help you decide if working with a PEO is right for you, we’ll cover the benefits of PEOs, how PEOs work, and additional questions about PEOs in this guide.

PEO Definition

As previously mentioned, PEO stands for Professional Employer Organization. If your business wants to outsource elements of its HR function, PEOs can offer extensive employment management services. They can provide holistic HR and admin solutions,  including:

• Payroll
• Managing benefits (in some countries)
• Onboarding
• Assistance to help companies keep to local employment laws
• Assistance to meet local customs and industry best practices

As these administrative processes require dedicated resources and expertise, PEOs can offer an outsourced HR function that helps companies comply with local tax and employment laws. 

How Does a PEO Work?

If your business decides to work with a PEO, you’ll sign a contract to enter what is known as a co-employment relationship. Under this contract, your company and the PEO will each assume specific responsibilities outlined in the agreement. 

The PEO assumes full responsibility for HR functions outlined in the co-employment relationship. This includes payroll processing, paying payroll taxes, onboarding employees, and more. 

When entering into a co-employment relationship with a PEO, businesses remain legally responsible for their employees. This means you are responsible for hiring, firing, and managing employees while complying with local employment laws.  

Benefits of Working With a PEO

PEOs are a great option for companies expanding their operations globally and setting up local entities but who require local HR support for their global team. They can help take away some of the workload associated with HR functions and save your company money. 

There are a handful of other benefits of working with an experienced PEO team, including:

• Lower HR overheads
• Simplified payroll process and tax preparation
• Assistance with regulatory compliance and management of legal risks
• Assistance with industry best practices and benchmarks
• Improved employee experience
• Robust benefits packages that small businesses may not be able to offer on their own
• More time to focus on business and productivity

By working with PEOs, you can often outsource a range of HR functions while maintaining control of organizational decision-making, such as managing your employees’ day-to-day roles and responsibilities.

But there is one significant disadvantage to working with a PEO, and that’s that the legal responsibility remains with you as the employer. This means you have to set up a local entity (i.e., incorporate a company or register your business) in the jurisdiction where your employees will work. This can be time-consuming and complex, especially for start-ups or SMEs.

The alternative to this is using an Employer of Record (EOR), which we’ll discuss in more detail below.

Choosing a PEO 

How you choose a PEO will primarily depend on the scale of your workforce. PEOs generally fall into one of two categories: local or global. Let’s take a closer look at these two types of PEOs.

Local PEOs

PEOs are traditionally local organizations, meaning companies can work with them to manage talent local to the PEO. What a PEO offers depends on the country it’s operating in, for example, a UK PEO may differ from one in another country. Generally, local PEOs provide consultancy services for local employment needs.

But PEOs aren’t always treated the same from country to country. For example, PEOs in China are known by the term Foreign Enterprise Service Company (FESCO), which provide labor dispatching services. Chinese FESCOs will employ staff for their clients, much like an EOR.

Global PEOs

Unlike most local PEOs, global PEOs offer their services worldwide. So rather than looking for a PEO in each country, your company can utilize global PEO services to manage all your workers worldwide. This can help you streamline your operations and costs.

Other PEO FAQs

Here are some additional questions you might still have about PEOs that weren't covered in our previous sections.

What’s the Difference Between an EOR and a PEO?

PEOs and EORs are often confused, but there are some key differences. The main difference between a PEO vs. an EOR is that EORs become the legal employers of their clients’ chosen talent. This means that EORs act on behalf of client companies and hire talent for clients via service agreements. Furthermore, EORs take responsibility for complying with local employment laws for their clients. With PEOs, your business retains the legal responsibility of your employees, but the PEO handles some HR functions for you.

Will Using a PEO Replace Your Internal HR Staff?

While you can outsource many operational HR functions to a PEO, it’s not a replacement for a high-quality internal HR team. For example, you still need HR professionals to help build your company culture, recruit and retain staff, and drive performance. Working with a PEO simply frees up their time to focus on more holistic HR functions rather than getting tied up in operational complexities.