How Does A Professional Employee Organization Work?

A Professional Employer Organization (PEO) is a company that small and medium-sized businesses (SMBs) can partner with to manage employment liability and provide better benefits to their employees. PEOs can also handle human resource services, including workers’ compensation, benefits, payroll administration, and employment taxes.

When a client company partners with a PEO, they enter into a co-employment contract called a client service agreement (CSA). The CSA establishes a relationship between the PEO and the client’s employees, and outlines the responsibilities, rights, and risks of both parties.

Under the CSA:

• The PEO handles administrative employer duties, while the business owner manages worksite employer responsibilities.
• The PEO manages employee benefits, wages, and with holdings and handles tax remittance under its own tax ID.
• The client retains complete control over the company and makes decisions regarding hiring, management, and firing.
• The client handles non-employee-related tasks, such as customer service, sales, and marketing.
• The PEO and the client may share some responsibilities, as specified in the CSA.

Using a PEO is beneficial because it allows a company to use economies of scale to provide better benefits and outsource administrative tasks. This is especially helpful for businesses that do not have an HR team or have a small HR team that is overwhelmed. By shifting administrative tasks to the PEO, the company can focus on growing the business. Additionally, a PEO can negotiate better health benefits for employees at a lower rate than a company could without a PEO.