How Do Professional Employer Organizations Work - Updated Guide (2024)?

How Do Professional Employer Organizations Work - Updated Guide (2024)?

In 2017, the Professional Employer Organizations (PEOs) in the United States catered to around 175,000 clients. Fast forward to the end of 2023, and the number has surged remarkably, with 208,000 PEO clients benefiting from expert services. This growth is no doubt an indication of the expanding influence and value that PEOs bring to businesses across the nation.

If you’re considering hiring a PEO for your business this year and wondering if it is the right solution for your business’ administrative issues, this article provides an updated guide about PEOs, how they work and what is involved in working with one.

How Does a PEO Arrangement Work?

A PEO arrangement is a business relationship where a company outsources certain human resource functions to a third-party PEO or CPEO. This arrangement allows businesses to focus on their core operations while the PEO takes care of various HR-related tasks. 

Here's how a typical PEO arrangement works:

The client company (the business outsourcing HR functions) and the PEO enter into a contractual co-employment agreement outlined in a document known as a client service agreement (CSA). This document specifies the responsibilities and sharing of duties between the PEO and the client.

Within the co-employment structure, the PEO becomes a co-employer alongside the client company. While the client maintains control over daily operations and the strategic direction of the business, the PEO assumes responsibility for specific HR tasks which typically include but are not limited to payroll processing, tax administration, employee benefits management, workers' compensation, risk management, and compliance assistance.

The specific roles of the PEO and the client depend on the details of the agreement, as outlined in the CSA. Each party is responsible for certain employment obligations, with some obligations shared. Note that neither the PEO nor the client is the sole employer for all purposes; responsibilities are distributed based on the terms of the agreement. But the bsuiness owner or company is the primary employer of their staff.

Both the PEO and the client establish relationships with worksite employees, but their roles differ. The PEO may engage with worksite employees regarding human resource management and compliance matters, while the client company directs and controls employees in day-to-day operations and the production of goods or services.

The client provides the physical tools and workspace for worksite employees, and some PEOs offer guidance on creating a safe, productive workplace compliant with employment regulations. PEOs also assist with workers' compensation insurance and various employee benefits programs.

If your company or business is considering a PEO arrangement, you should carefully review the terms of the agreement, understand the services provided, and assess how well the PEO aligns with their business needs and values.

What a PEO Does Not Do

While a PEO takes on various responsibilities to support businesses, there are certain things they typically do not handle. The specifics can vary based on the terms outlined in the client service agreement, but here are common areas where PEOs may not be extensively involved:

1. Direct Business Operations:

PEOs do not typically get involved in the day-to-day operations of your core businesses. You will usually retain control over your products, services, and overall business strategy.

2. Decision-Making:

Decisions regarding business direction, major investments, and long-term planning remain under the control of your company. PEOs focus more on HR and administrative functions.

3. Certain Legal and Regulatory Matters:

While PEOs assist with compliance, there are legal matters, such as litigation or major legal decisions, that may fall outside the scope of a PEO's responsibilities. Clients usually retain their legal counsel for such issues.

4. Exclusive Control over Employees:

Your HR department will still retain substantial control in managing your employees. While PEOs may assist with HR management, your HR team usually maintains authority over hiring, firing, and day-to-day supervision of employees.

5. Operational Tools and Workspace:

While PEOs may offer guidance on creating a safe and productive workplace, the responsibility for providing tools, instruments, and physical workspace to employees usually lies with the client.

6. Employee Hiring Decisions:

Your HR team typically makes decisions related to hiring, choosing candidates, and determining the qualifications of employees. PEOs may assist with recruitment processes, but the final decisions usually rest with the client.

It's necessary for businesses to clearly define roles and responsibilities in the client service agreement to ensure both the PEO and your company understand each other’s respective duties. This way, the collaboration is effective, and each party can focus on its specific strengths and areas of expertise.

Does Your Business Need a PEO?

Determining whether your business needs a PEO involves considering important factors like your company's size, structure, HR needs, and long-term business goals. Partnering with a PEO clearly comes with a lot of benefits, even for small and medium businesses. However, before making a decision, it would be wise to thoroughly research and compare different PEO providers, understand their service offerings, and assess how well they align with your business objectives. 

The Mission is here to help your business navigate this process and help you find a PEO that fits perfectly. We understand the needs of different businesses and will make sure that your business’ HR needs are met with one integral package for all your employees, regardless of size or location. Don't hesitate to contact us if you have further questions about PEO or hiring employees in other locations. We service the entire US but have been proudly providing top-tier PEO consulting in the South East.