Professional employer organization

A professional employer organization (PEO) is a firm that provides a service under which an employer can outsource employee management tasks, such as employee benefits, payroll and workers' compensation, recruiting, risk/safety management, and training and development. The PEO does this by hiring a client company's employees, thus becoming their employer of record for tax purposes and insurance purposes. This practice is known as co-employment.

As of 2010, there were more than 700 PEOs operating in the United States, covering 2-3 million workers. PEOs operate in all fifty U.S. states. Similar services are described in Sweden and Germany.

In co-employment, the PEO becomes the employer of record for tax purposes, filing paperwork under its own tax identification numbers. The client company continues to direct the employees' day-to-day activities. PEOs charge a service fee for taking over the human resources and payroll functions of the client company: typically, this is from 3 to 15% of total gross payroll. This fee is in addition to the normal employee overhead costs, such as the employer's share of FICA, Medicare, and unemployment insurance withholding.

One service provided by a PEO is to secure workers' compensation insurance coverage at a lower cost than client companies can obtain on an individual basis. Essentially, a PEO obtains workers' compensation coverage for its clients by negotiating insurance coverage that covers not just the PEO, but also the client companies. This is allowed because, legally, the PEO is the employer of the workers at the client companies. PEOs can also offer basic levels of background & drug screening.

Using a PEO could potentially save the time and staff that would be used to prepare payroll and administer benefits plans, and may reduce legal liabilities or obligations to employees that it would otherwise have. The client company may also be able to offer a better overall package of benefits, and thus attract more skilled employees. The PEO model is therefore attractive to small and mid-sized businesses and associations, and PEO marketing is typically directed toward this segment.

Several variations on the PEO model exist, differing in the nature of the relationship formed between PEO and client company.

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