What Does a PEO Do for Me?

A PEO is a company that specializes in taking care of all the responsibilities that come with employing people. By hiring a PEO, you are "getting out of the business of being an employer," says Bill Maness, president of Syndio Outsourcing, a PEO in Wichita, KS.

PEOs started in the 1980s and have grown quickly in the last few years as the number of state and federal regulations has increased. There are about 700 PEOs in the United States serving more than 100,000 businesses with approximately 2.5 million employees, according to the National Association of Professional Employers (NAPEO), the trade association for the PEO industry.

The primary distinction from other HR service providers is that the PEO actually becomes the legal employer of your workers and thus takes on the accompanying legal liabilities.

For a fee typically ranging from 1.5% to 8% of your payroll, the PEO "co-employs" your workers. (The fee depends on a number of factors, including the number of employees and the average salary level of your employees.) PEOs handle the whole gamut of HR responsibilities, including benefits, payroll, taxes, workers' compensation, and regulatory compliance.

Because they take over most of the headaches of being an employer, PEOs are ideal for small businesses. In fact, most PEOs target companies that have 150 or fewer employees; the average client of a NAPEO member has 17 employees.

Frequently, a PEO arrangement is the only way a small business can offer benefits like health insurance, dental and vision care, life insurance, retirement saving plans like 401(k)s, Section 125 cafeteria plans (flexible spending accounts for healthcare and childcare), job counseling, adoption assistance, and educational benefits. Most small businesses could neither afford nor manage these benefits on their own.