United States: Professional Employer Organizations – What’s The Buzz?

Professional Employer Organizations, also known as "PEOs," are becoming more popular every year.  PEOs service businesses with only one employee and up to hundreds, and in almost any industry imaginable.  They also recently obtained long-awaited federal recognition with President Obama's signing of the Small Business Efficiency Act.  This law, among other things, provides for IRS certification of eligible PEOs, thereby validating the industry and giving its customers new confidence in the PEO relationship.  It is curious, however, that many business owners are unaware of or misunderstand this valuable resource.  In this article, we will take a quick look at the way PEOs operate, the services they offer and their potential benefits.  In later articles we will examine the principle terms of the client service agreements used by PEOs, the details of the Small Business Efficiency Act, and other topics of concern to PEOs and their clients.

A typical client of a PEO is a small or medium sized business which chooses to outsource various human resource functions.  These functions include payroll, human resources administration, workers' compensation, unemployment and other benefits administration, tax administration and regulatory compliance.  The PEO enters into a contract with the client pursuant to which they share employer responsibilities for the client's worksite employees.  The PEO and the client become co-employers of those worksite employees, and the respective rights and obligations of the PEO and the client are set forth in their agreement.  The PEO is not a staffing service; its fundamental role is to provide human resource and benefits functions, not to provide workers.  As for compensation, the PEO usually is paid either a percentage of payroll or on a per-employee basis.

PEOs can be enormously helpful to a small or medium sized business owner.  Start with the simple requirement of administering payroll.  As any business owner knows, this is not as simple as merely calculating pay and arranging for checks or direct deposits to be made.  There is additional work which includes, at a minimum, tracking vacation and sick leave, withholding and remitting federal, state and local taxes, issuing year end W2s and W3s, and handling all other federal, state and local reporting and compliance.  Relieving the business owner of these responsibilities will be a huge help, but it is only the beginning.

Management of workers' compensation and unemployment claims is a critical PEO function.  Procuring workers' compensation insurance, claims review and administration, and billing functions all drain valuable management resources.  In addition, improperly managing claims can have a profound effect on a company's bottom line.  Having a PEO as a co-employer to undertake these responsibilities often makes good business sense.

Another essential benefit of using a PEO is to take advantage of the purchasing power it acquires by aggregating all of its clients' worksite employees to obtain health insurance, 401(k) and other employee benefits.  The rates and terms that a PEO can command are often far more beneficial than those that can be obtained by a small employer.  The client can avoid committing valuable resources searching for and investigating medical and dental plans, as well as administering numerous other employee benefits plans.

PEOs also provide human resources services and often provide consultation services in the areas of recruiting, interviewing, hiring and firing, performance reviews, and preparation of employment policies and handbooks.  Finally, federal, state and local compliance requirements are complex and constantly changing, as evidenced by the Affordable Care Act.  Without a dedicated HR department, it is risky for an employer to attempt to keep up with the changes, and also requires time and energy to meet compliance requirements.

One misconception about PEOs is that the employer will lose control over its employees.  The reality, however, is that the PEO issues paychecks and administers benefits under its own name, but the day-to-day management of the worksite employees generally is left to the worksite employer.  There are times when a PEO gets directly involved in the hiring, discipline or termination of worksite employees, but typically that occurs after the employer requests such assistance from the PEO.  Sometimes there are concerns about the reliability and trustworthiness of the PEO to pay the worksite employees and remit taxes to the authorities.  The employer transfers these funds to the PEO with the expectation they will be paid, and there have been instances of PEOs failing to honor their obligations.  But many PEOs are accredited by ESAC –the Employer Services Assurance Corporation – which serves as a financial backstop to PEOs much the same way that the FDIC protects bank depositors.  Also, the newly enacted Small Business Efficiency Act protects employers who engage an IRS certified PEO by absolving them of liability for payroll taxes if their PEO fails to remit.

PEOs may not be suitable for every business.  But given their benefits, they certainly deserve serious consideration because they free up more time for a business owner to concentrate on the business's core strengths. Stay tuned for more on this rapidly expanding business development.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions