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 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.