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PEO is short for Professional Employer Organization. It is a form of co-employment that enables you to leverage some of the infrastructure of a larger organization.
Okay, but that still likely doesn’t make sense. Let’s break it down.
In a traditional (non PEO) setup, you broker your benefits directly, you set up payroll operations in every state that you operate, have your on Workers Comp policy, etc. When tax time comes around, employees receive a W-2 that has your company’s EIN (Employer Identification Number, the rough equivalent of a Social Security Number for companies) on it.
When you use a PEO, you’re effectively leveraging the PEO’s EIN instead. Employees are paid through the PEO’s EIN (ie. their W-2 will say the PEO’s EIN, not your organization).
This abstraction enables you to utilize the PEO’s infrastructure, which is often much more robust than the average startup.
It’s that robust infrastructure that makes it worth evaluating.
At a high level, a PEO helps you with:
| Area | Description |
|---|---|
| Benefits Programs | Offering a wider array of benefits & caliber of programs. Likely (but not guaranteed) better renewal rates. |
| Payroll Operations and Taxes (Multi-state) | As more companies (especially software driven) move towards distributed, a PEO reduces some (not all) of the burdens associated with multi-state payroll and tax remittances. |
| Compliance and Administration (Multi-state) | With benefits, payroll and taxes, in addition to general compliance activities (ex. EEO-1 filings), a PEO may manage many things on your behalf or assist heavily in their completion. In addition, they keep you aware of compliance considerations (how to manage a leave) and areas of risk (classification of employees). |
| Advisory Services | Depending on the PEO, they likely provide an array of ancillary services (ex. HRBP support, compensation advisory, training programs, etc) in the gap before you are able to hire a dedicated headcount. |
| Out-of-the-box Software & Partner Integrations | With a PEO, there’s a lot of pre-built infrastructure you can leverage. (Some PEOs use fairly dated software while others are more modern. Overall, you may be able to start offering things with less complex implementations). |
All of this infrastructure enables you to operate a more lean People team while operating with some of the setup of a much larger company.
Deciding to go with a PEO isn’t without it’s tradeoffs.
| Area | Description |
|---|---|
| Ability to control | Since you’re utilizing the PEOs infrastructure, you often need to play by the PEOs rules. (Ex. when you run payroll, how terminations are processed, what software you use). |
| Explaining it to employees | At first, it can be a pretty difficult concept for employees to grasp. And it can cause some confusion at W-2 time, for leases and mortgages, etc. |
| Cost Management | Depending on the PEO, the platform cost can be fairly expensive (especially compared to the cost of a tool like Gusto). It’s important to evaluate holistically what |
| Unwinding from a PEO | Taking things ‘in house’ involves a significant amount of work. And some PEOs can be less than helpful navigating that process. It also means hiring in people (full time or fractional) to cover what the PEO had been doing. |