Mar 26, 2024

Understanding the Roles and Responsibilities of a Professional Employer Organization: A Complete PEO Guide

In this blog, we will understand the role and responsibilities of a professional employer organization (PEO).

Understanding the Roles and Responsibilities of a Professional Employer Organization: A Complete PEO Guide


In today's business landscape, Human Resources (HR) teams are confronted with increasingly complex challenges, ranging from intricate global payroll processing to ever-changing labor laws and the need to remain competitive in offering employee benefits. Many organizations turn to a Professional Employer Organization (PEO) for assistance in streamlining payroll operations, ensuring compliance, and enhancing their employee benefits.

PEOs offer substantial value to their clients across three key areas:

  • Employee Attraction, Motivation, and Retention: PEOs assist in attracting, motivating, and retaining employees by offering competitive benefits and efficient HR management.
  • Core Business Focus: By entrusting HR matters to global PEOs, organizations can concentrate on their core business activities while experts handle HR tasks.
  • Cost Efficiency: Engaging a global PEO often leads to cost savings, with research suggesting an estimated 27.2% annual return on investment (ROI) based solely on cost reductions. This figure is conservative and does not account for additional benefits in areas such as compliance and employee satisfaction.

According to a report by the NAPEO, using a global PEO results in significant cost savings. The research indicated that a conservative estimate of the expected ROI for PEO clients, based on cost savings alone, is 27.2% per year. The estimate is almost certainly an underestimate and is based only on cost savings (it does not incorporate the important benefits noted above in areas 1 and 2) in the following five HR-related areas:

  • HR personnel costs
  • Health benefits
  • Workers’ compensation
  • Unemployment insurance (UI)
  • Other external expenditures in areas related directly to HR services (payroll services, benefits, etc.)

It also stated that companies that manage employee benefits without a PEO overspend by $4,500 USD per employee per year.

To effectively leverage the advantages of a global PEO, companies first have to understand how responsibilities are divided between the PEO and their company. This guide walks you through where a PEO’s role begins and ends, empowering you to maintain control over core business operations and make strategic decisions while benefiting from the PEO’s expertise and support.

What is a Professional Employer Organization (PEO)?

A professional employer organization (PEO) is a strategic partner hired by a company to handle various HR tasks such as payroll, tax filing, and benefits administration. When a company engages a global PEO, they enter into a co-employment relationship, which means the PEO assumes partial legal responsibility for the employees. Employee wages are reported under the PEO’s federal employer identification number (EIN), not the client company’s.

illustration of how a PEO engagement works between the employer and employee.

To use a global PEO, you must own a local legal entity in the country or region of operation and may have to meet a minimum headcount. A global PEO can help you with state registration if needed.

With a global PEO, you can:

  • Access exclusive benefits: Through a global PEO, you gain access to employee benefits typically reserved for Fortune 500 companies. This means companies of any size can offer employees top-tier health insurance, retirement plans, and perks.
  • Improve local legal compliance: PEOs employ local legal experts to ensure your company complies with country and state laws. They can manage safety training programs, assist with inspections and audits, and handle liability insurance to reduce risk.
  • Increase HR efficiency: A global PEO takes over time-consuming and repetitive administrative tasks involved in payroll processing, benefits administration, and HR compliance, allowing businesses to focus their resources on strategic initiatives, employee engagement, and talent development.
  • Cut costs: By pooling together a large number of employees from various client companies, global PEOs can leverage economies of scale to offer cost-effective HR solutions. They often negotiate better rates for employee benefits, insurance premiums, and other services, resulting in potential cost savings for the client company.

When to consider using a Global PEO

A company may consider engaging a global PEO for a variety of reasons. Here are some of the most common drivers:

  • Pursuing business expansion: When a company consider global expansion into a new region, they often rely on a PEO with expertise in the target location to ensure compliance with local labor laws, tax regulations, and employment practices.
  • Experiencing rapid growth: Companies experiencing rapid growth may struggle to keep up with the increasing demands of HR functions. A PEO can provide scalable HR solutions to accommodate growth by minimizing their administrative workload.
  • Facing limited HR resources: Small businesses or startups often have limited resources and may lack a dedicated HR department. By engaging a PEO, these companies can access professional HR services and expertise without investing in building an internal HR infrastructure.
  • Attracting and retaining talent: Attracting and retaining talented employees often requires offering competitive benefit packages. By joining a PEO, companies gain access to a larger employee base, allowing them to offer more comprehensive and cost-effective benefits to attract top talent.
  • Working in high-risk industries: Some industries or occupations carry higher levels of risk, such as construction or healthcare. PEOs assist companies in these sectors by managing workers’ compensation, implementing safety programs and HR policies, and providing compliance support.

Responsibilities of the PEO

Compliance and risk management

PEOs have teams of legal experts who can help you navigate sensitive employment issues and mitigate risk. They stay up to date on employment laws and regulations to create and maintain compliant documentation and processes for your team.

They are typically responsible for setting up and managing local payroll tax accounts, complying with state and federal HR laws, and managing claims support for unemployment, workers’ compensation, workplace harassment, and employment practices liability insurance (EPLI).

Any workers’ compensation and insurance claims will go through the process set by your PEO, who will manage all communication and paperwork required by the employee and insurance company.

HR expertise

As part of their HR responsibilities, a global PEO will help your team streamline worker onboarding, configure paid time off (PTO) policies, navigate employee claims, and collect compliance documentation in line with federal, state, and local laws.

Some international peos, like Wisemonk, also include support for employee training, employee relations, Family Medical Leave Act (FMLA) management, employee handbooks, and job descriptions.

Payroll and tax administration

PEOs typically handle payroll processing, deductions, and reporting on behalf of a company, as well as delivering online pay stubs and invoices. The PEO will calculate, file, and pay federal and state payroll taxes owed by your company on your behalf.

Full-service employee benefits administration

A global PEO allows you to access big-company benefits for less than you’re paying today while ensuring compliance with federal, state, and local benefit laws.

PEOs can administer mandatory and voluntary benefits packages per local requirements, including health insurance such as Medicare, retirement savings plans like a 401(k), unemployment insurance, and more.

They typically manage benefits enrolment, employee education, and claims processing, and liaise with insurance providers on your behalf. PEOs can also help US employers navigate COBRA administration as well as the complex employer reporting requirements included under the Affordable Care Act (ACA) regulations.

Services not provided by a PEO

PEOs typically do not handle responsibilities involving executive action, day-to-day employee management, or global expansion.

Strategic decision-making

The client company retains autonomy in making strategic decisions that impact the direction and growth of the business.

Employee supervision and performance management

The client company remains responsible for the day-to-day supervision of employees, setting performance expectations, and conducting performance evaluations.

Core business operations

PEOs focus primarily on HR functions, while the client company manages core business operations such as production, marketing, sales, and service delivery.

Company culture and employee engagement

The client company is responsible for its culture, promoting employee engagement, and building a strong employer brand.

Financial and accounting matters

PEOs handle payroll processing and related tax calculations, but broader financial and accounting functions remain the responsibility of the client company.

International expansion

PEOs are used for local expertise. Companies seeking support for international hiring, payroll, and HR should consider using a global-first HR platform like Wisemonk.

Wisemonk’s Employer of Record (EOR) model is particularly beneficial for companies planning international expansion, as it enables them to legally engage employees in another country or region without establishing a foreign subsidiary.

If your company already has legal entities in other countries, you can use Wisemonk’s Global Payroll software to manage employee payments with a single click. You can also use Wisemonk’s equipment solution to equip your remote employees with the latest technology and manage them on a single dashboard.

Responsibilities of the Employer

At the start of a co-employment arrangement, the client company and PEO sign a client service agreement (CSA) outlining each party’s responsibilities. As the client company, you will retain management control of your workforce while using a PEO. This includes:

  • Employee work schedules
  • Employees’ scope of work
  • Day-to-day employee supervision
  • Performance management
  • Strategic decisions
  • Core business operations
  • Maintaining company culture
  • Administrative fees

Does a PEO replace your HR department?

This depends on your team's needs. Founders often find themselves at a crossroads where they can no longer manage HR, payroll, and benefits administration themselves. In this case, they either hire an in-house HR team or completely outsource the responsibilities to a PEO to access better benefits and local expertise without incurring the costs of hiring an entire HR team.

For companies with an established in-house HR department, the PEO works collaboratively with your existing team to bolster HR functions and ensure you meet full regulatory compliance, freeing your global workforce to focus on strategic matters that require deep knowledge of your company and its growth ambitions.

Either way, the employee experience is significantly improved due to streamlined HR processes, simpler onboarding, and access to competitive benefits plans.

PEOs vs. other HR service providers

Some PEO responsibilities overlap with those of other HR service providers, complicating the decision-making process. Here’s a quick overview of how they compare.

Employee leasing companies

The main difference between a PEO and an employee leasing company (ELC) is their relationship with the employees.

Employee leasing companies provide a company with new workers, usually for temporary projects. After the leased employees complete the work for the company, they return to the ELC to find another short-term job.

A client company hires a PEO to handle HR tasks. Once a PEO and client company terminate their relationship, the employees stay with the client company, and their ties with the PEO cease. PEOs do not provide the company with a supply of new employees.

Temporary staffing services

Like an ELC, temporary staffing services provide client companies with additional staff. These organizations recruit workers for companies experiencing seasonal shortages, temporary skill shortages, or employee absenteeism.

Administrative services outsourcing (ASO)

Under an ASO arrangement, the client company retains full employer status and must report payroll taxes using its own employer identification number. Companies can also maintain their existing benefits and workers’ compensation providers with an ASO.

Human resources outsourcing (HRO)

With an HRO, the client company retains full administrative employer status. However, unlike PEOs and ASOs, HROs provide specific HR-related tasks based on their experience and specialty. HROs are popular with larger companies that have developed internal departments and only require specific HR expertise.

Employer of record (EOR)

Like a PEO, an employer of record takes care of a company’s HR tasks while the company manages their workers’ day-to-day activities, schedules, and workloads. However, the EOR is the legal employer of the company’s workforce, which means they assume complete responsibility for the company’s full-time employees. Read more on how an EOR differs from a PEO in this comprehensive blog.

Payroll service providers (PSP)

Traditional payroll service providers only provide support for payroll and tax-related processes, not HR duties outside their specific scope of practice.

Simplify workforce management with Wisemonk

With Wisemonk, US companies are no longer restricted to US-centric platforms that lack support for global processes. Now, you can streamline HR and run instant, accurate payroll for US teams and beyond, all on one platform.

With Wisemonk, you can reduce duplicate costs, consolidate your tech stack, and end data errors while providing a user-friendly experience for your team.

Learn more about Wisemonk’s PEO / EOR offerings or schedule a 30-minute demo with an expert to get a closer look at the platform.

International PEO: FAQs

What is the Role of an International PEO Provider?

Understanding the primary responsibilities of an international PEO provider is crucial. Typically, PEOs handle HR-related tasks such as payroll, benefits administration, tax compliance, and employment contracts. Clarify what specific services an international PEO offers to ensure they align with your needs.

How Does Co-Employment Work with an International PEO?

Companies often have questions about co-employment, a key aspect of partnering with a PEO. It's important to understand how co-employment affects your relationship with employees and what legal responsibilities the PEO assumes. Discuss the implications and benefits of this arrangement.

What Global Regions Does the PEO Cover?

Ensure that the international PEO provider can support your global expansion plans by asking about the regions they operate in. Different PEOs may have varying levels of coverage and expertise in specific countries or continents. Verify that their global reach matches your business goals.

How Does Pricing and Billing Work for International PEO Services?

Pricing structures can vary among PEO providers. Inquire about their fee structure, including setup costs, ongoing fees, and any additional charges. Understanding the cost implications of partnering with an international PEO is essential for budget planning.

Can the PEO Assist with Compliance in Different Legal Jurisdictions?

Compliance with local labor laws, tax regulations, and employment practices is critical when operating in multiple countries. Ask the PEO how they ensure compliance in various jurisdictions and whether they provide legal expertise or guidance to navigate complex international regulations.