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What is a PEO?


Professional employer organizations (PEOs) enable clients to cost-effectively outsource the management of human resources, employee benefits, payroll and workers' compensation. PEO clients focus on their core competencies to maintain and grow their bottom line.

Businesses today need help managing increasingly complex employee related matters such as health benefits, workers' compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. They contract with a PEO to assume these responsibilities and provide expertise in human resources management. This allows the PEO client to concentrate on the operational and revenue-producing side of its operations.

Integrated Services

A PEO provides integrated services to effectively manage critical human resource responsibilities and employer risks for clients. A PEO delivers these services by establishing and maintaining an employer relationship with the employees at the client's worksite and by contractually assuming certain employer rights, responsibilities, and risk.

Businesses across America have discovered the incredible value of PEOs because they provide:

  • Relief from the burden of employment administration.
  • A wide range of personnel management solutions through a team of professionals.
  • Improved employment practices, compliance and risk management to reduce liabilities.
  • Access to a comprehensive employee benefits package, allowing clients to be competitive in the labor market.
  • Assistance to improve productivity and profitability.

Explaning the Co-Employer Process

The PEO relationship involves a contractual allocation and sharing of employer responsibilities between the PEO and the client; this shared employment relationship is called co-employment.

When evaluating the employer role of either the PEO or the client, the facts and circumstances of each employer obligation should be examined separately, since neither party alone is responsible for performing all of the obligations of employment.
Each party will be solely responsible for certain obligations of employment, while both parties will share responsibility for other obligations.
When the facts and circumstances of a PEO arrangement are examined appropriately, both the PEO and the client will be found to be an employer for some purposes, but neither party will be found to be "the" employer for all purposes.

Both the PEO and the client company establish common law employment relationships with worksite employees. Each entity has a right to independently decide whether to hire or discharge an employee. Each entity has a right to direct and control worksite employees — the PEO directs and controls worksite employees in matters involving human resource management and compliance with employment laws, and the client company directs and controls worksite employees in manufacturing, production, and delivery of its products and services.

The client company provides worksite employees with the tools, instrumentalities, and place of work. A PEO can assist in ensuring that worksite employees are provided with a worksite that is safe, conducive to productivity, and operated in compliance with employment laws and regulations. In addition, the PEO provides worksite employees with workers' compensation insurance, unemployment insurance and a broad range of employee benefits programs.

PEOs create an employment relationship with their workers. This relationship exists in fact, not just in form. PEOs can manage the risks attendant to the personnel functions that they perform only if they establish an employment relationship with their worksite employees. Unless a PEO has a right to direct and control worksite employees, as well as a right to hire, supervise, discipline, and discharge these employees, the PEO will merely assume liability without having a means to manage that liability.

PEOs manage their employment liability exposure by monitoring and requiring compliance with employment laws, developing policies and procedures that apply to worksite employees, supervising and disciplining worksite employees, exercising discretion related to hiring new employees, and ultimately terminating worksite employees who do not comply with requirements established by the PEO.


NAPEO, the National Association of Professional Employer Organizations, is the largest trade association for professional employer organizations nationwide. NAPEO has nearly 400 PEO members operating in all 50 states, representing approximately 90 percent of the revenues of the $61 billion industry. NAPEO's members range in size from start-up PEOs to large, publicly held companies with years of success in the industry. The Source for PEO Education®, NAPEO provides its members with the very best educational services and business resources including conferences, seminars, a monthly magazine, online services, marketing resources, PR support and more. The Voice of the PEO Industry®, NAPEO also embraces a commitment to furthering and protecting the interests of its PEO members at all levels of government through proactive lobbying efforts and timely communications on regulatory and legislative issues of interest.

For more information about NAPEO or the PEO industry, please spend some time on this website or contact NAPEO headquarters at (703) 836-0466.