What does PEO stand for? This is a very honest question that we get all the time. PEO is an acronym that is thrown around in business conversations quite often. You are not alone if you don’t know what it means. The thing is, even after we define the acronym it doesn’t necessarily help you understand what a PEO does, so we will help with that too.
PEO stands for Professional Employer Organization
Professional Employer Organization is not exactly a self-explanatory phrase. Let’s go through what a PEO does from a general perspective, and variations of PEO.
What does a PEO Do?
A PEO is a B2B service company that allows its clients to outsource a range of employee management tasks. Tasks include employee benefits, payroll/worker’s comp, recruiting, risk management, and/or training. A PEO will typically charge a service fee based on a percentage of the employee’s total compensation. This can happen in two different ways:
1. Co-Employment or Joint Employment
One option for engaging a PEO is by joint employment. In this relationship, the PEO actually becomes the employer of record of their client’s employees for tax and benefits purposes. The client company still retains all control of the day to day activities of their employees, but all employee administrative tasks including payroll, benefits, etc. are handled by the PEO.
The benefit of joint employment is greatly reduced rates on all HR type of expenses due to client pooling. Essentially, the PEO takes all the employees of their clients and pools them to help drive down rates on things like insurance, payroll, training, risk, etc. The pooling method is particularly important when getting better workers compensation insurance rates.
2. An ASO or Administrative Services Organization
An ASO is a service firm that could fall under the PEO umbrella but may be more of a parallel service. It is worth mentioning because they also are firms that provide outsourced employee management services, they just don’t practice joint employment. A company that engages with an ASO will still remain the employer of record for their employees. The ASO just helps in whatever management tasks it has been engaged to serve.
An ASO can still provide value by saving companies tons of time on these types of tasks and still has the ability to get better rates in things like benefits, insurances, payroll, etc.
As previously mentioned, PEO is a broad term used in many ways. We wanted to outline the various types of service providers that could fit into the PEO definition. Therefore, you can clarify in the future which type of PEO your colleague is referring to.
1. Joint Employment PEO
2. ASO or Administrative Services Organization
3. Umbrella Companies (UK)
In the UK they are particularly sensitive to contractors and consultants being able to avoid taxes that normal employees wouldn’t have to pay. Since the IR35 legislation has been put in place, many of these contractors joined an umbrella company to try and decrease their tax risk and compliance issues.
4. Pass-Through Agencies
These agencies act as the employer of record for independent contractors but do not find work for them. They help the contractors manage their tax, insurance, pay, etc. to save time.
5. Financial Intermediaries
This type of employer of record primarily has come about because of the home healthcare workers for disabled persons. This intermediary employer of record is needed so neither the patient/homeowner or the government agency providing funding needs to act as employer for these types of workers.
5. International PEO
International PEO is a way in which companies can quickly hire full-time employees internationally without having to create or maintain a foreign subsidiary. International PEOs serve as the employer of record in the desired country. Furthermore, they manage employees contracts, payroll, benefits, compliance, etc. with a local level of expertise. Usually, companies utilize International PEO to help reduce liability, reduce time to hire (setting up a subsidiary can take months) and protect IP.
We hope you found this article informing! Velocity Global’s International PEO solutions has helped hundreds of organizations expand their global presence in over 185 countries—and we can do the same for your organization. Whether you’re hiring on employee in Germany or considering opening an office in Vietnam, International PEO can get you global in as few as 48 hours. Ready to take the first step? Let’s get started.