PEOs Explained: Should Your Business Use One? (Pros & Cons)

The way businesses manage HR is evolving. Compliance is getting more complex. Competition for talent is fiercer than ever. Companies need smarter, more cost-effective ways to manage payroll, benefits, and hiring. Enter PEOs (Professional Employer Organizations).

PEOs help businesses outsource essential HR functions—reducing overhead while ensuring compliance and efficiency. But are they the right choice for your business? Let’s break it down.

Key Takeaways

• A Co-Employment Model for HR Outsourcing: A Professional Employer Organization (PEO) is an HR partner that enters into a co-employment relationship with a business. The PEO handles administrative HR tasks like payroll, benefits, and compliance, while the client company retains control over its employees’ daily work and core operations.
• Provides Access to Enterprise-Level Benefits and Compliance: The primary advantages of using a PEO are gaining stronger legal and regulatory compliance and being able to offer employees access to more competitive, enterprise-level benefits (like health insurance and retirement plans) than a small or mid-sized business could typically afford on its own.
• Best Suited for SMBs and Startups with an Existing Legal Entity: PEOs are most beneficial for small and mid-sized businesses (SMBs) and startups that lack a dedicated in-house HR team but need expert support to scale. They are generally used by companies that already have a legal entity established in the location where they are hiring.
• Crucially Different from an Employer of Record (EOR): It is important to understand that a PEO is not the same as an Employer of Record (EOR). A PEO is a co-employer, sharing legal responsibility with the client company. An EOR, in contrast, becomes the full legal employer of the staff and is the better choice for companies hiring internationally in a country where they do not have a legal entity.

What Is a PEO?

A Professional Employer Organization (PEO) is an outsourced HR provider that helps businesses manage payroll, benefits, compliance, and risk. Unlike a traditional HR outsourcing service, a PEO enters a co-employment relationship with your company, meaning it shares employer responsibilities while you retain operational control.

How Does a PEO Work?

• Your employees remain under your management.
• The PEO handles HR administration—payroll, tax filings, and benefits.
• The PEO files payroll taxes under its own tax ID.
• The business avoids legal and compliance headaches related to labor laws.
• Employees gain access to better benefits at lower costs through the PEO’s group plans.

By leveraging a PEO, small and mid-sized businesses (SMBs) gain enterprise-level HR capabilities without the expense of an in-house team.

Why Do Businesses Use PEOs?

Companies turn to PEOs for one simple reason: efficiency. Managing HR in-house takes time, expertise, and resources. A PEO offloads this burden so businesses can focus on growth.

Common Reasons Businesses Choose a PEO

• Scaling Quickly: Startups and growing businesses need HR support without hiring full-time staff.
• Reducing Compliance Risks: Labor laws change constantly; PEOs ensure compliance.
• Cutting Costs: PEOs help companies save on payroll, benefits, and administrative overhead.
• Hiring Internationally: Expanding to new markets without establishing a legal entity.
• Improving Employee Benefits: Access to better insurance, retirement plans, and perks than small businesses can typically offer.

For businesses struggling with HR complexities, a PEO removes friction and improves workforce management.

Pros of Using a PEO

PEOs aren’t just about compliance—they’re about unlocking growth opportunities. Here’s how they benefit businesses:

1. Lower HR Costs

HR departments are costly, encompassing salaries, software, and training. A PEO provides HR expertise at a fraction of the cost of an in-house team. Notably, the PEO industry’s 208,000 clients represent 17% of all employers with 10 to 99 employees.

2. Stronger Compliance & Legal Protection

Navigating payroll taxes, labor laws, and benefits regulations is complex and errors can be costly. PEOs ensure adherence to federal, state, and international laws, reducing liability risks. Businesses in a PEO arrangement grow 7-9% faster, have 10-14% lower turnover, and are 50% less likely to go out of business.

3. Competitive Employee Benefits

Large corporations attract talent with superior benefits. Small businesses often struggle to match these offerings. PEOs aggregate multiple businesses under one plan, providing affordable healthcare, retirement options, and perks typically reserved for large enterprises. The PEO industry’s 4.5 million worksite employees were paid $305 billion in 2022. 

4. Simplified Payroll & Tax Filing

Payroll errors lead to fines and frustrated employees. PEOs automate payroll, file taxes, and ensure accuracy, so businesses stay compliant and employees get paid on time.

5. Faster Hiring & Recruitment Support

Some PEOs offer recruitment assistance—helping businesses source, onboard, and retain top talent without the hassle.

6. Access to HR Technology

PEOs provide cloud-based HR software for payroll, benefits administration, and employee self-service—streamlining workforce management.

For many businesses, these advantages make a PEO an obvious choice.

Cons of Using a PEO

PEOs aren’t perfect. Before signing up, consider these potential drawbacks:

1. Loss of Some Control

Since the PEO handles payroll, benefits, and compliance, businesses must follow the PEO’s processes—sometimes limiting customization.

2. Standardized HR Policies

PEOs offer predefined HR policies and benefits packages, which may not fit companies with highly specific HR needs.

3. Additional Costs

While PEOs save money compared to in-house HR, pricing varies. Some PEOs charge per employee, while others take a percentage of payroll. Businesses must evaluate whether the cost aligns with their needs.

4. Communication Gaps

Working with a PEO adds an extra layer of communication between employers and employees. Delays can happen when resolving HR or payroll concerns.

For businesses that need full control over HR policies, a PEO might not be the best fit.

Who Should Use a PEO?

PEOs work well for:

• Small and Medium Businesses (SMBs) – Companies without an in-house HR team.
• Startups & Scale-Ups – Businesses looking to grow fast while staying compliant.
• International Employers – Companies hiring in new markets without a local entity.
• Businesses Seeking Better Benefits – Employers wanting to attract talent with strong perks.

PEO vs. Employer of Record (EoR): What’s the Difference?

Companies hiring internationally often consider PEOs and EoRs, but they serve different purposes.

Feature	PEO	EoR
Employment Model	Co-employment	Full employment under the EoR
Who Handles Compliance?	Shared responsibility	EoR assumes full legal liability
Payroll & Benefits	Managed by PEO	Fully handled by EoR
Best For	Businesses with legal entities	Companies hiring in new markets without an entity

For businesses expanding overseas, an EoR is often a better fit than a PEO.

How to Choose the Right PEO

If a PEO sounds right for your business, here’s how to pick the best one:

1. Define Your Needs – Payroll, benefits, compliance, or full HR outsourcing?
2. Compare Pricing Models – Flat fee per employee vs. percentage of payroll.
3. Check Industry Expertise – Does the PEO serve businesses like yours?
4. Review HR Technology – Ensure the PEO offers modern HR tools and automation.
5. Assess Flexibility – Will the PEO scale as your business grows?
6. Understand Contract Terms – Look for transparent agreements with easy exit options.

Choosing the right PEO can transform workforce management and drive business growth.

Should You Use a PEO?

A PEO can be a game-changer for businesses needing expert HR support, cost savings, and compliance assurance. It’s especially valuable for SMEs, startups, and international companies expanding into new markets.

But it’s not for everyone. Large enterprises with strong HR teams may not need a PEO, and businesses seeking full HR control might prefer in-house management or an EoR.

For companies considering PEOs or offshore staffing solutions, understanding the real costs of offshoring and workforce management is key. 

What’s Next?

Considering a global PEO? Looking for end-to-end staffing solutions? Penbrothers specializes in helping businesses hire and manage offshore teams seamlessly—without the legal complexities.

Want to explore your options? Let’s talk.

Frequently Asked Questions