This past week, while giving my new health coverage information to a medical provider, I mentioned that I’d moved to the professional employer organization industry. The provider, who was in the office getting files for the next patient, looked up at me curiously. “What is it, exactly, that your business does?”

The National Association of Professional Employer Organizations (NAPEO) defines a PEO as a business that:

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.

The critical difference between a PEO and the traditional understanding of a firm that does outsourced human resources services is the co-employment concept.

In traditional human resources outsourcing, the client company is still considered the employer. Although the outsourcing firm takes over (sometimes significant) administrative and consultative duties, the client is the business that bears the liabilities and risks associated with being an employer. It is the “group” for purposes of benefits; it is the entity responsible for compliance with employment-related statutes and regulations; it retains final authority for all human resources-related activities and actions.

PEOs, on the other hand, actually employ the client company’s employees – including, in many cases, the principals of the client company. Assuming the duties (and rights) of the employer means the PEO assumes a substantial portion of the risk and liability associated with being an employer. This is the client consideration in a PEO service agreement: the client is no longer able to overrule the PEO in employment-related decisions, but the client also no longer bears sole risk and liability for those decisions. (In practical application the client retains considerable employment-related authority as a matter of good customer service.)

To give an illustrative example, the W-2s for employees whose companies utilize a human resources outsourcing firm bear the name of the client company. The W-2s for employees of the PEO where I am employed bear my company’s name instead.

The PEO industry has been in existence for several decades, but it is considered a “newcomer” in the business world. At the moment, there is not much in the way of regulation, although NAPEO supports voluntary regulation and standards of ethics and responsibility. Technically, PEO organizations and human resources outsourcing organizations are competitors, although PEOs especially tend to set themselves apart from outsourcing organizations when establishing a corporate identity. In general, PEO services are more expensive than traditional outsourcing, but most clients consider the extra expense more than worth the savings in employer liability.

My employer, which is a NAPEO member, positions itself based on a very specific customer service model. Other PEOs market themselves using price, value and marketing factors familiar to any business organization. (Some even concentrate on specific niche markets.) The industry has been growing, especially as human resources becomes a more and more complex field. While the PEO industry may still be regarded as a “newcomer” in the business world, I feel certain it is a concept that is here to stay, especially as the number of small businesses grows. This is the biggest reason I was willing to accept a position in the industry.