A professional employer organization, or "PEO", is an entity that provides a spectrum of administrative services to businesses that are too small or just don't want to do it themselves. These services include payroll processing, workers' compensation insurance, employee benefits administration and human resources services.

They are able to do what they do via a process called "employee leasing". Although it is a strange word (how do you lease a human being?), the concept is really quite simple. If you use a PEO, then your employees will technically work for the. They then "leases" the employee back to the original company. This allows the original employer to take advantage of the skills of its employees without the hassles of providing the required administrative services to those employees.

A company that hires a PEO can expect to pay a fee for its services up to 10%. The PEO fee does not include employee expenses such as the cost of unemployment insurance. However, despite the fees charged, this can actually SAVE a company money.

A PEO purchases health insurance not just for your company - it purchases health insurance for ALL of the employees of ALL of its clients. Remember - your employees no longer work for you, but instead work for the PEO. Thus, the PEO can purchase group health insurance based on a much larger number of employees than are in just your company alone. This allows you to get a better rate on insurance, with those cost savings being shared by the PEO's client companies (exclusive of the service fees).

Another way a PEO can save you money is by freeing up time that you would have to spend on administrative tasks, or freeing up resources that would be tied up having a person on your staff perform those tasks. Administration of payroll, insurance, and other human resources-related items is a terrible burden on the typical small business. Peos make it easy.

Another benefit of using a PEO is that it may be able to provide better benefits to your employees than you would on your own. This will help you attract higher quality employees. A typical employee won't care that it's not your signature on his check. Better benefits = better employees. Having a PEO take care of the dirty work might even let you offer higher salaries.

When hiring a PEO, do your homework. Because of the nature of the business, it is ripe for con artists, and there have definitely been many fake PEOs created over the years. According to Fraud Digest, in 2006, there were criminal prosecutions of at least 15 PEOs. The typical con is to charge a client company for taxes and payments, but then use the money for something other than paying the client's bills. So it is a good idea to research a PEO before hiring. Find out how long the company has been in business, and ask for referrals.

A professional employer organization can make life much easier for business owners. It can save you money and let you concentrate on what's really important - running your business.