How Common are PEO Agreements?

More than 175,000 small- and mid-size businesses across the U.S. utilize Professional Employer Organizations (PEOs) in some form or another. So, PEO agreements are quite common. There are PEOs in all 50 states and they are a practical resource for companies across industries.

Just one call to NetPEO at (678) 841-7195 can connect you with a highly skilled, qualified dream team to handle nearly any variety of human resources, benefits, and finance tasks. For 20 years, NetPEO has been a leading authority on PEOs. And we’re always happy to share our knowledge with anyone considering partnering with a PEO.

The PEO Agreement

PEO agreements are also known as PEO client service agreements. This is a legal document that details the nature of your partnership with your chosen PEO. It breaks down the co-employer arrangement and the responsibilities of each party. The agreement also lays out which employees are included.

Why businesses sign PEO agreements

Businesses choose PEOs for a few repeatable reasons:

• Administrative relief: Payroll, benefits, and compliance take time and expertise. PEOs reduce that burden.

• Cost management: Pooling employees across clients lets PEOs access better insurance and benefits pricing than many small businesses can get on their own.

• Compliance help: Employment law, payroll taxes, and benefits regulations are complex and state-specific—PEOs provide specialized knowledge and tools.

• Access to HR expertise: Small firms often lack senior HR staff. A PEO can offer HRBP-style support and templates.

• Scaling quickly: Fast-growing startups that don’t want to build an HR department often use PEOs to scale operations faster.

• Risk management: PEOs often include workers’ comp management and safety programs that reduce claims and costs.

The commercial attraction translates into relatively frequent PEO agreements among the right audience: small, growth-oriented firms, or companies operating in risky, highly regulated industries.

How common are PEO agreements — data and market signals (general trends)

Exact numbers can vary depending on the data source and definition, but we can make sensible, conservative observations that reflect long-term trends:

• PEOs have grown steadily over the past two decades as payroll complexity and benefit costs rose and SMBs sought outsourcing options.

• Among U.S. small businesses with fewer than 100 employees, a meaningful minority use PEOs or similar employer-of-record services. Usage increases with firm size — companies with 20–200 employees are more likely to use a PEO than micro-businesses under 10 employees.

• Sector concentration: PEO use is not evenly distributed. Higher adoption is seen in industries with complex labor rules (e.g., construction, manufacturing, healthcare staffing) and service businesses with distributed workforces.

Why the ambiguity? PEOs are sometimes bundled into “HR outsourcing” or “employer-of-record” categories in market reports, and different vendors use different business models (co-employment PEOs, virtual PEOs, global employer-of-record for international hiring). This fragmentation makes a single global percentage hard to state confidently, but the practical takeaway is clear: PEO agreements are common for the businesses that benefit most from them — not universal across all companies.

Who uses PEOs — profile of common adopters

Professional Employer Organizations (PEOs) attract a specific type of business—those that are growing fast, managing HR complexity, or seeking to stay compliant without building a large internal HR department. Many of these businesses prefer to partner with a certified PEO that ensures greater financial reliability and protection for clients.

1. Company Size

The sweet spot for PEO clients is typically 10 to 200 employees.

• Smaller firms (under 10 employees) often manage HR informally, using basic payroll tools and local accountants.

• Larger firms (over 500 employees) tend to bring HR in-house once they reach the scale to justify dedicated teams and systems. In these cases, a PEO offers scalability and flexibility during the transition period.

2. Growth Stage

PEOs are especially popular among startups and small businesses in expansion mode. These companies want to scale their workforce efficiently without building HR infrastructure too early. A PEO allows them to focus on business growth while outsourcing HR, payroll, and compliance functions. Because the employer of record relationship transfers many HR and administrative duties to the PEO, growing firms can concentrate on revenue-generating activities while minimizing tax liabilities and compliance errors.

3. Industry

PEOs serve a diverse range of sectors, but adoption is highest in industries where compliance, payroll, or benefits administration is complex, such as:

• Construction and contracting

• Healthcare staffing

• Technology startups

• Professional services (law, accounting, marketing)

• Retail and franchise operations

In these industries, businesses value the workers compensation coverage and safety management expertise that a PEO offers, reducing administrative burdens and potential exposure to risk.

4. Geographical Spread

Companies operating in multiple U.S. states or planning to expand across state lines often rely on PEOs. Multi-state payroll, tax, and labor law compliance can be challenging, and PEOs bring the expertise to manage it seamlessly. Partnering with a certified PEO adds further assurance since these providers meet IRS standards for handling payroll taxes and compliance accurately.

5. Resource Constraints

Many adopters lack a dedicated HR leader or have a small finance team overwhelmed by payroll and compliance. Partnering with a PEO fills this gap without the overhead of hiring full-time HR staff. With the employer of record model, the PEO becomes legally responsible for many HR-related functions, simplifying tax liabilities and compliance obligations.

6. Desire for Better Benefits

Small and mid-sized businesses that want to offer competitive employee benefits—such as health insurance, 401(k) plans, and dental or vision coverage—turn to PEOs to access large-group plans they couldn’t secure independently. The additional workers compensation coverage and benefit administration support that a PEO offers help these companies attract and retain top talent without straining their budgets.

PEO customers typically value a combination of cost predictability, professional HR support, and smoother compliance.

Co-Employment

One of the things that makes PEOs unique is the co-employment relationship. As co-employer, the PEO shares responsibilities with their client company and assumes risks, rights, and responsibilities of an employer.

This means a PEO pays employment taxes and wages of each agreed-upon employee from its accounts. The PEO also accepts responsibility for collecting, depositing, and reporting state and federal employment taxes.

Related: Does NetPEO Offer PEO Services Or Act As A Broker?

An Overview of the PEO Agreement

Your PEO arrangement should clearly set out your expectations of the PEO as the client company. It should also address what the PEO will need from you and what they can and cannot do as a co-employer on behalf of your company.

Services Provided

Your PEO agreement will describe in detail the services provided to your company.

These can include:

• Performance management
• Recruiting
• Employee administration
• Employee benefits
• 401(k) plans
• Payroll processing
• Workers’ compensation
• Compliance
• Tax administration
• Human resources technologies
• Unemployment

Taxes

As an employer, you are responsible for tax payment and withholding for employees and for filing required paperwork and returns. When you enter into a co-employer relationship with a PEO, there are specific laws and rules, as laid out by the Internal Revenue Service (IRS). Some tax-specific provisions may be laid out in your PEO agreement.

Credit Approval

As co-employers, PEOs may be funding your payroll or other financial obligations. As such, they may require proof of financial solvency or run a credit check.

Payment

Your PEO agreement will also dictate how you will pay your PEO for premiums, fees, payroll, taxes, and other expenses. Typically payments are made via ACH (bank-to-bank), but wiring of funds may also be required.

Costs

As a PEO agreement is a legal document, every part of it is important. However, the section that lays out costs/fees and pricing is particularly critical and of interest.

Some PEOs will charge a flat rate per employee per month or as a percent of payroll. PEOs may charge additional fees for employee termination, payroll delivery, set-up of 401k accounts, international services, or other related expenses.

Fee Increases

If your PEO is ever intending on increasing fees, they will outline the process in your PEO agreement. Generally this will include the amount of notice they will give you if they’re going to raise fees and how much they can raise them.

If any of your former employees obtain COBRA coverage, your PEO may charge a fee for continuation of those former employees on the policy.

Insurance

As a PEO client, you will be required to maintain Employment Practices Liability Insurance (EPLI) in the event an employee files a lawsuit.

Hiring, Reassigning, and Termination

As a co-employer, you will grant your PEO the right to hire, reassign, and/or terminate covered employees in accordance with federal and state employment law.

Often, PEOs will include standardized “drug-free workplace” requirements that allow them to test employees for drug use if they’ve filed a worker’s compensation claim.

Reduction in Force

If your company is forced to conduct significant layoffs or you experience a large workforce reduction, your PEO may require additional fees. Your pricing agreement is based largely on the number of employees, so a considerable reduction in force can expose the PEO to financial and legal liability.

Severing the Relationship

If, for whatever reason, your relationship with your PEO is not working for you, you can leave at any point in time. However, you will be required to give minimum notice as laid out in the PEO agreement.

A PEO may sever their relationship with your company for any number of reasons, but the most common is due to insufficient funds in your accounts when it’s time for payroll or to pay taxes or other expenses.

Related: Is a PEO Required to Have In-Force Current Workers’ Compensation Insurance?

Why Working with a PEO Is Worth It

While your PEO agreement might feel overwhelming or complicated, outsourcing functions like payroll, human resources, and finance tasks can pay off and considerably benefit businesses, according to the U.S. Small Business Administration (SBA).

• Access to better employee benefits at a cost that fits your budget
• Reduction in payroll and accounting costs
• Compliance with local, state, and federal laws, rules, and regulations
• Reliable management of workers’ compensation
• Recruiting and screening highly qualified employee candidates
• Risk management and reduction
• Compliance with the Affordable Care Act (ACA)

All that, plus you gain back your time and ability to focus exactly where you need to — on growing your business.

Related: Does a PEO Handle Staffing Or Employee Leasing?

Talk with NetPEO Today

If you are considering working with a PEO, call NetPEO at (678) 841-7195 or fill out the form. We can answer any of your questions, address any concerns, and learn about your business goals to customize a package to meet your exact needs.

We can explain the PEO relationship and how we match you with a PEO in your area that is the best fit for your business size, industry, and specific outsourcing needs.