PEO Glossary: Every Term Explained, Sourced
A glossary of professional employer organization terms, written for the buyer rather than the sales team. Each definition is plain language, points at the fuller explanation where one exists, and avoids the marketing doublespeak that makes this industry hard to compare.
A
Administrative fee. The provider's actual charge for the service, before insurance and statutory pass-throughs are bundled in. The single number you need separated from every quote. How to force one out of a sales team.
ASO (administrative services organization). A vendor that administers HR and payroll while you remain the sole employer, with your own benefit plans, broker and unemployment account. PEO vs ASO.
C
Certified PEO (CPEO). A PEO that has met IRS requirements, including bonding and annual independent financial audits, and appears on the IRS public list. It changes who is liable for federal payroll taxes and what happens to your wage bases on a mid-year move. The full difference.
Client service agreement. The contract between you and the PEO. Where exit fees, notice periods, indemnification and the split of responsibilities actually live. Read it before you believe the brochure.
Co-employment. A contractual split of employer responsibilities between you and the PEO. Both of you are employers of the same people, for different purposes. The plain-language version.
E
EOR (employer of record). A company that becomes the sole legal employer on its own entity, used when you hire somewhere you have no legal entity. PEO vs EOR.
ESAC (Employer Services Assurance Corporation). A voluntary accreditation body that reviews a PEO's financial statements, payroll tax payments and benefits funding. Distinct from — and complementary to — IRS certification.
Exit fee. What leaving a PEO costs beyond the notice period: termination fees, the work of rebuilding your own payroll, benefits and unemployment accounts, and anything the agreement says about the way out. Hidden fees.
Experience rating. Your state unemployment insurance history, which sets your rate. Under a PEO arrangement, whether it stays yours or merges into the provider's depends on the state — and it becomes acute on the way out. State rules vary.
M
Master workers' compensation policy. A single workers' compensation policy covering the PEO's entire pool of client employees. It is what lets a small employer with hard class codes get coverage it could not place alone — and one of the most awkward things to unwind when you leave.
P
PEPM (per employee per month). The flat administrative fee shape: a dollar amount per employee per month. Predictable, and favours employers whose wages are rising. PEPM vs percentage.
Percentage of gross payroll. The alternative fee shape: a percentage of what you actually pay your people. It rises with every raise, bonus and commission. PEPM vs percentage.
PEO (professional employer organization). A company that co-employs your staff so it can run payroll, provide benefits and take on defined employment obligations, while you keep control of the work. What a PEO is.
Pass-through. An insurance or statutory cost the PEO charges through to you at cost — workers' compensation premium, state unemployment tax, benefits premium. The line between pass-through and administrative fee is where comparability lives. What a PEO costs.
S
SUI (state unemployment insurance) wage base. The earnings threshold on which you pay state unemployment tax per employee. It varies by state, it is a material part of employment cost, and a PEO changes who reports it. State pages.
W
Wage base. The earnings cap on which federal (and, separately, state) unemployment tax applies. A mid-year move to a non-certified PEO can restart your federal wage bases. What CPEO certification changes.
Workers' compensation class codes. The risk classification of your employees' jobs, which drives your premium. The class code mix is why two businesses of identical size can pay wildly different premiums — and why published "average" PEO costs are usually meaningless for you.
Terms we refuse to use
"Partnership." A co-employment arrangement is a contract, not a partnership, and the difference shows up in the liability clauses.
"Fully burdened cost." A bundled number that hides how much of it is pass-through. Ask for the unbundled version instead — the seven questions here produce it.
Next
Frequently asked
What is co-employment?
Co-employment is a contractual split of employer responsibilities between you and a PEO. Both of you are employers of the same people, for different purposes: the PEO takes payroll, tax and benefits; you keep direction and control of the work. Full explanation here.
What is a CPEO?
A certified professional employer organization is a PEO that has met IRS requirements, including bonding and annual independent financial audits. Certification changes who is liable for federal employment taxes and what happens to wage bases when you join mid-year.
What is a master workers' compensation policy?
A master policy covers the PEO's entire pool of client employees, so a small employer with hard class codes can get coverage it could not place alone. It is one of the most valuable things a PEO provides — and one of the most awkward to unwind.
What is PEPM?
Per employee per month — the flat administrative fee shape charged by PEOs. Its alternative is a percentage of gross payroll. The two are compared properly here.
Get matched with up to three PEOs
Answer six questions about your headcount, states and timeline. We shortlist providers that can actually serve you, and you choose which ones may contact you.
No obligation. You pick which providers get your details. We never sell your information to a data broker.