Professional employer organizations (PEOs) are a common method for small and mid-sized employers, or multi-national businesses with a smaller US presence, to obtain comprehensive payroll, human resources, and employee benefits services. When a company relies on the services of a PEO and that company is part of an M&A transaction, there are a variety of considerations that should be taken into account, including PEO contracts, 401(k) plan spinoffs and terminations, health coverage, payroll transitions, and purchase agreement provisions. Buyers may also want to enter into a PEO arrangement post-closing as an expedient way to provide human resources services and benefit plans to target employees post-closing.

What is a PEO?

A PEO is a co-employer with another employer that, under a contract, handles certain human resources-related obligations. (For convenience, the entity that contracts with the PEO will be referred to in this article as the "employer" even though the PEO contract may provide for a co-employment relationship.)  PEOs often provide HR functions such as payroll; income and employment tax withholding and reporting; health, welfare, and retirement benefit plans; management of unemployment and workers' compensation claims; compliance assistance on laws such as the Fair Labor Standards Act and the Affordable Care Act; and employee handbooks and policies.