Professional Employer Organization (PEO) Frequently Asked Questions

What is a Professional Employer Organization?

Most business owners want to focus their time and energy on the "business of their business" and not on the "business of employment." By "hiring" a PEO to become their co-employer clients empower the PEO to manage and deal with issues such as workers' comp, human resources, payroll administration, unemployment claims, and safety risk management. A PEO gives smaller employers access to benefits and amenities for their employees that they would not otherwise have.

What is the difference between employee leasing and a PEO arrangement?

Older statutes governing PEO services still use the term "employee leasing", however there are several difference between the employee leasing and PEO concepts. Employee Leasing companies were formed based on a "sole employer" concept, whereby the employee leasing company was the employer of the leased employees. PEO's are based on a "co-employment" relationship between the client company and PEO with the client's workforce. Today, the major distinction is that employee leasing or staffing service supplies new workers on a temporary or project specific basis. These leased employees return to the staffing service for reassignment after completion of their work at the client. Some would define employee leasing as a supplemental, temporary employment arrangement where one or more workers are assigned to a customer for a fixed period of time, often for a specific project. This concept creates little long-term equity or investment between the worker and customer (much like leasing a car for two years and knowing that you are using it for a specific need but not building any long-term equity). A Professional Employer Organization or co-employment arrangement, however, involves all or a significant number of the client's existing worksite employees in a long-term, non-project related, employment relationship. The PEO assumes employer responsibility for employee administration, workers compensation, labor compliance, employment tax filings, employee files, health benefits, and other human resource purposes. Through the use of a PEO relationship, client companies make a long-term investment in their workers, because in most cases, the Professional Employer Organization provides access to health benefits, retirement savings plans, and other critical employee benefits for their worksite employees. In the event a PEO relationship is terminated, the co-employees will cease to work for the PEO but will continue as employees of the client.

What is the difference between temporary staffing services and a PEO arrangement?

Like employee leasing, a temporary staffing service recruits employees and assigns them to clients to support or supplement the client's workforce in special work situations, such as employee absences, temporary skill shortages, or seasonal workloads. These workers are traditionally only a small portion of the client's workforce. Professional Employer Organization services, contractually assumes and manages employee administration for all or a majority of a client's workforce. Industry ratios identify the PEO arrangement as a long-term relationship with nearly 90% of our clients and worksite employees remaining with the PEO for a year or longer. Worksite employees participate in the PEO's full range of employee benefits including, health benefits, dental, and life insurance, vision care, and retirement savings plans.

Who uses a PEO?

The average client of a PEO is a small to mid-sized business with 5-50 employees, though larger businesses also find value in a PEO relationship. PEO clients come from every type of industry or business such as: accounting firms, manufacturers, doctors offices, wholesale and retail operations, artesian contractors (plumbers, electricians, carpenters, etc.) and many more.

How many Americans are employed in a co-employment Professional Employer Organization arrangement?

It is estimated that 2-3 million Americans are currently co-employed in a PEO arrangement. PEO's serve companies and their workforces in every state and the industry continues to grow more at an average of 15% each year. Today, it is estimated there are approximately 1000 PEO companies.

How does a PEO arrangement work?

Once a client company contracts with or "hires"a PEO, the PEO then becomes a co-employer with the client of the worksite employees. In the relationship among a PEO, a worksite employee, and a client company, there exists a co-employment relationship in which both the PEO and client company have an employment relationship with the workforce. The PEO assumes responsibility and liability for the employee administration such as risk management or workers compensation, personnel management, employee files, and payroll tax filings. The client company retains responsibility for the direction and control of their workforce. The PEO and the client share certain responsibilities for employment law compliance. As a co-employer, the PEO will often provide employee administration, labor compliance, workers compensation, employee handbooks and health benefits for the worksite employees.

Why would a small business use a PEO?

Small business owners want to focus their time and energy on the "business of their business" and not on the "business of employment." As businesses grow, most small business owners don't have the necessary human resource training; payroll and accounting skills; knowledge of regulatory compliance; or backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an employer. Human Resource Outsourcing takes over the employee administration for the business owner allowing them to grow their business.

Does the small business owner lose control of his or her business?

No. The client retains ownership of the company and control over its operations. As co-employers, the PEO and client will contractually share or allocate employer responsibilities and liabilities. The PEO will generally only assume responsibilities for employee administration, payroll, taxes and benefits. The client usually retains those rights and responsibilities associated with the actual business operations. As such, the client will continue to have responsibility for worksite safety and compliance. The PEO will be responsible for payroll and employment taxes, will maintain employee files, employee handbooks and health benefits. Because the Professional Employer Organization may also be responsible for workers' compensation, the PEO will also focus on improving safety manuals and compliance. In general terms, the PEO will focus on employment-related issues and the client will be responsible for the actual business operations.

Why would a worker of a small business want a PEO as an employer?

Workers seek financial security, quality benefits, a safe work environment, and opportunities for retirement savings. PEO services provide "Large Corporation" quality employee benefits including, health insurance and 401(k) savings plans, and professional workplace risk management and safety manuals. Job security is improved as the PEO's economy of scale permits a business to lower employment costs. When workers are provided quality human resource services like employee handbooks, safety manuals, and improved communications; employee moral, productivity, and profitability increases.

Is this just a "fired and rehired" scheme?

No. Workers are not fired by the client business and rehired by the PEO. Instead, a worker becomes an employee of two employers in a co-employment relationship. The PEO assumes employer responsibilities and liabilities for the human resource and personnel obligations of the worksite employees. This responsibility includes the employee wages and employment taxes, workers' compensation and unemployment insurance, and employee benefits. The small business retains employer responsibilities and supervision for the production of the products or the delivery of services. HR Outsourcing otherwise known as PEO services, ASO and BPO services are legal and approved through each states department of labor as well as IRS code.

Is this a scheme to avoid providing health or retirement saving benefits to rank and file workers?

No. The reverse is generally true. Frequently, HR Outsourcing arrangements are the only opportunity for a worker of small businesses to receive Fortune 500 quality employee benefits like health insurance, dental and vision care, life insurance, and retirement saving plans.

Who is responsible for the employee's wages and employment taxes?

Using Human Resource Outsourcing through PEO's, ASO or BPO programs, they assume responsibility and liability for payment of wages and compliance with all rules and regulations governing the reporting and payment of federal and state taxes on wages paid to its employees. PEO's have long established their role as reporting income and handling withholding, FICA and FUTA. In 2002, the IRS issued guidance confirming the ability of human resource outsourcing entities (including PEO services) to offer qualified retirement benefits.

Who is responsible for state unemployment taxes?

As the employer for employment tax and employee benefits, PEO's assume responsibility and liability for payment of state unemployment taxes, and most states recognize the PEO as the responsible entity. A few states require the PEO to report unemployment tax liability under its clients' account number, and some states may hold the client and PEO jointly liable for unemployment taxes.

Who is responsible for employment laws and regulations?

Both the client and the Professional Employer Organization have compliance obligations. However, PEOs provide worksite employees with coverage under the entire spectrum of employment laws and regulations, including federal, state, and local discrimination laws, Title VII of the 1964 Civil Rights Act, maintaining employee files, employee handbooks, safety manuals, Age Discrimination in Employment Act, ADA, FMLA, HIPAA, Equal Pay Act, and COBRA. In many cases, these laws would not apply to workers at small businesses without the PEO relationship, since many statutes have exemptions based upon the number of workers in a work force. Once included in the PEO's workforce, the workers are protected by these laws.

Who is responsible for workers' compensation?

Many states recognize the PEO as the employer of worksite employees for purposes of providing workers' compensation coverage.

Does a PEO arrangement impact a collective bargaining agreement?

No. PEO's work equally well in union and non-union worksites. The National Labor Relations Board (NLRB) recognizes that, in co-employment relationships, worksite employees are appropriately included in the client employer's collective bargaining unit. Where a collective bargaining agreement exists, PEO services fully abide by the agreement's terms. PEO's endorse the rights of employees to organize, or not organize, according to standards of the NLRB.