What is a Professional Employer Organisation (PEO)?
Exactly What is a PEO?
Professional Employer Organizations (PEOs) enable clients to cost-effectively outsource the management of human resources, employee benefits, payroll and workers' compensation. PEO clients focus on their core competencies to maintain and grow their bottom line.
Businesses today need help managing increasingly complex employee related matters such as health benefits, workers' compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. They contract with a PEO to assume these responsibilities and provide expertise in human resources management. This allows the PEO client to concentrate on the operational and revenue-producing side of its operations.
Starting your own business can be an effective way to gain control over your career. However, being your own boss also means that you have to familiarize yourself with employment laws and engage in other administrative tasks. Working with a professional employment organization (PEO) can help you balance your role as an entrepreneur with your responsibilities to be a good leader to your people.
Overview of a PEO and How It Can Help Your Business
When you enter into an agreement with a PEO, you are entering into a co-employment arrangement. The PEO's will take over many of the administrative functions generally carried out by your internal staff or human resources (HR) department. These functions include payroll processing, tracking benefits accrued and creating an employee handbook.
The PEO is responsible for making sure federal payroll tax returns are prepared and filed in a timely manner and payroll taxes are deposited timely. If your employees are subject to local, state or any other government agency withholding, you can rest assured those payments will also be made in a timely manner.
Your PEO will also be able to ensure that you adhere to local, state or federal employment laws. This is especially helpful if your company operates in multiple locations or has workers performing tasks remotely in multiple cities. As a general rule, you must abide by the laws where an employee is located regardless of where your company is headquartered.
Failing to abide by sick time, minimum wage or other standards in a given area can result in significant fines. It can also result in bad press that can harm your brand now and in the future. Ultimately, having a PEO means that you don't have to spend hours learning about labor laws when you could be out acquiring new clients.
Advantages of Using a PEO for Your Small Business
1. Save Money
One of the key advantages of using PEO payroll services or benefit services is that you can save money on administrative costs. Often, PEOs have streamlined payroll and benefit administration processes that operate more efficiently than the systems that your company has in place.
2. Get Access to Legal or Other Services
As a co-employer, the PEO handles workers' compensation claims or other legal matters on your behalf. Therefore, you will have access to a team of specialists who can mitigate claims in a timely and affordable manner. Your PEO team may have the ability to prevent employment law claims by recommending proper documentation and discipline practices.
3. Provide Better Benefits
In addition to saving money, PEOs offer access to perks or tools that you may not have the ability to provide on your own. For instance, a PEO might offer access to a 401(k) plan or offer a wider array of medical or other benefits that you could not afford to provide. In some cases, a PEO might offer benefits that you simply wouldn't have access to as a small or medium employer.
How PEOs Work
Although a PEO is listed as a co-employer, it will not actually provide any employees. In fact, a PEO HR team will not usurp the role of your existing HR team if you have one. Instead, it will simply integrate with your existing team and provide support wherever possible. The types of services it will provide will be negotiated before any co-employment agreement is signed and executed.
How the PEO works with your existing team, whether there is an internal HR team or not, will also be determined prior to signing a client agreement. For instance, you could stipulate that your PEO helps with enforcing rules already outlined in the employee handbook. Alternatively, you could stipulate that the PEO creates the handbook and provides training as to how its rules should be enforced.
Types of PEOs
There are a number of different PEOs that you can work with that may fit your needs and budget.
You could also choose to work with a PEO that specializes in employee leasing services. Depending on your needs, you could opt to partner with a PEO that offers formal co-employment services. In such a scenario, it would become the employer of record for your employees, which could help your company reduce its liability as well as cut down on overhead costs.
PEOs and Other Categories of Outsourcing
Working with a PEO is just one way in which you can have access to an HR department or enhance your current HR department’s services. For example, partnering with a human resources organization (HRO) ensures your company's HR needs are met.
However, unlike a PEO, you wouldn't actually be sharing employer responsibilities in an HRO relationship.
PEO Provides Integrated Services
A PEO provides integrated services to effectively manage critical human resource responsibilities and employer risks for clients. A PEO delivers these services by establishing and maintaining an employer relationship with the employees at the client's worksite and by contractually assuming certain employer rights, responsibilities, and risk.
Businesses across America have discovered the incredible value of PEOs because they provide:
PEO vs ASO
ASO
- All of the same PEO services can be provided.
- HR services can be provided.
- There is no sharing of employer liability.
- The employees’ wages and taxes are reported under the client’s taxpayer identification number.
PEO
- Share employer liability.
- Provide HR services.
- Provide PEO services.
- The employees’ wages and taxes are reported under the PEO’s taxpayer identification number.
PEO vs. Certified PEO
Using a CPEO can be ideal if you are worried about potential liability if employment taxes aren't submitted in a timely manner. This is because the CEPO is solely responsible for any financial or other issues that might arise due to a late or missed payment.
If you use a traditional PEO, the IRS might still decide to pursue that organization to obtain a past due balance. However, it also has the right to come after your firm for payment. The government has broad authority to take money out of bank accounts or even seize equipment to accomplish this goal.
What a PEO Doesn't Do
1. PEOs Don't Handle Day-to-Day Operations
While a PEO offers a lot to your company, there are certain things that it will not or cannot do for your business. For instance, the PEO will not run the company on your behalf, which means that you retain the day-to-day duty and direction of your employees. . It will also not be able to make decisions with regard to the employees without consulting with you or other members of your leadership team first.
2. PEOs Won't Mean Drastic Change for Your Employees
A quality PEO will largely remain in the background as far as your employees are concerned. When done properly, the biggest impact will be the fact that the name of the PEO appears on everyone's paycheck along with your company’s name. Otherwise, it will generally be known as the entity to talk to when a worker needs a copy of a pay stub or to review their insurance options.
Become an “Employer of Choice"
Effective employee management is one of the biggest challenges owners and managers face in running and growing a business. The tasks of hiring, training, engaging, evaluating and compensating employees are at the heart of all companies, large and small. Successfully managing these tasks is essential to building and keeping an effective team of employees.
Today, largely as a result of the pandemic, employees are wanting more from their jobs and from their employers…and employers are eager to offer more…but only within defined and affordable budgets that do not undermine operating budgets and profits.
It is a truism that when employees feel valued, they have a sense of engagement with each other and with the company. This sense of being valued promotes working toward a common set of goals as a team that will drive your company to meet, and exceed, your goals.
With ProSourceSolutions as your partner, your company can meet the challenge of effectively managing your employees, driving recruitment up and employee turnover down.
As your Co-employer, ProSourceSolutions can help you become the ‘Employer of Choice’ and help you turn your company vision into a reality.
Explainer Video: What is a PEO?
Frequently Asked Questions
A professional employer organization (PEO) is a company which contractually assumes and manages critical human resource and personnel responsibilities and employer risks as a ‘Co-employer’ businesses by establishing and maintaining an employer relationship with 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.
No. As co-employers, the PEO and small business owner become partners in the employment of their workers. The client retains ownership of the company. As co-employers, the PEO and client contractually share or assume employer responsibilities and liabilities.
The PEO assumes a real and factual employer role. PEOs are responsible for payroll and employment taxes, maintaining employee records, reserve the ultimate right to hire and fire, and have the authority to resolve employee disputes. By shifting these responsibilities to the PEO, the client gains more command of the "core" revenue generating aspects of their business.
A PEO can provide increased financial security, quality health insurance, a safe working environment, and opportunities for retirement savings. PEOs may provide Fortune 500 quality employee benefits including, health insurance and 401(k) savings plans, and aggressive workplace risk management. Job security is improved as the PEO's economy of scale permits a business to lower employment costs. Job satisfaction and productivity increases when workers are provided quality human resource services like employee manuals, grievance procedures, and improved communications.
The IRS acknowledges that a PEO may be the employer for federal income and unemployment taxes. Several states provide some form of licensing, registration, or regulation for PEOs. Moreover, many states statutorily recognize PEOs as the employer or co-employer of worksite employees for purposes of workers' compensation and state unemployment insurance taxes.
Although many still view these two staffing arrangements as the same, they are quite different. A PEO arrangement involves all or a significant number of the client’s workplace employees engaged in a long-term, non-project related, employment relationship. The PEO assumes the employer responsibility for employment tax, benefit plans, and other human resource purposes. Through the use of a PEO relationship, client companies make a long-term investment in their workers, because the PEO provides health insurance, retirement savings plans, and other critical employee benefits for their worksite employees.
The concept of employee leasing envisioned a transfer of certain responsibilities from a client to the employee leasing company. Employee leasing initiated the concept of "fire, hire, and lease back," which does not occur in a PEO arrangement. Employee leasing can be defined 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 temporary staffing service recruits employees and assigns them to clients to support or supplement the client's workforce in special work situations. These may include employee absences, temporary skill shortages, or seasonal workloads. In contrast, a PEO contractually assumes and manages employer responsibilities for all or a majority of a client's workforce. Worksite employees participate in the PEO's full range of employee benefits including, health, dental, and life insurance, vision care, and retirement savings plans.
Who uses a PEO?
The average PEO client customer is a small business with 16 worksite employees, though larger businesses also find value in a PEO arrangement. These small business customers include every type of business from accountants to zookeepers and every profession in between including doctors, retailers, mechanics…and more.
In the relationship between 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 employee. The PEO and client company contractually allocate some and share other employer responsibilities and liabilities. The PEO assumes responsibility and liability for the "business of employment" such as risk management, personnel management, human resource compliance, and payroll & employee tax compliance. The client company manages product development and production, marketing, sales, and service.
The PEO assumes and establishes an employment relationship with the worksite employees and provides a complete human resource and employee benefit package.
No, Workers are never fired by the client business and rehired by the PEO. Instead, a worker becomes an employee of two employers in a contractual 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 employees’ 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.
No. In fact, a PEO arrangement is often the only opportunity for a worker of many small businesses to receive Fortune 500 quality employee benefits like health insurance, dental and vision care, life insurance and retirement saving plans.
PEOs 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. The Internal Revenue Service recognizes the PEO as the employer for federal income and unemployment taxes, and case law affirms the principle that the PEO is responsible for payroll taxes.
The PEO is the employer for employment tax and employee benefits, PEOs 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 four states have laws that hold the client and PEO jointly liable for unemployment taxes.
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, Age Discrimination in Employment Act, ADA, FMLA, HIPAA, Equal Pay Act, and COBRA. In some 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, these laws protect the workers.
Many states recognize the PEO as the employer of worksite employees for purposes of providing workers' compensation coverage.
No. PEOs work equally well in union and non-union workplaces. The National Labor Relations Board (NLRB) recognizes that, in co-employment relationships, worksite employees may be included in the client employer's collective bargaining unit. Where a collective bargaining agreement exists, PEOs fully abide by the agreement's terms. PEOs endorse the rights of employees to organize, or not organize, according to standards of the NLRB.
A PEO may sponsor employee benefit plans for its worksite employees. Such benefits are either mandated by law, such as workers' compensation and unemployment benefits, or voluntary, but desirable in attracting and retaining quality employees, such as health, life, dental and disability insurance. PEOs are consumers of insurance and procure these benefits from licensed insurance agents and authorized insurers.
Yes, NAPEO, the National Association of Professional Employer Organizations, is the largest trade association for professional employer organizations nationwide. ProSourceSolutions is one of NAPEO’s nearly 400 PEO members operating in all 50 states. As an industry leader, Alison LeCompte, ProSourceSolutions’ CEO has been selected to serve as Chairperson for the Texas State NAPEO committee and to serve on the Board for the National NAPEO Committee.
The association represents approximately 90 percent of the revenues of the $61 billion industry. NAPEO's members range in size from start-up PEOs to large, publicly held companies with years of success in the industry. For more information, visit napeo.org.