DEFINITION & FAQS OF A PEO
What is a PEO?
Professional Employer Organizations (PEOs) enable clients to cost-effectively outsource human resources management, employee benefits, payroll and workers’ compensation. PEO clients are able to focus on their core competencies to maintain and grow their bottom line.
Who uses a PEO?
Any business can find value in a PEO relationship. An average client of a NAPEO (National Association of Professional Employer Organizations) member company is a business with 17 worksite employees. Increasingly, larger businesses are also finding value in a PEO arrangement, because PEOS offer robust web-based HR technologies and expertise in HR management. PEOS can partner with companies that have 500 or more employees and work in conjunction with their existing human resources department.
PEO clients include many different types of businesses ranging from accounting firms to high-tech companies and small manufacturers. Many different types of professionals benefit from PEO services, including doctors, retailers, mechanics, engineers and plumbers.
What is NAPEO?
Formed in 1984, the National Association of Professional Employer Organizations is the national trade association for the PEO industry. NAPEO has nearly 400 PEO members operating in all 50 states, representing approximately 90 percent of the revenues in the $61 billion industry.
Are PEOS recognized as employers at the state and federal levels?
Yes. PEOs operate in all 50 states. Many states provide some form of specific licensing, registration or regulation for PEOs. These states statutorily recognize PEOs as the employer or co-employer of worksite employees for many purposes, including workers' compensation and state unemployment insurance taxes. The IRS has accepted the right of a PEO to withhold and remit federal income and unemployment taxes for worksite employees. The IRS has promulgated specific guidance confirming the authority of PEOs to provide retirement benefits to workers.
Why would a business use a PEO?
Outsourcing to a PEO gives your business the freedom to focus on what’s most important to you. As businesses grow, most owners do not have the necessary human resource training, payroll and accounting skills, the knowledge of regulatory compliance, or the backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an employer. PEOs give small-group markets access to many benefits and employment amenities they would not have otherwise.
What is the difference between employee leasing and a PEO arrangement?
A PEO or co-employment arrangement involves all or a significant number of the client's existing worksite employees in a long-term, non-project related, employment relationship. The PEO brings services to the client, including the management of human resources, employee benefits, payroll and worker's compensation. The PEO assumes 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 in most cases, the PEO provides access to health insurance, retirement savings plans and other critical employee benefits for their worksite employees. If a PEO relationship is terminated, the co-employees will cease to work for the PEO but will continue as employees of the client.
By comparison, a 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 with the client company. 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.
Do business owners lose control of their businesses?
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 and liabilities associated with a "general" employer for purposes of administration, payroll, taxes and benefits. The client will continue to have responsibility for worksite safety and compliance. It is still the responsibility of the client to hire, direct and guide employees on a daily basis. The PEO will be responsible for payroll and employment taxes, will maintain employee records and will reserve a right to hire and fire. Because the PEO also may be responsible for workers' compensation, many PEOs also focus on improving safety and compliance. In general terms, the PEO will concentrate on employment-related issues and the client will be responsible for the actual business operations.
How do PEOs help their clients control costs and grow their bottom line?
The PEO’s economy of scale enables each client company to lower employment costs and increase the business's bottom line. The client can maintain a simple in-house HR infrastructure or none at all by relying on the PEO. The client can also reduce hiring overhead. PEO professionals can provide critical assistance with employer compliance, which helps protect the client against liability. In many cases, the client can pay a small up-front cost for a significant technology and service infrastructure or platform provided by the PEO. In addition, the PEO provides time savings by handling routine and redundant tasks for its clients, enabling the business owner to focus on the company's core competencies and grow its bottom line.
Is a PEO’s financial statement publicly available?
Similar to their business clients, most PEOs are private entities that do not have public financial statements. Nonetheless, clients are advised to check a PEO’s references, reputation and financial background. Ask if the PEO has audited financial statements, obtain credit references and conduct due diligence. In states where required, make certain that the PEO is duly licensed or registered. Many PEOs provide clients an independent CPA’s attestation regarding the PEO’s audited financial statements and payment of taxes and benefit plans.