A professional employer organization (PEO) is a company which contractually assumes and manages critical human resource and personnel responsibilities and employer risks for its small to mid-sized businesses by establishing and maintaining an employer relationship with worksite employees.
PEOs operate in all fifty of the United States. Twenty-three states provide some form of specific licensing, registration, or regulation for PEOs. Many states statutorily recognize PEOs as the employer or co-employer of worksite employees for purposes of workers' compensation and state unemployment insurance taxes. The IRS has long 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.
Although older statutes governing PEOs still use the leasing terminology, PEOs are in fact based upon the co-employment of an existing workforce.
Today, the major distinction is that 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 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 PEO 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 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. 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.
Like a leasing situation, 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. A PEO contractually assumes and manages employer responsibilities 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, dental, and life insurance, vision care, and retirement savings plans.
The average client customer of a PEO is a small business with 16 worksite employees, though larger and smaller businesses also find a tremendous value in a PEO arrangement. These small business customers include every single type of business from accountants to small manufacturers and every profession in between including doctors, retailers, mechanics and more.
It is estimated that 2-3 million Americans are currently co-employed in a PEO arrangement. PEOs are operating in every state and the industry continues to grow more at an average of 20% each year. Today, it is estimated there are around 800 PEO companies who are responsible for generating more than $43 billion in gross revenues.
Once a client company contracts with a PEO, the PEO will then co-employ the client's 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 worker. The PEO and client company 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 retains responsibility for and manages product development and production, business operations, marketing, sales, and service. The PEO and the client will share certain responsibilities for employment law compliance. As a co-employer, the PEO will often provide a complete human resource and benefit package for the worksite employees.
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. 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 usually retains those rights and responsibilities associated with "special" employers related to 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 records, and reserves a right to hire and fire. Because the PEO may also be responsible for workers' compensation, the PEO will also focus on improving safety and compliance. In general terms, the PEO will focus on employment-related issues and the client will be responsible for the actual business operations.
Workers seek financial security, quality health insurance, a safe working environment, and opportunities for retirement savings. Many PEOs 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.
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 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. The reverse is generally true. Frequently, a PEO arrangement is 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, retirement saving plans, job counseling, adoption assistance, and educational benefits. Absent the PEO, a small business can neither afford nor manage these benefits.
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. PEOs have long established their role as reporting income and handling withholding, FICA and FUTA. In 2002, the IRS issued guidance confirming the ability of PEOs to offer qualified retirement benefits.
As 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 some states may hold the client and PEO jointly liable for unemployment taxes.
Both the client and the PEO 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, 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.
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 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, 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.
Like other employers, a PEO may sponsor employee benefit plans for its worksite employees. Such benefits may 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.