PEO Industry Information
Frequently Asked Questions About PEOs
A professional employer organization (PEO) is a company which contractually assumes and manages critical human resource, risk management and personnel responsibilities and employer risks for businesses by establishing and maintaining an employer relationship with client employees.
The Internal Revenue Service acknowledges that a PEO may be the employer for federal income and unemployment taxes. Seventeen 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, in fact, quite different. The term “employee leasing” means different things to different people and has been, and continues to be, used in many diverse contexts. The confusion surrounding this terminology is one reason NAPEO has been active in defining and distinguishing the PEO concept; however, many commentators, regulators, and statutes use the terms interchangeably.
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. 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 97% of our clients employees remaining with the PEO for a year or longer. Client’s employees participate in the PEO’s full range of employee benefits including, health, dental, and life insurance, vision care, and retirement savings plans.
Historically, the average client customer of a PEO was a small business. Increasingly, larger businesses with employees in the 5 to 500+ range are finding value in a PEO arrangement, by avoiding the investment in new or additional human resource personnel and maintenance of costly infrastructures. These companies include every single type of business from accountants to zookeepers and every profession in between including doctors, retailers, mechanics and more.
It is estimated that 5 million Americans are currently co-employed in a PEO arrangement. PEOs are operating in every state, and the industry has historically grown between 20-30% per year. Future growth projections for the industry is anticipated to be in the 35% range for 2017. Today, there are approximately 900 PEO companies who are responsible for over $44 billion in employee wages and related human resource and employee benefits.
In the relationship among a PEO, the employee, and a client company, there exists a co-employment relationship in which both the PEO and client company share an employment relationship with the worker. The PEO and client company contractually allocate some and share other traditional 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 employee and provides a complete human resource and employee benefit package.
As businesses grow, most 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. Business owners want to focus their time and energy on the “business of their business” and not on the “business of employment.” Most do not have the desire to invest and maintain non-core infrastructure associated with human resources, benefits, payroll and the associated software systems. More and more, these functions are outsourced to professionals and organizations where these tasks are fundamental to the business. PEO’s facilitate this process by assuming and providing support for all aspects associated with employment management.
As co-employers, the PEO and 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 most responsibilities and liabilities associated with a “general” employer. The client usually retains those rights and responsibilities associated with “special” employers. The PEO assumes a real and factual employer role. PEOs are responsible for payroll and employment taxes, maintaining employee records, in consultation with the client 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 command of the “core” revenue generating aspects of their business.
Workers seek 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.
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 client’s employees. This responsibility includes the employees’ wages and employment taxes, workers’ compensation and responsibilities and supervision for the production of the products or the delivery of unemployment insurance, and employee benefits. The client retains employer services.
No. In fact, a PEO arrangement is often the only opportunity for a worker of many 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.
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 the 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.
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 four states have laws that hold the client and PEO jointly liable for unemployment taxes. PEOs can provide its services and still retain the non-contributing posture that is available to non-profits in most states.
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, the workers are protected by these laws.
Many states recognize the PEO as the employer of co-employees for purposes of providing workers’ compensation coverage.
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 co-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.
American business is undergoing a fundamental change in human resource management, and the PEO industry is one response to market demands for change. The expertise required to manage the human resource elements of a business has outgrown the experience and training of many organizations. The PEO industry is demand driven as business owners seek solutions to the increasingly complex “business of employment.” PEOs are one of the growth industries of the 1990s and of the next century.
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Reference: National Association of Professional Employers Organizations, Alexandria, VA