How does a PEO arrangement work?

In the relationship with 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 contractually allocate some and share other traditional employer responsibilities and liabilities.

The PEO assumes responsibility and liability for the "business of employment" including risk management, human resources, labor law compliance, payroll, and employee taxes. The client company manages product development and production, marketing, sales, and service. The PEO assumes and establishes an employment relationship with the worksite employee and provides a complete human resource and employee benefit package.

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

A temporary staffing service recruits employees and assigns them to clients to support or supplement the client's workforce in special situations. A PEO arrangement involves all or a significant number of the client workplace employees 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.

Why would a business use a PEO?

All business owners want to focus their time and energy on the "business of their business" and not on the "business of employment." Most business owners don't have the necessary human resource training, payroll and accounting skills, knowledge of regulatory compliance, or background in risk management, insurance and employee benefit programs to meet the demands of being a good employer.

In a PEO arrangement, does the business owner lose control of his or her business?

Absolutely not. As co-employers, the PEO and client/business owner become partners in the employment of their workers. The client retains ownership of the company and manages the day-to-day activities of the employees. As co-employers, the PEO and client contractually share or assume employer responsibilities and liabilities.

What responsibilities are typically assumed by PEOs?

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.

As the employer for employment tax and employee benefits, PEOs assume responsibility and liability for payment of state unemployment taxes. Most states recognize the PEO as the employer for UI purposes. Many states also recognize the PEO as the employer of worksite employees for purposes of providing workers' compensation coverage.

Additionally, 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.

Why would a worker want a PEO as an employer?

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, 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 increase when workers are provided quality human resource services.

What is the future of the PEO industry?

American business is undergoing a fundamental change in human resource management. Driven by the needs of business owners seeking solutions to the increasingly complex "business of employment," the PEO industry is leading the way as the staffing solution of the future.

SUCCESSFUL PARTNERSHIP

Guidelines for Selecting a PEO

1. Assess your workplace to determine your human resource and risk management needs.
2. Make sure the PEO is capable of meeting your goals. Meet the people who will be serving you.
3. Check the firm’s financial background. Ask for banking and credit references. Ask the PEO to demonstrate that payroll taxes and insurance premiums have been paid.
4. Ask for client and professional references.
5. Check to see if the company is a member of NAPEO, the national trade association of the PEO industry. NAPEO members share a commitment to continuing education, professional development, and the Association’s Code of Ethics.
6. Investigate the company’s administrative and risk management service competence. Evaluate the depth and level of experience of their internal staff.
7. Understand how the employee benefits are funded. Are they fully insured or partially self-funded? Who is the third party administrator or carrier? If required in your state, is their TPA or carrier licensed?
8. Understand how the employee benefits are tailored. Determine if they fit the needs of your employees.
9. Review the service agreement carefully. Are the respective parties responsibilities and liabilities clearly laid out? What guarantees are provided? What provisions permit you or the PEO to cancel the terms of the contract?
10. If your state requires a PEO to be licensed or registered, make sure the company you are considering meets all such requirements.