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.
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:
Are PEOs recognized as employers?
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.
What is the difference between employee leasing and a PEO arrangement?
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.
What is the difference between temporary staffing services and a PEO arrangement?
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 PEOs full range of employee benefits including, health, dental, and life insurance, vision care, and retirement savings plans.
How many Americans are employed in a co-employment PEO arrangement?
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 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.
How does a PEO arrangement work?
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 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
Why would a business use a PEO?
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 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.
Does the business owner lose control of his or her business?
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.
Why would an employee of a business want a PEO as an employer?
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.
Is this just a "fired and rehired" scheme?
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.
Is this a scheme to avoid providing health or retirement saving benefits to rank and file workers?
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, and retirement saving plans. Absent the PEO, a small business can neither afford nor manage these benefits.
Who is responsible for the employee's wages and employment taxes?
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.
Who is responsible for state unemployment taxes?
As the employer for employment tax and employee benefits, PEOs assume responsibility and liability for payment of state unemployment taxes, and Nevada recognizes the PEO as the responsible entity.
Who is responsible for employment laws and regulations?
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 as it applies to their specific worksite, 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.
Questions on whether or not these laws apply to the worksite should be directed to the AdvanStaff HR Department.
Who is responsible for workers' compensation?
Nevada requires each subscriber company to carry its own workers' compensation policy. However, our in-house specialists and powerful systems efficiently manage the entire process from start to finish, thus freeing the time and resources up for the manager and business owner to focus on the core business.
Does a PEO arrangement impact a collective bargaining agreement?
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.
Do PEOs need to be licensed to provide insurance benefits to their workers?
Like other employers, a PEO may sponsor employee benefit plans for its worksite employees. Such benefits may be 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.
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