WHAT IS A PEO? FAQ

• What is a PEO?
• Are PEOs recognized as employers?
• What is the difference between employee leasing and a PEO arrangement?
• What is the difference between temporary staffing services and a PEO arrangement?
• Who uses a PEO?
• How does a PEO arrangement work?

What is a PEO?

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 business clients by establishing and maintaining a co-employer relationship with worksite employees.

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 on 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 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 insurance, dental insurance, life insurance, vision care, and retirement savings plans.

Who uses a PEO?

The average client customer of a PEO is a small to medium-sized business with 20 to 200 worksite employees, though larger businesses also find value in a PEO arrangement. These business customers include every single type of business from accountants to small manufacturers and every profession in between including doctors, retailers, mechanics and more.

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 and client company share 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.