FAQs (adapted from napeo.org)
Who uses a PEO?
Any business can find value in a PEO relationship. An average client of
a NAPEO member company is a business with 17 worksite employees. Increasingly,
larger businesses also are finding value in a PEO arrangement, because
PEOs offer robust Web-based HR technologies and expertise in HR management.
PEOs can partner with companies that have 500 or more employees and work
in conjunction with their existing human resources department.
PEO clients include many different types of businesses ranging from accounting firms to high-tech companies and small manufacturers. Many different types of professionals, including doctors, retailers, mechanics, engineers and plumbers, also benefit from PEO services.
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 arrangement 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 and allocate responsibilities
and liabilities. The PEO assumes much of the responsibility and liability
for the business of employment, such as risk management, human resource
management, and payroll and 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 worksite employees.
What is NAPEO?
Formed in 1984, the National Association of Professional Employer Organizations
is the national trade association for the PEO industry. NAPEO is known
both as NAPEO — The Voice of the PEO Industry® for government
affairs and as The Source for PEO Education® due to the association's
education and training programs. NAPEO promotes a Code of Ethics and
a number of best practices to its member companies. NAPEO has nearly
400 PEO members operating in all 50 states, representing approximately
90 percent of the revenues of the $61 billion industry.
Are PEOS recognized as employers at the state and federal levels?
Yes. PEOs operate in all 50 states. Many states provide some form of specific
licensing, registration, or regulation for PEOs. These states statutorily
recognize PEOs as the employer or co-employer of worksite employees for
many purposes, including workers' compensation and state unemployment
insurance taxes. The IRS has 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.
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 owners do not have the necessary human resource training;
payroll and accounting skills, the knowledge of regulatory compliance,
or the backgrounds in risk management, insurance and employee benefit programs
to meet the demands of being an employer. PEOs give small-group markets
access to many benefits and employment amenities they would not have otherwise.
Do the business owners lose control of their businesses?
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
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
also may be responsible for workers' compensation, many PEOs also focus
on and improve 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.
What is the difference between employee leasing and a PEO arrangement?
A PEO or co-employment arrangement involves all or a significant number
of the client's existing worksite employees in a long-term, non-project
related, employment relationship. The PEO brings services to the client,
including the management of human resources, employee benefits, payroll
and workers' compensation. 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. If a PEO relationship is terminated, the
co-employees will cease to work for the PEO but will continue as employees
of the client.
By comparison, 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 with the client company. 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.
Some older statutes governing PEOs still use the leasing terminology.
What is the difference between temporary staffing services and
a PEO?
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 86 percent of the 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.
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. The average PEO has grown more than 20 percent per
year for each of the last six years, according to a survey of NAPEO members.
About 700 PEOs that offer a wide array of employment services and benefits
are operating today in 50 states. The PEO industry generates approximately
$61 billion in gross revenues annually. PEOs have an 88 percent client
retention rate due to strong client satisfaction. NAPEO member companies
are estimated to account for more than 90 percent of the industry's gross
revenues.
How do PEOs help their clients control costs and grow their bottom
line?
The PEO's economy of scale enables each client company to lower employment
costs and increase the business's bottom line. The client can maintain
a simple in-house HR infrastructure or none at all by relying on the PEO.
The client also can reduce hiring overhead. The professionals at the PEO
can provide critical assistance with employer compliance, which helps protect
the client against liability. In many cases, the client can pay a small
up-front cost for a significant technology and service infrastructure or
platform provided by the PEO. In addition, the PEO provides time savings
by handling routine and redundant tasks for its clients. This enables the
business owner to focus on the company's core competency and grow its bottom
line.
How do employees benefit from a PEO arrangement?
Employees seek financial security, quality health insurance, a safe working
environment and opportunities for retirement savings. When a company
works with a PEO, job security is improved as the PEO implements efficiencies
to lower employment costs. Job satisfaction and productivity increase
when employees are provided with professional human resource services,
training, employee manuals, safety services and improved communications.
And in many cases, a co-employment relationship provides employees with
an expanded employee benefits package, to include a 401(k), life insurance,
disability insurance, discount plans, a flexible spending plan and more.
Do workers receive comprehensive benefits?
Frequently, a PEO arrangement is the only opportunity for a worker at many
small businesses to receive FORTUNE 500 quality employee benefits like
health insurance, dental and vision care, life insurance, retirement
savings plans, job counseling, adoption assistance, and educational benefits.
Absent the PEO, a small business can neither afford nor manage these
benefits.
Who is responsible for the employees' wages and employment taxes?
PEOs assume responsibility and liability for payment of wages and compliance
with the 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 most states
recognize the PEO as the responsible entity. In those states that require
the PEO to report unemployment tax liability under its clients' account
numbers, the PEO can still manage this responsibility.
Who is responsible for employment laws and regulations?
As employers, both the client and the PEO have compliance obligations.
However, PEOs provide worksite employees with coverage under many 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 workforce. Once included in the PEO's workforce, the workers are
protected by these laws.
Who is responsible for workers' compensation?
Many states recognize the PEO as the employer of worksite employees for
purposes of providing workers' compensation coverage.
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, under state and federal laws.
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 they may be voluntary benefits
that will help attract and retain quality employees, such as health, life,
dental and disability insurance. PEOs as employers may sponsor or acquire
programs for their employees. As such, PEOs are consumers of insurance
and procure these benefits from licensed insurance agents and authorized
insurers.
Why is it important that a PEO have audited financial statements?
A number of state PEO licensing and registration laws require audited financial
statements. In addition, the PEO industry best professional performance
practices recommend audited financial statements in order to enhance
internal controls and accuracy of financial information. While independent
audits cannot prevent fraud or financial failure, they provide management
with an independent review of and opinion that the financial statements
of the entity are accurate, complete and fairly presented according to
generally accepted accounting principles (GAAP).
Is a PEO’s financial statement publicly available?
Similar to their business clients, most PEOs are private entities that
do not have public financial statements. Nonetheless, clients are advised
to check a PEO’s references, reputation, and financial background.
Ask if the PEO has audited financial statements, obtain credit references,
and conduct due diligence. In states where required, make certain that
the PEO is duly licensed or registered. Many PEOs provide clients an
independent CPA’s attestation regarding the PEO’s audited
financial statements and payment of taxes and benefit plans.