Q. What is a PEO?

A. A professional employer organization (PEO) is a company that contractually assumes and manages critical human resource and personnel responsibilities and employer risks for its small to mid-sized businesses by establishing and maintaining an employer relationship with the employees.

Q. Are PEOs recognized as employers?

A. 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 the employees. The IRS has promulgated specific guidance confirming the authority of PEOs to provide retirement benefits to workers.

Q. What is the difference between employee leasing and a PEO arrangement?

A. 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 arrangement, however, involves all or a significant number of the employees in a long-term, non-project related, employment relationship. The PEO assumes employer responsibility for employment tax, health and retirement benefit plans, and other human resource purposes. Through the use of a PEO relationship, client companies make a long-term investment in the employees, because in most cases, the PEO provides access to health benefits and/or insurance, retirement savings plans, and other critical employee benefits for their employees. In the event a PEO relationship is terminated, the employees will cease to work for the PEO, thus becoming employees of the client.

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

A. 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 employees remaining with the PEO for a year or longer. Employees participate in the PEO's full range of employee benefits including, health benefits, dental, and life insurance, vision care, and retirement savings plans.

Q. Who uses a PEO?

A. The average client customer of a PEO is a small business with 16 employees, though larger businesses also find value in a PEO arrangement. These small business customers include every single type of business from accountants to small manufacturers and every profession in between including doctors, retailers, mechanics and more.

Q. How many Americans are employed by a PEO?

A. It is estimated that 2-3 million Americans are currently employed in a PEO arrangement. PEOs are operating in every state and the industry continues to grow more 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. NAPEO member companies are estimated to account for more than 70% of the industry's gross revenues.

Q. How does a PEO arrangement work?

A. Once a client company contracts with a PEO, the PEO will then employ the employees. 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 an employer, the PEO will often provide a complete human resource and benefit package for its employees.

Q. Why would a small business use a PEO?

A. Small 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 small business owners don't have the necessary human resource training; payroll and accounting skills; knowledge of regulatory compliance; or backgrounds in risk management, worker’s compensation insurance, and employee benefit programs to meet the demands of being an employer

Q. Does the small business owner lose control of his or her business?

A. No. The client retains ownership of the company and control over its operations. 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.

Q. Why would a worker of a small business want a PEO as an employer?

A. Workers seek financial security, quality health benefits, a safe working environment, and opportunities for retirement savings. Many PEOs provide Fortune 500 quality employee benefits including, health benefits 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.

Q. Is this just a "fired and rehired" scheme?

A. No. Workers are not fired by the client business and rehired by the PEO. The PEO assumes employer responsibilities and liabilities for the human resource and personnel obligations of its 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.

Q. Is this a scheme to avoid providing health or retirement saving benefits to rank and file workers?

A. 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 benefits, dental and vision care, life insurance, retirement saving plans, job counseling, adoption assistance, and educational benefits. Absent the PEO, a small business can neither afford nor manage these benefits.

Q. Who is responsible for the employee's wages and employment taxes?

A. 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.

Q. Who is responsible for state unemployment taxes?

A. 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 some states may hold the client and PEO jointly liable for unemployment taxes.

Q. Who is responsible for employment laws and regulations?

A. Both the client and the PEO have compliance obligations. However, PEOs provide 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 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 work force. Once included in the PEO's workforce, the workers are protected by these laws.

Q. Who is responsible for workers' compensation?

A. Many states recognize the PEO as the employer for purposes of providing workers' compensation coverage.

Q. Does a PEO arrangement impact a collective bargaining agreement?

A. No. PEOs work equally well in union and non-union worksites. The National Labor Relations Board (NLRB) recognizes that, in PEO relationships, 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.

Q. Do PEOs need to be licensed to provide health benefits to their workers?

A. Like other employers, a PEO may sponsor employee benefit plans for its employees. Such benefits may mandated by law, such as workers' compensation and unemployment benefits, or voluntary, but desirable in attracting and retaining quality employees, such as health benefits, life, dental and disability insurance.