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PEO Services

How Does A PEO Work?

Anna Leo Holder. MBA
by Anna Leo Holder. MBA on June 22, 2020

Professional Employer Organizations (PEOs) have been around since the 1960s and have continued to evolve and gain in popularity. Yet today, 54% of business decision-makers are unfamiliar with PEOs, and even more, don’t fully understand how they work. What a shame!

Partnering with a PEO creates a unique opportunity to save time and money, reduce risk and liability, support the hiring and retention of great employees, and gain access to HR support.

Are you intrigued?

Read on to learn about the unique qualities associated with a PEO partnership and how they can benefit small and medium-sized businesses.

Q: What’s unique about working with a PEO?

A: Unlike a la carte HR services and technologies that support employers functionally, partnering with a PEO creates a formal division of responsibilities between the business and the PEO. Although the company retains certain responsibilities, it transfers a comprehensive set of administrative burdens and liabilities to the PEO. Co-employment or “shared” employment is at the heart of this unique arrangement.

Q: What is co-employment?

A: Co-employment is a legal agreement allocating employer responsibilities between the client company and the PEO. While the client company maintains direction and control over employees (to hire, fire, discipline, determine duties, set wages, etc.), the PEO becomes the “employer of record,” responsible for a set of clearly defined administrative functions.

Q: How does co-employment work?

A: For the duration of the co-employment agreement, the client company places its existing employees and subsequent hires on the PEO’s payroll for tax purposes. This practice is referred to as “employee leasing.” It enables the PEO to perform administrative duties on behalf of the client. At the same time, the employees continue to perform their work for the client company, as usual.

Q: As a business owner, what are my responsibilities within a co-employment agreement?

A: You continue to be responsible for business decisions, operations, and the management of your employee’s daily tasks and job functions. Although you remain responsible for compliance with labor and employment laws, your PEO will offer expert guidance to help you navigate this area.

Q: What is a PEO responsible for within a co-employment agreement?

A: A PEO takes responsibility for a variety of interlocking duties and their accompanying liabilities.

Put simply, the PEO handles:

  • Payroll processing and payroll tax administration
  • Workers’ compensation and employment practices liability insurance
  • Human resources support
  • Employee health care, other benefits, and/or program administration (optional)

Q: How does a co-employment agreement impact my company’s payroll and taxes?

A: Your employees will become W-2 employees of the PEO and will be added to the PEO’s payroll. Federal and most state employer taxes will be reported and paid under the PEO’s tax ID number, and the PEO will be responsible for the administrative tasks underlying this function.

The PEO will:

  • Pay and report wage-related taxes
  • Issue W-2s annually
  • Respond to unemployment claims
  • File 941s (employer’s quarterly federal tax return form) typically using the PEO FEIN
  • File all tax forms required by states
  • Receive and handle wage garnishments and tax deductions

Q: How does workers’ compensation coverage through a PEO compare to my own policy?

A: The classifications for workers’ compensation (WC) insurance continue to be determined by the National Council on Compensation Insurance’s (NCCI) coding system and are based on the risk of work performed. However, a PEO is typically the holder of a single workers’ compensation policy that covers all employees on the PEO payroll, including leased employees. 

The client pays for coverage through the PEO, instead of paying for a policy outright, which has several benefits:

  • For those who would pay a high individual WC premium, coverage through the PEO creates a “pay-as-you-go” arrangement that eliminates upfront costs as it is billed with payroll each pay period.
  • The client only pays for WC coverage for employees who report wages (perform work) during a pay period.
  • PEOs typically have a large, master policy that allows them to offer competitive rates.
  • More than an insurance policy, WC within the PEO framework includes comprehensive support services for risk, safety, and claims management, as well as return to work programs.


Q: In a co-employment relationship, I’m responsible for managing my employees and complying with state and federal employment laws. How does a PEO support my human resource needs and help mitigate my risk?

A: First, the PEO will provide you with access to HR experts, knowledgeable in all aspects of labor and employment compliance. They will advise you on how laws are applied and interpreted, and best practices for hiring, employee training, and more. Before making a decision about an employee, you can schedule a consultation to discuss the circumstances and receive guidance.

You will also have access to a vast library of HR forms, documents, policies, and handbooks. Additionally, PEOs aim to keep clients current on changing federal and state legal regulations through ongoing communications.

Second, you will access Employment Practices Liability Insurance (EPLI) through your PEO. Like WC, the PEO holds one EPLI policy through which all employees on the PEO payroll are covered. It helps to cover expenses incurred by defending against employee claims of harassment, wrongful termination, discrimination, retaliation, etc.

Q: How can a PEO help me offer benefits to my employees?

A: A benefits program will motivate great candidates to come aboard with your company and incentivize great employees to stay. A PEO can help you customize and administer a benefits program that works for your company and your employees.

PEOs typically offer a variety of employee benefits such as health care, life, disability, dental, vision, 401(k) plans, and special discounts. Depending on the size of the company, a client may benefit greatly from using the PEO’s group plan to access big company benefits at a fraction of the price. If not, the PEO has the flexibility to shop for individual plans that suit a client’s unique situation. Or, clients may opt to manage their own benefits program.

Once benefits are in place, the PEO handles their administration through premium payroll deductions and carrier payments, so these burdens are shifted from the employer, freeing up internal resources. Plus, the PEOs benefits experts help clients navigate rules and regulations associated with health care, like the Affordable Care Act (ACA).

If you’d like to learn more about co-employment and FrankCrum’s PEO solution, call 800-277-1620.

Anna Leo Holder. MBA
Anna Leo Holder. MBA

Anna Leo Holder leads the Client Experience, Compliance and Enrollment teams and works to deliver superior customer service to FrankCrum’s PEO clients nationwide. She has been with FrankCrum since 2006 and strives to foster improvements in customer satisfaction and develop ongoing strategies for success.