The PEO Animal

A PE…What?? 

If you’re new to the Professional Employer Organization (“PEO”) world, the concept of “co-employment,” how it works for our clients and the services we provide may seem like a whole new animal. 

Once you understand the general purpose of the
relationship – what it is and what it isn’t – the animal will seem much tamer!

The concept of co-employment or “shared” employment isn’t new, but it helps to understand what is shared and what is not.  First, understand that it is not the same as in a temporary staffing arrangement where the sole employer is the temporary staffing agency and they supply (for a fee) their employees/workers to their clients to perform work at the clients’ worksites.

Employee Leasing

In a PEO arrangement – sometimes referred to as “employee leasing,” employers - the client companies of the PEO - place their existing employees (and subsequent hires during the contract period) on the PEO's payroll and the PEO performs administrative functions on behalf of the client while the employees continue performing work at the clients’ worksite(s).

The client maintains all the control over its employees as it always had (to hire, fire, discipline, determine working hours, location of work, duties, wages, etc.) and they simply tell the PEO when to add or remove someone from the payroll as well as how much to pay them.  So the employer doesn’t stop being an employer and doesn’t have to give up any control of their worksite or their employees.

Likewise, since they still have control over the employees the client remains responsible for compliance with the labor and employment laws concerning their employees.

The benefit of the relationship with a PEO however, is that the PEO will provide expert advice and guidance regarding such compliance, so the employer can focus on their business operations rather than trying to become a labor and employment law expert. (See the Human Resources section below for additional information regarding compliance.)

Taxes and Other Mandatory Deductions

In further regard to the term “co-employment”, the word “employ” on the PEO side doesn’t mean the employees actually perform work for the PEO, it means they are employed on the PEO’s payroll for tax purposes.

They actually become a W-2 employee of the PEO. As such, the employer taxes (federal and most states) are paid/reported under the PEO’s tax ID number(s).  This affects several things:

• The PEO is responsible for paying/reporting all wage-related taxes
• The PEO is responsible for issuing W-2s each year
• The unemployment claims are made against the PEO, so the PEO responds to them
• The PEO must file all 941s (employer’s quarterly federal tax return form)
• The PEO must file all required state tax forms

In addition to tax deductions, since the PEO processes the payroll on behalf of employers, the PEO will also receive and handle orders for wage garnishments (for things like child support or other court mandated wage deductions).

Just the payroll processing and above tasks related to wages alone could require several full time employees!  A PEO can take those administrative burdens off your hands.

Workers’ Compensation Insurance

Another responsibility that the PEO assumes is workers’ compensation insurance coverage.  Typically, the PEO has one policy (the PEO is the policy holder) and it covers all the employees on the PEOs payroll (including the leased employees).  So the client does not technically pay for a ‘policy,’ they pay for ‘coverage’ during their contract period with the PEO.

This can be beneficial to clients who would normally pay a high premium for their WC policy since this creates a “pay-as-you-go” arrangement for the coverage.  The rates are still determined by the codes established by the Nations Council on Compensation Insurance (NCCI) (the amount of risk assigned to the kind of work each employee performs), but the client pays for the coverage each pay period and only when the employees perform work (if they have no wages there is no comp charged for that individual).

PEOs also offer risk management services, claims management, and return to work programs.

Employment Practices Liability Insurance (EPLI)

Other insurance provided through the PEO is the employment practices liability insurance (EPLI). Similar to workers’ compensation, there is generally one EPLI policy (the PEO is the policy holder) and the clients pay for coverage (not a policy) through their periodic payroll invoices and not one big premium all at once.

EPLI is important coverage for employers to have in the ever-changing and challenging employment arena. Employment laws have increased protections for employees over the years, and individuals have recognized this and become more litigious as a result.

EPLI helps cover some of the expense of defending various claims made by employees against an employer such as wrongful termination, discrimination, harassment and retaliation.

Human Resources

As mentioned above, the clients of a PEO still maintain the same requirements to comply with state and federal employment laws because they continue to make all the decisions that affect their employees. So what good is a PEO if you keep the risk?

The PEO has a staff of HR professionals who are subject matter experts in all aspects of labor and employment compliance. So, while the client still must comply with the employment laws, the experts at the PEO can advise the client what those laws are and how they are applied and interpreted.

The clients can consult with the PEO prior to making decisions about their employees to make sure it is the best course of action under the circumstances.

Additionally, the PEO will have a vast library of forms, documents, policies and handbooks for the client to use to keep all personnel operations running smoothly. 

Employee Benefits

Generally a PEO can offer a wide variety of insurance benefits (health, life, disability, dental, vision, etc.) as well as benefits like 401(k) and special discount plans for the clients’ employees. Depending on the size of the organization a client may benefit from using the group plan of the PEO but will also have the option for the PEO to shop individual plans as well.

Once the benefits are in place, the PEO can handle the payroll deductions for the premiums as well as the payment to the carrier(s). The clients do however retain the ability to manage their own benefits if they so choose.

Additionally, with the tricky rules and regulations surrounding healthcare and the Affordable Care Act (ACA), it is certainly helpful to have a team of benefits experts to guide you through your obligations with those issues as well.

The Takeaway

Hopefully this helps explain what a PEO is, and the concept of co-employment. Why is this important to business owners? Because partnering with a PEO can result in some huge upsides for a small or medium-size business: save time, save money, attract and retain good talent, reduce risk & liability, and gain the support and guidance of a deep staff of professionals in payroll, HR, benefits, and risk management.

The PEO relationship enables business owners to spend more time growing their business, while avoiding costly HR mistakes.