Professional employer organization
From Wikipedia, the free encyclopedia
A Professional Employer Organization, or PEO, is a service provider utilizing a business relationship that allows outsourcing of human resources tasks, mainly for small to mid-sized business that do not have the need or resources for a dedicated human resources department. The concept is virtually unknown outside of the United States.
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[edit] Description
Typically, a PEO will legally hire a company's current employees, thereby making the PEO the "employer of record" for taxation and insurance purposes. Subsequently, the employees are leased back to the original employer (now client) under a co-employment contract, which sets out the powers, responsibilities and liabilities of the parties. This practice is also known as employee leasing or staff leasing. The PEO assumes responsibility for all payroll obligations and tax filings, with health benefits, welfare and retirement benefits being optional additional services that can also be contracted, as well as all the associated administrative paperwork.
A PEO is defined as an organization that provides an integrated and cost effective approach to the management and administration of the human resources and employer risk of its clients, by contractually assuming substantial employer responsibilities and risk, through the establishment and maintenance of a co-employer relationship with the clients employees.
More specifically, a PEO establishes a contractual relationship with its clients whereby the PEO:
- pays wages and employment taxes of the employee out of its own accounts;
- reports, collects, and deposits employment taxes with state and federal authorities;
- establishes and maintains a co-employment relationship with its employees which is
intended to be long term and not temporary;
- assumes responsibility as an employer for specified purposes of the workers assigned
to the client locations; and
- shares the responsibility of co-employees wages and safety with the client.
Businesses may desire to outsource increasingly complex employee related matters, such as personnel management, health benefits, workers' compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. Businesses contract with a PEO to assume these responsibilities, which then allows the client to concentrate on the revenue-producing side of its operations.
A PEO provides integrated services that manage critical human resource responsibilities and employer risks for clients. PEOs deliver these services by establishing and maintaining an employer relationship with the workers assigned to its client and by contractually assuming substantial employer rights, responsibilities, and risk.
[edit] Origins
The first PEO is said to have opened in California in 1972, although others cite the leasing of security guards from the Pinkerton National Detective Agency in the 19th century as the origins of employee leasing. It is estimated that there as of 2006 there are over 500 PEOs operating in the USA.
[edit] Operating procedures
The PEO issues pay checks to the leased employees, usually drawn on its own bank accounts and receives an agreed professional services fee from the client company. A leased employee is a worker who is essentially rented on a long-term basis from the PEO, which is responsible for employing the worker, paying the salary or wages, taxes and providing benefits for that employee. Under a typical agreement, an employer contracts with a PEO and the employer and the PEO become the co-employers of the workers, with the PEO being the employer of record.
As the employer of record of the leased employees, the PEO company handles all of the employee-related tasks and expenses, such as:
- 1. Paying and filing Federal payroll taxes and reports;
- 2. Paying and filing state payroll taxes and reports;
- 3. Paying and reporting on workers' comp and workers' comp injuries;
- 4. State unemployment tax assessment wage reporting;
- 5. Benefit claims handling; and
- 6. Other human resource issues.
[edit] Human resource management
Most PEOs also provide human resource management to the client for the leased employees. Establishments in this industry usually operate in a co-employment (or joint employment) relationship with client businesses or organizations and are specialized in performing a wide range of human resource and personnel management duties, such as payroll accounting, payroll tax return preparation, benefits administration, recruiting and managing labor relations. PEOs exercise varying degrees of decision making relating to their human resource or personnel management role, but do not have any management accountability for the work of their clients' operations with regard to day-to-day work activities, strategic planning, output or profitability.
PEO's provide four integrated services through co-employment:
- Human Resource Compliance
- Risk Management
- Benefits Administration
- Payroll.
Employees may gain access to benefits such as group health, 401(k) plans, cafeteria 125 plans, life and dental insurance options. Many PEO's offer even more value adding benefits and services to help client employers and their employees succeed.
Acceptance of the co-employment arrangement varies by state and industry. In addition to assisting companies with state regulatory compliance, PEOs have traditionally provided worker’s compensation insurance coverage. Each state in the U.S. has differing regulations for workers’ compensation insurance and state unemployment tax laws. Workers’ compensation insurance regulation is controlled at the state level and all states require employers to provide coverage, with the exception of Texas. Employers failing to provide workers comp for their employees risk personal liability for the cost of employee injuries and fines from the state. Under a formal co-employment relationship with a PEO, workers’ compensation insurance is provided by the PEO and work comp claims and claims administration are handled by the PEO on behalf of the client. Each state has differing regulatory bodies for workers’ compensation law and licensing requirements for PEOs. The costs to employers for workers compensation insurance through a PEO is based on the risk type of the jobs being performed and the experience modifier of the client company.
[edit] Legal Issues
A PEO generally generates some of its income through various methods of insurance and tax arbitrage. In insurance products, a PEO will purchase workers' compensation, employment practices liability and employee benefits insurance at a given price. The PEO then adds a markup to the premium costs and bills that rate to the client company. For tax liability (specifically state unemployment taxes (SUTA)), a PEO contracts with a client that has higher SUTA rates. Due to the nature of the PEO contract, the PEO pays taxes at their SUTA rate and then charges a higher rate to the client. The difference in these rates is profit for the PEO.
Adding charges to workers' compensation and employment practices liability premiums may be considered a form of Deceptive Insurance Trade Practices, as the margins are rarely disclosed. Because of this, some states are prohibiting the use of "master policy" insurance products for use in PEO relationships. Adding charges to employee benefits premiums are a violation of the Employee Retirement and Income Security Act (ERISA).
SUTA arbitrage, commonly referred to as "SUTA dumping," has been prohibited by most states. In 2004, President George W. Bush signed into law The SUTA Dumping Protection Act of 2004. This law requires that all 50 states enact anti-SUTA-dumping legislation by 2007.
One major concern is that PEOs and their clients are mutually agreeing to avoid paying unemployment taxes and workers' compensation premiums (as calculated based on claims experience). Therefore, these arbitrage schemes are being gradually prohibited by federal and state law.
