Professional employer organization
Encyclopedia
A professional employer organization (PEO) is a single source provider of integrated services which enable business owners to cost-effectively outsource the management of human resources, employee benefits, payroll and workers’ compensation and other strategic services, such as recruiting, risk/safety management, and training and development.It does this by hiring a client company’s employees, thus becoming their employer of record for tax purposes and insurance purposes. This practice is known as co-employment
As of 2010, there were more than 700 PEOs operating in the United States, covering 2-3 million workers. PEOs operate in all fifty U.S. states. Similar services are described in Sweden, Germany,
purposes, filing paperwork under its own identification numbers. The client company continues to direct the employees’ day-to-day activities. PEOs charge a service fee for taking over the human resources and payroll functions of the client company: typically, this is from 3 to 15% of total payroll. This fee is in addition to the normal employee overhead costs, such as the employer's share of FICA, Medicare
, and unemployment insurance
withholding.
One key service usually provided by a PEO is to secure Workers Compensation insurance coverage for client companies. This is normally one of the key selling points stressed by a PEO, that a PEO can provide Workers Compensation insurance coverage at lower cost than client companies can obtain on an individual basis. While there is some merit to this assertion, it has also been an area of considerable controversy and litigation.
Essentially, a PEO obtains Workers Compensation coverage for its clients by negotiating insurance coverage that covers not just the PEO but also the client companies. This is allowed because legally the PEO is the co-employer of the workers at the client companies. There can be economies of scale that come into play, allowing a PEO to obtain Workers Compensation insurance at a cost lower than the individual client companies can obtain on their own. However, there have also been instances of PEOs using improper means to lower their Workers Compensation insurance costs. Some principals of PEOs have been found criminally liable for fraud for using improper means to lower Workers Compensation insurance premiums.
Effectively, PEO companies maintain a relationship with their clients on keeping updates of employee information. In light of this, Professional Employer Organizations successfully engage in improving practices of employment—this includes compliance, risk management reducing liabilities. Also, it lifts up the burden of employers to maintain bulk work of management systems. With the professionalism of PEOs, they provide management solutions that can benefit their clientele. Lastly, an important service is the presence of strategy and knowledge of the labor market. With this key aspect in mind, the PEO will opt to maximizing the competency in the labor market. PEOs can also offer basic levels of background & drug screening.
The value proposition to client companies is that the use of a PEO saves time and staff that would be used to prepare payroll and administer benefits plans, and may reduce legal liabilities or obligations to employees that it would otherwise have. The client company may also be able to offer a better overall package of benefits, and thus attract more skilled employees. The PEO model is therefore attractive to small and mid-sized businesses and associations, and PEO marketing is typically directed toward this segment.
In the United States, many small to medium size professional services firms utilize PEOs to allow them to provide the kinds of benefit plans which otherwise could only be made available at a prohibitively high cost to both the employer and the employee.
Several variations on the PEO model exist, differing in the nature of the relationship formed between PEO and client company.
in the United States began in the late 1960's by 3 business men, Eugene Boffa Sr, Louis Calmare, Sr. and Joseph Martinez Sr. The concept was popularized by Marvin R. Selter, who leased the employees of a doctor's office in Southern California. The Employee Retirement Income Security Act of 1974
(ERISA) contained an exemption for multiple employer welfare arrangements (MEWA), which provided a loophole
for employers with leased employees to claim they were exempt from the ERISA requirements. Passage of the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA) further encouraged employee leasing by providing a tax shelter
for employers who contributed a minimum amount to employee plans. More stringent guidelines in the Tax Reform Act of 1986
later eliminated most of the TEFRA incentive, however.
By 1985, there were approximately 275 staff leasing companies in the United States.
A new business has also developed recently, in which a marketing or brokering company serves to connect businesses with professional employer organizations. Many of these sites receive a commission if they arrange a contract between a PEO and a new business client. These sites earn their money by "brokering" for various PEOs and receiving compensation for contracting PEO relationships.
In 2004, President George W. Bush
signed into law the SUTA Dumping Protection Act of 2004, which requires that all 50 states enact anti-SUTA-dumping legislation by 2007. Most states have now done so; however, federal law does not prohibit companies from using a PEO to obtain more favorable SUTA rates.
The staff leasing industry itself has also taken steps to address abuses. It formed its first trade association, the National Staff Leasing Association, in 1985. The association changed its name to the National Association of Professional Employer Organizations in 1994 to reflect the term in current usage.
As part of the industry's efforts to self regulate, an independent accreditation body, Employer Services Assurance Corporation (ESAC), was formed in 1995. ESAC's purpose is to verify PEO compliance with important ethical, financial, and operational standards and to provide financial assurance backing the performance of its accredited PEOs.
PEOs may also undergo a certification process conducted by the independent Certification Institute (CI) formed in 2002. This certification verifies that a PEO's workers' compensation (WC) program is meeting proven insurance industry risk management best practices to reduce work-related accidents and health exposures and control WC insurance losses.
As of 2010, there were more than 700 PEOs operating in the United States, covering 2-3 million workers. PEOs operate in all fifty U.S. states. Similar services are described in Sweden, Germany,
Business Model
In a co-employment contract, the PEO becomes the employer of record for taxTax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
purposes, filing paperwork under its own identification numbers. The client company continues to direct the employees’ day-to-day activities. PEOs charge a service fee for taking over the human resources and payroll functions of the client company: typically, this is from 3 to 15% of total payroll. This fee is in addition to the normal employee overhead costs, such as the employer's share of FICA, Medicare
Medicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
, and unemployment insurance
Unemployment benefit
Unemployment benefits are payments made by the state or other authorized bodies to unemployed people. Benefits may be based on a compulsory para-governmental insurance system...
withholding.
One key service usually provided by a PEO is to secure Workers Compensation insurance coverage for client companies. This is normally one of the key selling points stressed by a PEO, that a PEO can provide Workers Compensation insurance coverage at lower cost than client companies can obtain on an individual basis. While there is some merit to this assertion, it has also been an area of considerable controversy and litigation.
Essentially, a PEO obtains Workers Compensation coverage for its clients by negotiating insurance coverage that covers not just the PEO but also the client companies. This is allowed because legally the PEO is the co-employer of the workers at the client companies. There can be economies of scale that come into play, allowing a PEO to obtain Workers Compensation insurance at a cost lower than the individual client companies can obtain on their own. However, there have also been instances of PEOs using improper means to lower their Workers Compensation insurance costs. Some principals of PEOs have been found criminally liable for fraud for using improper means to lower Workers Compensation insurance premiums.
Effectively, PEO companies maintain a relationship with their clients on keeping updates of employee information. In light of this, Professional Employer Organizations successfully engage in improving practices of employment—this includes compliance, risk management reducing liabilities. Also, it lifts up the burden of employers to maintain bulk work of management systems. With the professionalism of PEOs, they provide management solutions that can benefit their clientele. Lastly, an important service is the presence of strategy and knowledge of the labor market. With this key aspect in mind, the PEO will opt to maximizing the competency in the labor market. PEOs can also offer basic levels of background & drug screening.
The value proposition to client companies is that the use of a PEO saves time and staff that would be used to prepare payroll and administer benefits plans, and may reduce legal liabilities or obligations to employees that it would otherwise have. The client company may also be able to offer a better overall package of benefits, and thus attract more skilled employees. The PEO model is therefore attractive to small and mid-sized businesses and associations, and PEO marketing is typically directed toward this segment.
In the United States, many small to medium size professional services firms utilize PEOs to allow them to provide the kinds of benefit plans which otherwise could only be made available at a prohibitively high cost to both the employer and the employee.
Several variations on the PEO model exist, differing in the nature of the relationship formed between PEO and client company.
- Administrative services organizations (ASO)Administrative Services OrganizationAn administrative services organization is an organization that provides outsourced solutions to meet the administrative and HR needs of the client with the client retaining all employment-related risks and liabilities. The term ASO was established by the PEO industry in the late 1990s in order to...
are similar to PEOs but do not create a co-employment relationship. Employees remain solely under the control of the client company. Tax and insurance filings are done by the ASO, but under the client company’s Employer Identification NumberUmbrella companiesUmbrella companyAn umbrella company is a company that acts as an employer to agency contractors who work under a fixed term contract assignment, usually through a recruitment employment agency in the United Kingdom. Recruitment agencies issue contracts to a limited company as the agency liability would be reduced...
, found primarily in the UKUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, act as employer of record for independent contractors instead of permanent employees. The contractors become employees of the umbrella company, but do not also become employees of the client. The growth in umbrella companies in the UK is attributed to legislation targeting "disguised income" by contractors performing the same duties as employees but hired via intermediaries. The press release announcing the legislation, IR35IR35IR35 is a term used to denote United Kingdom tax legislation designed to tax "disguised employment" at a rate similar to employment. In this context, "disguised employees" means workers who receive payments from a client via an intermediary and whose relationship with their client is such that had...
, is often used to refer to the legislation itself. - Pass-through agencies are staffing firms that act as the employer of record for independent contractors, but do not obtain work for them. Like umbrella companies in the UK, the contractors do not become employees of the client.
- Financial intermediaries, also called fiscal intermediaries, act as an employer of record for home healthcare workers who serve disabled persons. This streamlines the process of hiring such workers, because neither the household hiring them nor government units that provide funding need to take on the duties of an employer. They are part of the self-determination movement in disability care.
Early History
Employee leasingEmployee leasing
According to the Division of Unemployment Assistance , "Employee Leasing Company" is defined as:"an employing unit that contract with a client company to supply workers to perform services for the client company, provided, that the term "employee leasing company" does not include private employment...
in the United States began in the late 1960's by 3 business men, Eugene Boffa Sr, Louis Calmare, Sr. and Joseph Martinez Sr. The concept was popularized by Marvin R. Selter, who leased the employees of a doctor's office in Southern California. The Employee Retirement Income Security Act of 1974
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
(ERISA) contained an exemption for multiple employer welfare arrangements (MEWA), which provided a loophole
Loophole
A loophole is a weakness that allows a system to be circumvented.Loophole may also refer to:*Arrowslit, a slit in a castle wall*Loophole , a short science fiction story by Arthur C...
for employers with leased employees to claim they were exempt from the ERISA requirements. Passage of the Tax Equity and Fiscal Responsibility Act of 1982
Tax Equity and Fiscal Responsibility Act of 1982
The Tax Equity and Fiscal Responsibility Act of 1982 , also known as TEFRA, was a United States federal law that rescinded some of the effects of the Kemp-Roth Act passed the year before. As a result of ongoing recession, a short-term fall in tax revenue generated concern over the budget deficit...
(TEFRA) further encouraged employee leasing by providing a tax shelter
Tax shelter
Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments...
for employers who contributed a minimum amount to employee plans. More stringent guidelines in the Tax Reform Act of 1986
Tax Reform Act of 1986
The U.S. Congress passed the Tax Reform Act of 1986 to simplify the income tax code, broaden the tax base and eliminate many tax shelters and other preferences...
later eliminated most of the TEFRA incentive, however.
By 1985, there were approximately 275 staff leasing companies in the United States.
A new business has also developed recently, in which a marketing or brokering company serves to connect businesses with professional employer organizations. Many of these sites receive a commission if they arrange a contract between a PEO and a new business client. These sites earn their money by "brokering" for various PEOs and receiving compensation for contracting PEO relationships.
Abuses
- PEOs have been used to evade minimum participation rules for pension and health care plans, which state that a minimum percent of employees must participate for the plan to be offered. Employers that do not want to offer such plans to its lower-paid employees outsource those employees to a PEO so they are not counted. This leaves the remaining highly-paid employees with a qualifying level of participation. Participation requirements are generally 75% percent with a PEO, however the client companies are required to meet that participation and the only way to get around the 75% rule is to have employees with valid waivers of coverage through a spouse or domestic partner.
- SUTA arbitrage, commonly referred to as "SUTA dumping," occurs when an employer with a high unemployment insurance rate transfers or "dumps" employees to purchased subsidiaries with lower unemployment insurance rates. However in any PEO relationship the client company would take the Professional Employer Organization's SUTA rate by law, in effect many times lowering their SUTA through SUTA Arbitrage, however the only time this wouldn't apply are in client reporting states.
Regulation
Each state in the U.S. has differing regulations for workers’ compensation insurance and state unemployment insurance, so PEOs are typically regulated at the state level.In 2004, President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
signed into law the SUTA Dumping Protection Act of 2004, which requires that all 50 states enact anti-SUTA-dumping legislation by 2007. Most states have now done so; however, federal law does not prohibit companies from using a PEO to obtain more favorable SUTA rates.
The staff leasing industry itself has also taken steps to address abuses. It formed its first trade association, the National Staff Leasing Association, in 1985. The association changed its name to the National Association of Professional Employer Organizations in 1994 to reflect the term in current usage.
As part of the industry's efforts to self regulate, an independent accreditation body, Employer Services Assurance Corporation (ESAC), was formed in 1995. ESAC's purpose is to verify PEO compliance with important ethical, financial, and operational standards and to provide financial assurance backing the performance of its accredited PEOs.
PEOs may also undergo a certification process conducted by the independent Certification Institute (CI) formed in 2002. This certification verifies that a PEO's workers' compensation (WC) program is meeting proven insurance industry risk management best practices to reduce work-related accidents and health exposures and control WC insurance losses.
See also
- Agency worker lawAgency worker lawAgency worker law refers to a body of law which regulates the conduct of employment agencies and the labour law rights of people who get jobs through them...
- Manpower Inc.Manpower Inc.ManpowerGroup is a workforce solutions and services provider company headquartered in Milwaukee, Wisconsin, United States. It was established by Elmer Winter and Aaron Scheinfeld in 1948. It was acquired by Blue Arrow of Britain in 1987, but became independent again in 1991.The directors include...
- Precarious workPrecarious workPrecarious work is a term used to describe non-standard employment which is poorly paid, insecure, unprotected, and cannot support a household. In recent decades there has been a dramatic increase in precarious work due to such factors as: globalization, the shift from the manufacturing sector to...
- Contingent workforceContingent WorkforceA contingent workforce is a provisional group of workers who work for an organization on a non-permanent basis, also known as freelancers, independent professionals, temporary contract workers, independent contractors or consultants...
External links
- Types of Professional Employer Organizations Retrieved from StaffMarket.com March 2011
- What is a PEO? From PEOcompare.com (March 2011)