What is PEO - Professional Employment Organization

What is a PEO?

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.

Business Model

In a co-employment contract, the PEO becomes the employer of record for tax 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.

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.

Benefits of a PEO

When it comes to managing complex related matters, businesses need as much help as possible. It may be tedious to allow other fields to progress as businesses may need to keep records consistent and error-free for matters such as health benefits, payroll, workers' compensation claims, unemployment insurance claims, and payroll tax compliance. With the bulk work needed for the employees to be fully satisfied, a company may sacrifice productivity for compensation. A PEO prevents this from happening and opens up the gateway to other possible management systems. A business will then benefit from the advantage of rerouting their focus on more profitable means in their business.

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.

What Value Does Professional Employer Organizations have for Businesses?

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.

Learn more about specific duties that a PEO would be responsible for to see if a Florida Professional Employer Organization is the best solution for your business by viewing the PEO chart here.