Professional employer organization

A professional employer organization (PEO) is a firm that provides a service under which an employer can outsource employee management tasks such as employee benefits, payroll and workers’ compensation, 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,

Business Model

In co-employment 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 withholding.

One key service usually provided by a PEO is to secure Workers Compensation insurance coverage at a lower cost than client companies can obtain on an individual basis. 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 have also been instances of PEOs using improper means to lower their Workers Compensation insurance costs and some principals of PEOs have been found criminally liable for fraud . PEOs can also offer basic levels of background & drug screening.

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.

Several variations on the PEO model exist, differing in the nature of the relationship formed between PEO and client company.

• Administrative services organizations (ASO) 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 companies, found primarily in the UK, 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, IR35, 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.

PEOs can benefit companies differently, for example a blue collar organization may see more value in Workers' Compensation Insurance and vice versa. A variation of a PEO model without co-employment is an administrative services organization.^{[citation needed]}

Early History

Employee leasing 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.

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.^{[citation needed]}

• 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.^{[citation needed]}

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 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 law
• Manpower Inc.
• Precarious work
• Contingent workforce