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What is a PEO?

  • PEOs provide services to 173,000 small and mid-sized businesses, employing 4 million people.

  • There are 487 PEOs in the United States.

  • The 4 million worksite employees were paid $216 billion in 2020.

  • The total employment represented by the PEO industry is roughly the same as the combined number of employees for Walmart (United States only), Amazon, Kroger, and Home Depot. 

  • The PEO industry’s 173,000 clients represent 15.3 percent of all employers with 10 to 99 employees.

  • From 2008 to 2020, the number of WSEs employed in the PEO industry grew at a compounded annual rate of 7.6 percent. This is 7 percent higher than the compounded annual growth rate of employment in the economy overall during the same period.

 

Sources: National Association of Professional Employer Organizations

PEO stands for Professional Employer Organization

PEO stands for professional employer organization. During your research, you may have heard PEO services referred to as co-employment, business process outsourcing, or HR outsourcing. PEOs enable clients to cost-effectively outsource the management of human resourcesemployee benefitspayroll, and workers’ compensation. The PEO industry has been around for 30+ years. There are more than 700 PEOs nationwide. PEOs operate in every state and provide services to 173,000 small and mid-size businesses, employing more than four million people according to NAPEO.

A professional employer organization (PEO) provides comprehensive HR solutions for small and mid-size businesses. Payroll, benefits, HR, tax administration, and regulatory compliance assistance are some of the many services PEOs provide to growing businesses across the country. Small businesses that work with a PEO grow 7 to 9 percent faster, have employee turnover that is 10 to 14 percent lower, and are 50 percent less likely to go out of business. The return on investment of using a PEO, in costs savings alone, is 27.3 percent.

How does a PEO work?

Business owners want to focus their time and energy on the "business of their business" and not on the "business of employment." As businesses grow, most owners do not have the necessary human resource training, payroll and accounting skills, the knowledge of regulatory compliance, or the backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an employer. PEOs give small-group markets access to many benefits and employment amenities they would not have otherwise.

 

PEO clients include different types of businesses ranging from accounting firms to high-tech companies and small manufacturers. A broad range of professionals, including doctors, retailers, mechanics, engineers and plumbers, also benefit from PEO services.

Why would a business use a PEO?

Business owners want to focus their time and energy on the "business of their business" and not on the "business of employment." As businesses grow, most owners do not have the necessary human resource training, payroll and accounting skills, the knowledge of regulatory compliance, or the backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an employer. PEOs give small-group markets access to many benefits and employment amenities they would not have otherwise.

 

PEO clients include different types of businesses ranging from accounting firms to high-tech companies and small manufacturers. A broad range of professionals, including doctors, retailers, mechanics, engineers and plumbers, also benefit from PEO services.

Who uses a PEO?

Any business can find value in a PEO relationship. Small and larger businesses find value in a PEO arrangement, because PEOs offer robust web-based HR technologies and expertise in HR management. Advisor HR can partner with companies that have 1employee to over 500 or more employees and work in conjunction with their existing human resources department. 

PEO clients include different types of businesses ranging from accounting firms to high-tech companies and manufacturers. A broad range of professionals, including doctors, retailers, mechanics, engineers and plumbers, also benefit from PEO services.

 

Do the business owners lose control of their business when they work with a PEO?

No. The PEO client/business owner retains ownership of the company and control over its operations. As co-employers, the PEO and client will contractually share or allocate employer responsibilities and liabilities per a client service agreement (CSA). The PEO will generally only assume responsibilities associated with a "general" employer for purposes of administration of benefits and remittance of payroll and payroll taxes. The client will continue to have responsibility for worksite safety and compliance. The PEO will be responsible for remittance of payroll and employment taxes, may maintain employee records and may retain a limited or general right to hire and fire, as delineated in the CSA. Because the PEO also may be responsible for providing access to workers' compensation coverage, many PEOs also focus on and provide assistance with safety and compliance. In general terms, the PEO will focus on employment-related issues, and the client will be responsible for the actual business operations.

What is the difference between a PEO and an employee leasing company?

PEOs do not supply labor to worksites. PEOs supply services and benefits to a business client and its existing workforce. PEOs enter into a co-employment arrangement typically involving all of the client's existing worksite employees and sponsor benefit plans for the workers and provide human resources services to the client. In most cases, the PEO provides access to health insurance, retirement savings plans, and other critical employee benefits for the worksite employees of the business client. If a PEO relationship is terminated, the worksite employees’ co-employment arrangement with the PEO ceases, but they will continue as employees of the client. 

By comparison, a leasing or staffing service supplies new workers, usually on a temporary or project-specific basis. These leased employees return to the staffing service for reassignment after completion of their work with the client company. Some define employee leasing as a temporary employment arrangement where one or more workers selected by the leasing or staffing entity is assigned to a customer frequently for a fixed period of time or for a specific project. Upon termination of the staffing or leasing company arrangement, the worker has no continuing employment relationship with the client. 

 

Historically, leasing terminology was used to describe what has evolved into PEO relationships. Some older state statutes governing PEOs still use the leasing terminology, contributing to the confusion about PEOs. 

How do employees benefit from a PEO arrangement?

Through a PEO, the employees of small businesses gain access to big-business employee benefits such as: 401(k) plans; health, dental, life, and other insurance; dependent care; and other benefits they might not typically receive as employees of a small company. And, when a company works with a PEO, job security is improved as the PEO implements efficiencies to lower employment costs. Job satisfaction and productivity increase when employees are provided with professional human resource services, enhanced benefits, training, employee manuals, safety services and improved communications.

Do workers receive comprehensive benefits through a PEO?

Frequently, a PEO arrangement is the only opportunity for a worker in a small businesses to receive Fortune 500-quality employee benefits like health insurance, dental and vision care, life insurance, retirement saving plans, job counseling, adoption assistance, and educational benefits. Absent the PEO, a small business can neither afford nor manage these benefits.

Does a PEO arrangement impact a collective bargaining agreement?

No. PEOs work equally well in union and non-union worksites. The National Labor Relations Board (NLRB) recognizes that in co-employment relationships, worksite employees are appropriately included in the client employer's collective bargaining unit. Where a collective bargaining agreement exists, PEOs fully abide by the agreement's terms. PEOs endorse the rights of employees to organize, or not organize, under state and federal laws. 

Do PEOs need to be licensed to provide insurance benefits to worksite employees?

Like other employers, a PEO may sponsor employee benefit plans for its worksite employees. Such benefits may be mandated by law, such as workers' compensation and unemployment benefits, or they may be voluntary benefits that will help attract and retain quality employees, such as health, life, dental and disability insurance. PEOs might sponsor or acquire access to programs for worksite employees. As such, PEOs are consumers of insurance and procure access to these benefits from licensed insurance agents and authorized insurers.

Why is it important a PEO have audited financial statements?

A number of state PEO licensing and registration laws require audited financial statements. In addition, the PEO industry best professional performance practices recommend audited financial statements in order to enhance internal controls and accuracy of financial information. While independent audits cannot prevent fraud or financial failure, they provide management with an independent review of and opinion that the financial statements of the entity are accurate, complete and fairly presented according to generally accepted accounting principles (GAAP). 

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