Is a PEO Right For You? Browse Our FAQ for Answers to the Most Common Questions We Hear About PEOs and ASOs.
A professional employer organization (PEO) is a company that contractually assumes and manages critical human resource functions, personnel responsibilities, and employer risks. Today, 17 states provide some sort of licensing, registration, or regulation for PEOs. The Internal Revenue Service also acknowledges that a PEO may be the employer for federal income and unemployment taxes. Learn more here.
In a relationship between a PEO, a worksite employee, and a client company, there exists a co-employment relationship in which both the PEO and the client company have an employment relationship with the worker. The PEO and the client company contractually allocate some of the shared traditional employer responsibilities and liabilities. The PEO assumes the responsibility and the liability for the “business of employment” – such as risk management, personnel management, human resources compliance, payroll and tax compliance. The client company manages product development and production, marketing, sales, and service. The PEO establishes an employment relationship with the worksite employees and provides a complete human resources and employee benefits package.
An ASO is an Administrative Service Organization. The main difference is that with an ASO, the employees do not shift to a co-employment relationship as they do with a PEO. With an ASO, the employees remain with the employer, and all taxes are paid under the clients’ tax ID numbers. The services provided by Delta to ASO clients and PEO clients are essentially the same. All the human resources issues, risk management issues, benefit issues, and payroll and taxes are still processed by Delta. In an ASO, however, there is not as much of a shared liability, because there is no co-employment relationship. Contractually, Delta still assumes the tax liability as long as the invoices are paid on time. Some clients choose an ASO because they need their employees to remain in their corporate ID due to certain internal issues. A client may also choose an ASO if they are receiving government funds for the amount of employees they have on staff, etc. Learn more here.
NO. Workers are never fired by the client business and rehired by the PEO. Instead, a worker becomes an employee of two employers in a contractual co-employment relationship. The PEO assumes employer responsibilities and liabilities for the human resource and personnel obligations of the worksite employees. This responsibility includes employee wages and employment taxes, workers’ compensation and unemployment insurance and employee benefits. The PEO client retains employer responsibilities such as supervision of production of products or services, or the delivery of such services.
NAPEO (the National Association of Professional Employer Organizations) estimates that between 2.5 million and 4 million American workers are currently co-employed in a PEO arrangement. PEOs are operating in every state, and the industry has grown between 20% and 30% per year over the past 10 years. Today, there are well over 2,000 PEO companies that are responsible for over $20 billion in employee wages and employee benefits.
Workers seek financial security, quality health insurance, a safe working environment, and opportunities for retirement savings. PEOs may provide Fortune 500 quality employee benefits. Job security is improved, as the PEO economy of scale permits a business to lower employment costs. Job satisfaction and productivity increases when workers are provided quality human resource services like employee manuals, grievance procedures, and improved communications.
- Assess your workplace to determine your human resources and risk management needs.
- Make sure the PEO is capable of meeting your goals. Meet the people that will be serving you.
- Ask for references. Ask how long they’ve been in business, etc.
- Check to see if the company is a member of NAPEO, the national trade association of the industry.
- Investigate the company’s administrative and risk management competence. How much experience and depth do they have?
- Make sure all of their insurances are with “A” rated carriers or higher and that they are fully funded products.
- Review the service agreement carefully. Are the parties’ responsibilities clearly laid out? What provisions are there to cancel the contract?
- If your state requires a license for PEOs, make sure you are dealing with a licensed company (required in Louisiana as of 01-01-2002).
Small to medium-size business owners want to focus their time and energy on the “business” – rather than spending all day doing paperwork for the government. Most small business owners do not have the necessary human resource training, payroll and accounting skills, knowledge of regulatory compliance, or background in risk management, insurance, or employee benefits to meet the regulatory demands put upon them by the government. Even if you do have the necessary skills, is this how you want to spend your time, as opposed to focusing on creating a business that is growing and successful? A PEO provides you with a great opportunity to provide something special to your employees – benefits beyond what they normally would have working for a small business – while you are able to concentrate solely on running your business. Learn more here.
No. You are still in charge of managing your employees, making hiring and termination decisions, and making all business decisions. We are here to handle the administrative side of HR, answer questions from employees, and provide support with legal and compliance issues.
PEO certification means that the PEO has met specific IRS criteria, and that they have demonstrated a credible history of paying employment taxes for their clients. The IRS certification process requires an audit of the PEO’s financial statements, documentation that employment taxes are paid on time, and documentation of the PEO’s financial stability. Certification is not required for a PEO to operate, and it does not necessarily indicate that a provider is more credible than a non-certified PEO.
Co-employment means that the PEO and the client company share the risks and obligations of an employer. The PEO is the employer of record and employment taxes are filed under the PEO’s tax identification number. The client company retains control of all business decisions, and the PEO handles the majority of HR responsibilities including tax filing, compliance, insurance, benefits administration, and workers compensation.