In my experience, I have found many small businesses who benefit from having a relationship with a Professional Employer Organization (PEO).  With the advancing technology, outsourcing various functions is part of daily business life.  This includes basic internal functions.  The PEO will have the insurance company relationships, the technology to understand your risks, the payroll administration and other benefits.  The PEO will help you understand Workers Compensation and your other insurance products, understand the language of risk, and move your organization forward – allowing you to focus on growth.

What is a PEO?

A professional employer organization (PEO) integrates payroll administration, human resource management, and risk management into one cost-effective outsourcing solution for its client companies. PEOs deliver these services by contractually assuming substantial employer rights, responsibilities, and risks for the workers employed at their client companies’ work sites. The PEO industry addresses the need for small and medium-sized businesses to achieve better economies of scale, and allows business owners to focus on the heart and soul of their company rather than administrative tasks.

PEOs offer their client companies and worksite employees the benefits, services, and expertise of a personnel department within a large corporation. Many small businesses and start-up companies cannot afford to hire a full-time accountant, human resources professional, lawyer, risk manager, benefits manager, and manager of information services, in addition to the rest of their work staff. PEOs provide any and all of these services, allowing client companies to dedicate their time to achieving their business goals. PEOs enter a joint employment, or “co-employment,” agreement with their client companies. This arrangement is sometimes referred to as employee leasing, but it is important to note that PEOs take on a client company’s current workers rather than supplying the company with new, leased employees. Each party is solely responsible for certain obligations of employment, but both parties share responsibilities for other obligations, as designated by a contractual arrangement. Both the PEO and client company may be considered “an employer” for some purposes, but neither party would be considered “the employer” for all purposes.

Law and Regulation

In the United States, the Internal Revenue Service (IRS) grants PEOs several employer privileges, but typically recognizes the client companies as the common-law employer for co-employed workers. The SMALL BUSINESS CREDIT EFFICIENCY ACT OF 1995, re-introduced by Senators Charles Grassley and Bill Nelson on March 7, 2013, as S. 479, would grant PEOs legal status as employers.

Generally, a PEO will direct worksite employees in matters involving human resource management and compliance with applicable employment laws, while the client company will continue to oversee day-to-day functions of its internal operations. Many PEOs assist client companies in developing their employee handbooks, and provide related guidance and training for their clients’ managers and supervisors, possibly including seminars on such issues as how to avoid claims of sexual harassment, discrimination in the workplace, or wrongful termination. PEOs can be especially helpful to companies that have work sites in multiple states, as the firm will handle the employee compliance and recordkeeping tasks that often vary from one state to another.

PEO growth

It is estimated that between two and three million American workers are co-employed through a PEO arrangement. The National Association of Professional Employer Organizations (NAPEO) reports that there are about 700 PEOs operating in 50 states, serving approximately 250,000 small and mid-sized businesses in the United States. The NAPEO estimates that the PEO industry grew $10 billion to $81 billion in gross revenues in 2010. The average client of NAPEO members is a small business with an average of 20 employees. The average annual cost per worker for the PEO can run between $1,500 and $2,500, which typically includes the cost of processing the worker’s required documents and paperwork, handling their payroll taxes and retirement savings deductions, providing health and/or life insurance benefits, and ensuring that client companies are compliant with all applicable employment laws and regulations.

Impact of the Affordable Care Act

Though the PEO industry encountered some stagnation in the United States due to the economic climate, more businesses are expected to turn to PEOs for help complying with the Patient Protection and Affordable Care Act (PPACA), which will impose guidelines on health insurance, and require employers with 50 or more full-time or full-time equivalent employees to provide health care or face costly fines as of 2015.

Group rates for health insurance have always been a selling point for PEOs, which can provide a variety of benefits that small businesses could not otherwise afford to offer their employees. It is estimated that between four and six million individuals already benefit from health care plans provided by co-employment arrangements with a PEO.

Health, dental and life insurance; retirement plans; and dependent care are among the “big business” benefits a PEO can offer to small business employees. The NAPEO estimates that 95% of employees in PEO arrangements have access to 401(k) benefits, as compared to 19% of all small business employees. Most PEOs will provide client companies a comprehensive package of benefits, but some offer their services “cafeteria style,” allowing the client company to pick and choose which benefits the co-employed workers will receive. Some companies offer PEO services as just one facet of their business, also offering client companies options that include business processing outsourcing (BPO) or standalone payroll and benefits administration services.

The upward trend the PEO industry enjoyed prior to the recession was, in part, a reflection of the changes in personnel management among many American businesses over the past 30 years. Numerous, and sometimes sweeping, legislative and regulatory changes in employment law at the local, state, and federal levels have created a market for the outsourcing of various human resource responsibilities. Many companies have found it difficult to stay abreast of all of these changes, while still focusing on their business at hand, so they turn to PEOs to ensure compliance with all applicable employment regulations in the client company’s workplace.

Role of the PEO

PEOs closely monitor client companies’ work sites and, in a collaborative effort with their management and supervisory staff, ensure that the co-employer is maintaining compliance with all applicable employment laws, including: Title VII of the 1964 Civil Rights Act; the Age Discrimination in Employment Act (ADEA); the Americans With Disabilities Act (ADA); the Family Medical and Leave Act (FMLA); the Fair Labor Standards Act (FLSA); the Consolidated Omnibus Budget Reconciliation Act of 1988 (COBRA); the Employee Retirement Income Security Act of 1974 (ERISA); the Health Insurance Portability and Accountability Act of 1996 (HIPAA); and the Immigration Reform and Control Act (IRCA) for the US-domiciled insured. PEOs will also work with client companies to develop standard policies, practices, and procedures for managing, supervising, and disciplining their employees on the job. According to the terms of some standard co-employment contracts, PEOs can also exercise the complete or partial discretion with regard to the hiring and firing of client companies’ employees, as long as the affected workers will be or are currently listed on the PEO’s payroll.

When building their own office staff, PEOs hire individuals who are extremely well versed in the laws and regulations pertaining to human resources practices, as well as workplace safety and risk management. Many PEOs employ workers who are certified specialists in their area of expertise. Forty states have adopted laws to license or register PEOs, and if passed, the Small Business Efficiency Act will create a voluntary federal system for PEO certification. Many of the current laws impose financial disclosure and reporting requirements on the part of the insured. Some laws also specifically address the PEO’s capitalization for Workers’ Compensation and unemployment insurance. The PEO industry also has its own voluntary set of regulations.

Depending on the size and scope of its operations, a PEO may have as few as 5 to as many as 100 or more employees listed on its payroll. Most of these individuals will not work for the PEO in its office, but will hold positions with various client companies at off-site locations. The staff for the PEO’s own office will typically be comprised of several client relations specialists, human resources professionals, accountants and payroll specialists, attorneys, risk managers, employee benefits managers, worksite coordinators, and administrative support staff.

For more information on PEOs

Workers Comp Made Easy: For Business Owners, HR Professionals and PEO Brokers

This book describes Professional Employer Organizations. How they function, who they help, how to sell their benefits, if they are right for your business and everything else PEO related.

PEO Trade organizations

The largest trade association for professional employer organizations (PEOs) is the National Association of Professional Employer Organizations (NAPEO, which may be reached at The accreditation and financial assurance organization for PEOs is the Employer Services Assurance Corp. (ESAC, which may be reached at Workers’ Compensation Risk Management Certification for PEOs is managed by the Certification Institute (CI, which may be reached at

About the author

Arnold Smith

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