9 FAQs About Professional Employer Organizations (PEO)

1. What are Professional Employer Organizations (PEOs)?

A PEO is an organization to which an organization can outsource a wide range of human resource management tasks including benefits, compensation, recruitment, payroll, and training. Following a co-employment model, a PEO hires employees on behalf of their clients and acts as the “employer on record” responsible for insurance and tax compliance of the employees.

2. What are the types of businesses that need a PEO?

Any types of business can hire a PEO. In fact, even a non-profit organization can benefit by using PEO services. Businesses in Hi-tech, retail, manufacturing, financial services, and other sectors frequently get into PEO arrangements. Whether it is a two-person office or a manufacturing unit employing hundreds or thousands of workers, co-employment through a PEO set up proves to be an effective solution.

3. How are PEOs different from an employee leasing service?

An employee leasing company provides human resources on a temporary basis or for specific projects, whereas the role of a PEO is that of a service provider to its clients’ business and managing employees. During employee leasing, when a short-term project or temporary staffing requirement is fulfilled, the workers are either reassigned to another project or simply laid off. In the case of a PEO, employees continue their work for the employer even after the PEO contract ends.

4. How can clients of a PEO control the employees working for them?

Though PEOs officially fulfill all the staffing requirements, the actual business owners or clients can still directly supervise or control the employees. The clients determine job responsibilities, quality standards, wage rates, performance standards, working hours, compliance with rules, and other terms.

5. How can business owners control costs in a PEO arrangement?

PEOs control the costs of a business by providing service infrastructure, the latest technology solutions, and platforms for delivering the contracted services with due compliance. PEOs enable cost-savings by managing the routine and redundant tasks, such as payroll, taxes, employment practices, HR, employee benefits, and regulatory compliance.

6. How do PEOs pay employee wages and payroll taxes?

PEOs undertake a contractual obligation to pay wages and comply with the taxation rules and regulations of a country. They specialize in reporting income and withholding taxes and making sure all the federal and state taxes are paid on time.

7. In a PEO setup who bears the regulatory compliance obligations?

Organizations that seek to expand their businesses to foreign countries, often face the issue of not having the adequate know-how of the regulatory compliance. This is where PEOs come into play by efficiently managing payroll, accounting, taxation, and compliance issues.

8. Does setting up a PEO affect a Collective Bargaining Agreement (CBA)?

PEOs work in tandem with both union and non-union setups. The employees under a PEO contract are included in the collective bargaining unit of their original employer – the PEO’s client. PEOs adhere to the collective bargaining agreement terms applicable for their employees. The employees exercise their right to organize or choose to refrain from taking part in union activities.

9. Is it mandatory for a PEO to get their financial statements audited?

Whether auditing is mandatory for a PEO or not depends on the relevant federal and state level laws in a country. However, conducting an audit is considered one of the industry best practices to ensure accuracy and control of financial data. Independent audits verify the financial information according to Generally Accepted Accounting Principles (GAAP) that helps the PEO management in reviewing financial statements.