A PEO (Professional Employer Organization) is a company that provides an integrated, cost-effective solution to the management of employee administration and human resources. The PEO and the business owner enter into a contractual arrangement whereby both share certain employer responsibilities. The business owner retains full control of the company, concentrating on growing the business and managing day-to-day operations, while the PEO takes on the administrative role including payroll, human resources, benefits administration, and regulatory compliance.
The typical client of a PEO is a small or medium sized business; however PEO services can benefit any size company. Whether you have one employee or hundreds, a PEO can help relieve you from the burden of employee and human resource management, allowing you to concentrate on growing your business.
In the arrangement between a PEO, a worksite employee, and a client company, there exists a joint-employment relationship in which both the PEO and the client company assume certain employer rights, responsibilities, and risks. The PEO assumes the responsibility for personnel management, human resources, and benefits and payroll administration. The client company controls the business activities and the day-to-day management and directions of its employees.
Small business owners need to focus their time and energy on the ‘business of their business’ and not on the ‘business of employment’. According to the Small Business Administration, only 20% of start-up companies survive beyond 5 years. One reason is because many small business owners are not prepared for the onslaught of tasks entailed in employee administration, nor do they have the necessary human resources training, payroll and accounting skills, knowledge of regulatory compliance, or the backgrounds in risk management, insurance and employee benefits needed to meet the demands of being an employer. These tasks divert the business away from what made them a success in the first place—growing their business.
As joint-employers, the PEO and business owner become partners in the employment of the worksite employees. The client retains full ownership of the company and continues the daily supervision and direction of the employees. The PEO is responsible for payroll and benefits administration, risk management, regulatory compliance, and all other human resource-related functions. By shifting these responsibilities to the PEO, the client is able to focus on the revenue-generating aspects of their business.
Workers seek financial security, quality health insurance, and a safe working environment. PEOs provide Fortune 500 quality employee benefits including, health insurance, 401(k) savings plan, and workplace risk management. Job satisfaction and productivity increase when workers are provided with access to more comprehensive and affordable benefits and quality human resource services.
The PEO relationship involves a contractual allocation and sharing of employer responsibilities between the PEO and the client. This shared employment relationship is called co-employment. As co-employers with their client companies, PEOs contractually assume substantial employer rights, responsibilities, and risk through the establishment and maintenance of a co-employer relationship with the workers assigned to its clients. More specifically, a PEO establishes a contractual relationship with its clients defining the PEO’s responsibilities.
Both the PEO and the client company establish employment relationships with worksite employees. Each entity has responsibilities relating to the worksite employees. The PEO directs and controls worksite employees in matters involving human resource management and compliance with employment laws, and the client company directs and controls worksite employees in manufacturing, production, service and delivery of its products and services.
PEOs manage their employment liability exposure by working with their clients to monitor and require compliance with employment laws, develop policies and procedures that apply to worksite employees, supervise and discipline worksite employees, exercising discretion related to hiring new employees, and ultimately terminating worksite employees who do not comply with requirements established by the Client/PEO.