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Frequently Asked Questions and Answers on PEOs

1. What is a PEO?

A professional employer organization (PEO) is a company which contractually assumes and manages critical human resource and personnel responsibilities and employer risks for its small to mid sized businesses by establishing and maintaining an employer relationship with worksite employees.

2. Are PEOs recognized as employers?

The Internal Revenue Service acknowledges that a PEO may be the employer for federal income and unemployment taxes. Seventeen states provide some form of licensing, registration, or regulation for PEOs. Moreover, many states statutorily recognize PEOs as the employer or co-employer of worksite employees for purposes of workers compensation and state unemployment insurance taxes.

3. What is a PEO agreement?

A PEO arrangement involves all or a significant number of the client workplace employees in a long-term, non-project related, employment relationship. The PEO assumes the employer responsibility for employment tax, benefit plans, and other human resource purposes. Through the use of a PEO, relationship, client companies make a long term investment in their workers, because the PEO provides health insurance, retirement savings plans, and other critical employee benefits for their worksite employees.

4. Who uses a PEO?

The average client customer of a PEO is a small to medium sized business with 1 to 200 employees, though larger businesses also find value in a PEO arrangement. These business customers include every single type of business from accountants to zoo keepers and every profession in between including doctors, retailers, mechanics and more.

5. Why would a small business use a PEO?

Small business owners want to focus their time and energy on the "business of their business" and not on the "business of employment." Business owners don't have the necessary human resource training; payroll and accounting skills; knowledge of regulatory compliance; or backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an employer.

6. Does the small business owner lose control of his or her business?

As co-employers, the PEO and small business owner become partners in the employment of their workers. The client retains ownership of the company. As co-employers, the PEO and client contractually share or assume employer responsibilities and liabilities. The PEO assumes most responsibilities and liabilities associated with a "general" employer. The PEO assumes a real and factual employer role. PEO's are responsible for payroll and employment taxes, maintaining employee records, reserve the ultimate right to hire and fire, and have the authority to resolve employee disputes. By shifting these responsibilities to the PEO, the client gains more command of the "core" revenue generating aspects of their business.

7. Why would a worker of a small business want a PEO as an employer?

Workers seek financial security, quality health insurance, a safe working environment, and opportunities for retirement savings . PEOs may provide Fortune 500 quality employee benefits including, health insurance and 401(k) savings plans, and aggressive workplace risk management. Job security is improved as the PEO's 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.

8. Who is responsible for the employee's wages and employment taxes?

PEOs assume responsibility and liability for payment of wages and compliance with all rules and regulations governing the reporting and payment of federal and state taxes on wages paid to its employees. The Internal Revenue Service recognizes the PEO as the employer for federal income and unemployment taxes, and case law affirms the principle that the PEO is responsible for payroll taxes.

9.Who is responsible for state unemployment taxes?

As the employer for employment tax and employee benefits, PEOs assume responsibility and liability for payment of state unemployment taxes, and most states recognize the PEO as the responsible entity. A few states require the PEO to report unemployment tax liability under its clients' account number , and four states have laws that hold the client and PEO jointly liable for unemployment taxes.

10. Who is responsible for workers' compensation?

Many states recognize the PEO as the employer of worksite employees for purposes of providing workers' compensation coverage.

11. Does a PEO arrangement impact a collective bargaining agreement?

PEOs work equally well in union and non-union workplaces. The National Labor Relations Board recognizes that, in co-employment relationships, worksite employees may be included in the client employer's collective bargaining unit. Where a collective bargaining agreement exits, PEOs fully abide by the agreement's terms. PEOs endorse the rights of employees to organize, or not organize, according to standards of the NLRB.

12. What is the future of the PEO industry?

American business is undergoing a fundamental change in human resource management, and the PEO industry is one response to market demands for change. The expertise required to manage the human resource elements of a small to mid-sized business has outgrown the experience and training of many entrepreneurs who started these small businesses. The PEO industry is demand driven as business owners seek solutions to the increasingly complex "business of employment." PEOs are one of the growth industries of the 1990s and the next century.


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