WHAT IS A PEO?
In co-employment, the PEO becomes the employer of record for tax purposes, filing paperwork under its own tax identification numbers. The client company continues to direct the employees' day-to-day activities. PEOs charge a service fee for taking over the human resources and payroll functions of the client company: typically, this is from 3 to 15% of total gross payroll. This fee is in addition to the normal employee overhead costs, such as the employer's share of FICA, Medicare, and unemployment insurance withholding.
One service provided by a PEO is to secure workers' compensation insurance coverage at a lower cost than client companies can obtain on an individual basis. Essentially, a PEO obtains workers' compensation coverage for its clients by negotiating insurance coverage that covers not just the PEO, but also the client companies. This is allowed because, legally, the PEO is the employer of the workers at the client companies. PEOs can also offer basic levels of background & drug screening.
Using a PEO could potentially save the time and staff that would be used to prepare payroll and administer benefits plans, and may reduce legal liabilities or obligations to employees that it would otherwise have. The client company may also be able to offer a better overall package of benefits, and thus attract more skilled employees. The PEO model is therefore attractive to small and mid-sized businesses and associations, and PEO marketing is typically directed toward this segment.
Several variations on the PEO model exist, differing in the nature of the relationship formed between PEO and client company.
Administrative services organizations (ASO) are similar to PEOs, but do not create a co-employment relationship. Employees remain solely under the control of the client company. Tax and insurance filings are done by the ASO, but under the client company's Employer Identification Number.
Umbrella companies, found primarily in the UK, act as employer of record for independent contractors instead of permanent employees. The contractors become employees of the umbrella company, but do not also become employees of the client. The growth in umbrella companies in the UK is attributed to legislation targeting "disguised income" by contractors performing the same duties as employees but hired via intermediaries. The press release announcing the legislation, IR35, is often used to refer to the legislation itself.
Pass-through agencies are staffing firms that act as the employer of record for independent contractors, but do not obtain work for them. Like umbrella companies in the UK, the contractors do not become employees of the client.
Global PEO and International PEO services are now being offered. Although the translation of applicable rules and regulations vary from country to country (The USA being the only country to formally recognize the PEO industry in statute.) such companies are able to deliver PEO services in 160 countries.
Financial intermediaries, also called fiscal intermediaries, act as an employer of record for home healthcare workers who serve disabled persons. This streamlines the process of hiring such workers, because neither the household hiring them nor government units that provide funding need to take on the duties of an employer. They are part of the self-determination movement in disability care.
PEOs can benefit companies differently. For example, a blue collar organization may see more value in workers' compensation insurance and vice versa. A variation of a PEO model without co-employment is an administrative services organization.