What is a PEO
The term “PEO” stands for Professional Employer Organization. PEOs provide small-medium size companies with outsourced human resource services, specifically employment and HR management services. PEOs are not staffing companies.Traditionally, PEOs manage functions such as payroll, employer tax compliance, employee benefits, workers’ compensation , and government compliance, but those services have steadily expanded to include optional services such as talent acquisition, employee training, and performance management. The website of the National Association of Professional Employer Organizations, NAPEO (www.napeo.org), explains that PEOs bring value via:
• Relief from the burden of employment administration.
• A wide range of human capital strategy and guidance services offered via ateam of experienced professionals.
• Improved employment practices, compliance, and risk management to reduce employer-related liability.
• Access to a comprehensive employee benefits package, allowing smaller companies to be competitive in a tight labor market.
• Assistance to improve productivity and profitability.
PEOs’ Unique Selling Point: HR Isn’t Your Main Business
The reason for the existence of PEOs and the primary selling point for their business model is this: as an entrepreneur, you did not enter into business to become a human resources manager. You have no interest in handling payroll twice a month or weekly, negotiating benefits for your employees, or worrying about how to comply with a litany of government regulations.
You entered into business in order to sell a product or provide a service, and generate revenue doing what you do best. But HR is a necessity when you have employees. And what could be better than taking a piece of your business—which although a necessity, is also a distraction—off your plate, and making it somebody else’s problem?
PEOs and the Co-Employment Relationship
The PEO accomplishes its work by sharing a tax ID with its customers, which is called a “co-employer” relationship. This arrangement enables a company to transfer many of its key employer responsibilities to the PEO, including aspects of employer- related risk and compliance. A formal Customer Service Agreement specifies the division of responsibilities between the PEO and its customers. Once your organization enters into a co-employment relationship with the PEO, your employees still work for you. You still retain complete control over your operations, hiring and terminating your workforce, building your company culture, and defining your employment brand. But with the co-employment relationship, many of the other tasks related to administering HR become the responsibility of the PEO.
Both U.S. and Canadian governments now recognize there are two employers in this situation, but for the most part government agencies look at the PEO as being as the responsible party for the administration and HR. They consider the PEO the Employer of Record. This arrangement means your employees’ checks will carry the name of the PEO, though to the rest of the world, they are employed by your
organization. And if there are any legal issues arising from the HR function, then the PEO assumes some of that risk.