Professional Employer Organization (PEO) FAQ’s
- Who uses a PEO (Professional Employer Organization)?
Any business can find value in a PEO relationship. An average client of a NAPEO member company is a business with 16 worksite employees. Increasingly, larger businesses also are finding value in a PEO arrangement, because PEOs offer robust Web-based HR technologies and expertise in HR management. PEOs can partner with companies that have 500 or more employees and work in conjunction with their existing human resources department.
PEO clients include many different types of businesses ranging from accounting firms to high-tech companies and small manufacturers. Many different types of professionals, including doctors, retailers, mechanics, engineers and plumbers, also benefit from PEO services.
- How does a PEO arrangement work?
Once a client company contracts with a PEO, the PEO will then co-employ the client’s worksite employees. In the arrangement among a PEO, a worksite employee and a client company, there exists a co-employment relationship in which both the PEO and client company have an employment relationship with the worker. The PEO and client company share and allocate responsibilities and liabilities. The PEO assumes much of the responsibility and liability for the business of employment, such as risk management, human resource management, and payroll and employee tax compliance. The client company retains responsibility for — and manages — product development and production, business operations, marketing, sales, and service. The PEO and the client will share certain responsibilities for employment law compliance. As a co-employer, the PEO will often provide a complete human resource and benefit package for worksite employees
- Are PEOs recognized as employers at the state and federal levels?
Yes. PEOs operate in all 50 states. Many states provide some form of specific licensing, registration, or regulation for PEOs. These states statutorily recognize PEOs as the employer or co-employer of worksite employees for many purposes, including workers’ compensation and state unemployment insurance taxes. The IRS has accepted the right of a PEO to withhold and remit federal income and unemployment taxes for worksite employees. The IRS has promulgated specific guidance confirming the authority of PEOs to provide retirement benefits to workers.
- Why would a business use a PEO?
Business owners want to focus their time and energy on the “business of their business” and not on the “business of employment.” As businesses grow, most owners do not have the necessary human resource training, payroll and accounting skills, the knowledge of regulatory compliance, or the backgrounds in risk management, insurance and employee benefit programs to meet the demands of being an employer. PEOs give small-group markets access to many benefits and employment amenities they would not have otherwise.
- Do the business owners lose control of their businesses?
No. The client retains ownership of the company and control over its operations. As co-employers, the PEO and client will contractually share or allocate employer responsibilities and liabilities. The PEO will generally only assume responsibilities and liabilities associated with a “general” employer for purposes of administration, payroll, taxes and benefits. The client will continue to have responsibility for worksite safety and compliance. The PEO will be responsible for payroll and employment taxes, will maintain employee records and reserves a right to hire and fire. Because the PEO also may be responsible for workers’ compensation, many PEOs also focus on, and improve, safety and compliance. In general terms, the PEO will focus on employment-related issues and the client will be responsible for the actual business operations.
- How many Americans are employed in a co-employment PEO arrangement?
It is estimated that 2 to 3 million Americans are currently co-employed in a PEO arrangement. The average PEO has grown more than 20 percent per year for each of the last six years, according to a survey of NAPEO members. About 700 PEOs that offer a wide array of employment services and benefits are operating today in 50 states. The PEO industry generates approximately $42 billion in gross revenues annually. PEOs have an 86 percent client retention rate due to strong client satisfaction. NAPEO member companies are estimated to account for more than 70 percent of the industry’s gross revenues.
- How do PEOs help their clients control costs and grow their bottom line?
The PEO’s economy of scale enables each client company to lower employment costs and increase the business’s bottom line. The client can maintain a simple in-house HR infrastructure, or none at all, by relying on the PEO. The client also can reduce hiring overhead. The professionals at the PEO can provide critical assistance with employer compliance, which helps protect the client against liability. In many cases, the client can pay a small up-front cost for a significant technology and service infrastructure or platform provided by the PEO. In addition, the PEO provides time savings by handling routine and redundant tasks for its clients. This enables the business owner to focus on the company’s core competency and grow its bottom line.
- How do employees benefit from a PEO arrangement?
Employees seek financial security, quality health insurance, a safe working environment and opportunities for retirement savings. When a company works with a PEO, job security is improved as the PEO implements efficiencies to lower employment costs. Job satisfaction and productivity increase when employees are provided with professional human resource services, training, employee manuals, safety services and improved communications. In many cases, a co-employment relationship provides employees with an expanded employee benefits package, to include a 401(k), life insurance, disability insurance, discount plans, a flexible spending plan, and more.
- Who is responsible for the employee’s wages and employment taxes?
PEOs assume responsibility and liability for payment of wages and compliance with the rules and regulations governing the reporting and payment of federal and state taxes on wages paid to its employees. PEOs have long established their role as reporting income and handling withholding, FICA and FUTA. In 2002, the IRS issued guidance confirming the ability of PEOs to offer qualified retirement benefits.
- 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. In those states that require the PEO to report unemployment tax liability under its clients’ account numbers, the PEO can still manage this responsibility.
- Who is responsible for employment laws and regulations?
As employers, both the client and the PEO have compliance obligations. However, PEOs provide worksite employees with coverage under many employment laws and regulations, including federal, state, and local discrimination laws, Title VII of the 1964 Civil Rights Act, Age Discrimination in Employment Act, ADA, FMLA, HIPAA, Equal Pay Act, and COBRA. In many cases, these laws would not apply to workers at small businesses without the PEO relationship, since many statutes have exemptions based upon the number of workers in a work force. Once included in the PEO’s workforce, the workers are protected by these laws.
- Do PEOs need to be licensed to provide insurance benefits to their workers?
Like other employers, a PEO may sponsor employee benefit plans for its worksite employees. Such benefits may be mandated by law, such as workers’ compensation and unemployment benefits. Or they may be voluntary benefits that will help attract and retain quality employees, such as health, life, dental and disability insurance. PEOs as employers may sponsor or acquire programs for their employees. As such, PEOs are consumers of insurance and procure these benefits from licensed insurance agents and authorized insurers.
- What is the Dispute Resolution Program?
The Dispute Resolution Program was designed to incorporate both an open means of communication between the employee and the employer, while utilizing the powerful protection of ADR (Alternative Dispute Resolution).
- What is ADR?
ADR is the use of mediation and/or arbitration to settle disputes without the hassle of going to court. ContinuumHR is a strong advocate for a four step process that includes ADR. The first three steps of the Dispute Resolution Program are designed to provide an informal means to resolve employee/employer disputes. Over 90% of all disputes are typically resolved at level one, two or three. If necessary, binding arbitration, the fourth level, follows. For most situations, there is no need to incur the higher costs and preparation time associated with an arbitration.
- How effective is a Dispute Resolution Program that includes ADR?
Over 90 % of all disputes are settled at or before Mediation, and generally within one day. ADR provides a quick, affordable, easy to understand means of resolving disputes in a fair and private manner without litigation. The Dispute Resolution Program gives you instant access to a process that can protect your business from costly employee lawsuits and courtroom verdicts.
- What type of disputes does the program cover?
Our Dispute Resolution Program encompasses all disputes. This includes failure to hire, wrongful termination, harassment complaints, EEOC claims, unpaid wages, and compensation. Disputes existing at the time the employee signs the Dispute Resolution Agreement are included, as are disputes arising after an employee has been terminated. It does not pertain to state unemployment claims or Workers’ Compensation insurance matters.
- How do I explain the Dispute Resolution Program to my staff?
The benefits of the Dispute Resolution Plan to your Employees are the same as for the Employer…speed, Economy, and privacy. Resolution of issues utilizing levels one through three can generally be completed in one day. The process usually begins within one month from the time that formal request is received. Attorney time and therefore attorney fees are typically far less than for a jury trial since preparation time is greatly reduced. In addition, the confidential resolution of disputes tends to preserve everyone’s reputation.
It is important to emphasize to your employees that the Dispute Resolution Agreement does not change any substantive individual rights. It merely changes the forum in which the parties will exchange their information and views.
- As an employer, can I require my employees to use the Dispute?
In an “at will” state, you can require your staff to sign a Dispute Resolution Agreement as a condition of employment or while employed. This applies to both state and federal statutory claims. In March of 2001, the United States Supreme Court affirmed that such agreements are valid, irrevocable, and enforceable.
- Can my company be sued by people who apply for employment but are not hired?
No. The language included in both the Employee Agreement and the Applicant Agreement that are provided as part of the Dispute Resolution Program are written so as to “bind” the employee or applicant to the Dispute Resolution Program.
- What is the cost of Mediation and/or Arbitration?
There is no cost to the client for the Dispute Resolution Program at Level One or Two. If a dispute is submitted for Mediation, there is a $650.00 set-up fee as well as the cost of the mediator which is typically $200.00 per hour, which is paid to AAA (American Arbitration Association). If a dispute is submitted for Arbitration, there is a $1,050.00 filing fee as well as the cost of the Arbitrator which is $150.00 per day, which is paid to AAA (American Arbitration Association). The final cost for Arbitration is dependent upon the outcome of the arbitration and the size of the claim.
- How do I sign up for the Dispute Resolution Program?
To start the process, simply contact the ContinuumHR Solutions Marketing Department. We will schedule a time to speak with you and your employees and go over in detail the rules and procedures of the Dispute Resolution Program and take care of the Employer/Employee Agreements as well as any other documents that may require signing.