PEOs do not supply labor to worksites. PEOs supply services and benefits to a business client and its existing workforce. PEOs enter into a co-employment arrangement typically involving all of the client’s existing worksite employees and sponsor benefit plans for the workers and provide human resources services to the client. In most cases, the PEO provides access to health insurance, retirement savings plans, and other critical employee benefits for the worksite employees of the business client. If a PEO relationship is terminated, the worksite employees’ co-employment arrangement with the PEO ceases, but they will continue as employees of the client.
By comparison, a leasing or staffing service supplies new workers, usually on a temporary or project-specific basis. These leased employees return to the staffing service for reassignment after completion of their work with the client company. Some define employee leasing as a temporary employment arrangement where one or more workers selected by the leasing or staffing entity is assigned to a customer frequently for a fixed period of time or for a specific project. Upon termination of the staffing or leasing company arrangement, the worker has no continuing employment relationship with the client.
Historically, leasing terminology was used to describe what has evolved into PEO relationships. Some older state statutes governing PEOs still use the leasing terminology, contributing to the confusion about PEOs.
This is the biggest misconception of business owners about a PEO. When a company joins a PEO, the business owner will still determine business objectives, business agenda, and direct the organization’s employees’ daily activities.
The PEO client/business owner 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 per a client service agreement (CSA). The PEO will generally only assume responsibilities associated with a “general” employer for purposes of administration of benefits and remittance of payroll and payroll taxes. The client will continue to have responsibility for worksite safety and compliance.
The PEO will be responsible for remittance of payroll and employment taxes, may maintain employee records and may retain a limited or general right to hire and fire, as delineated in the CSA. Because the PEO also may be responsible for providing access to workers’ compensation coverage, many PEOs also focus on and provide assistance with 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.
Businesses commonly outsource their HR administration needs for two reasons. First, because they either cannot afford to have a full HR department. Second, because business owners know that time-consuming, non-revenue generating administrative tasks-such as payroll, benefits and compliance-are precisely what needs to be taken off their HR team’s plates. Outsourcing HR administration to a PEO allows organizations and their employees to streamline processes, add value, and focus on strategically growing their company.