A professional employer organization (PEO) is a firm that provides human resources, payroll, insurance, and training services to a company. They also provide risk and safety management to reduce a company’s liabilities. A PEO becomes the employer of record for their client company and establishes a co-employment relationship with their employees. They file quarterly and annual tax information under their own FEIN rather than the client’s FEIN. This relationship provides guidance and assistance to companies that are growing and need to minimize costs and liabilities.
PEOs charge a fee for their services. This fee normally ranges from 3% to 15% of the client’s total gross wages. The PEO uses these fees to cover overhead costs, income tax, FICA, Medicare and FUTA costs. The organization also secures a better rate for workers’ compensation insurance, since the company is part of a larger group of clients represented by the PEO. Client companies are exposed to less liability and risk because the PEO ensures that its clients are in compliance with current employment laws.
PEOs offer small to mid-size companies better benefits and rate packages. Employees of the PEO are enrolled in larger health insurance group plans. The client companies are therefore more attractive to potential employees and existing employees tend to stay longer in their positions.
The Affordable Care Act (ACA) was passed in 2010 and mandated that companies with greater than 50 employees offer health insurance benefits to their employees. In order to offer affordable coverage and avoid increasing benefit costs, many employers sought the services of PEO companies. Since 2010, PEOs have grown increasingly stronger and represent over two million workers in the US economy.