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Frequently Asked Questions

We know how difficult running a small business can be, which is why we provide answers to your “need-to-know” questions about human resource management, payroll processing, Employee Leasing (aka PEO), taxes, and more.

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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.

No. PEOs work equally well in union and non-union worksites. The National Labor Relations Board (NLRB) recognizes that in co-employment relationships, worksite employees are appropriately included in the client employer's collective bargaining unit. Where a collective bargaining agreement exists, PEOs fully abide by the agreement's terms. PEOs endorse the rights of employees to organize, or not organize, under state and federal laws.

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.

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.

Frequently, a PEO arrangement is the only opportunity for a worker of many small businesses to receive Fortune 500 quality employee benefits like health insurance, dental and vision care, life insurance, retirement saving plans, job counseling, adoption assistance, and educational benefits. Absent the PEO, a small business can neither afford nor manage these benefits.

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. And 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.

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.

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.

It is estimated that 2-3 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 $68 billion in gross revenues annually. PEOs have an 88 percent client retention rate due to strong client satisfaction. NAPEO member companies are estimated to account for more than 91 percent of the industry's gross revenues.

Formed in 1984, the National Association of Professional Employer Organizations is the national trade association for the PEO industry. NAPEO is known both as NAPEO — The Voice of the PEO Industry® for government affairs and as The Source for PEO Education® due to the association's education and training programs. NAPEO promotes a Code of Ethics and a number of best practices to its member companies. NAPEO has nearly 400 PEO members operating in all 50 states, representing approximately 91 percent of the revenues of the $68 billion industry.

Like a leasing situation, a temporary staffing service recruits and hires employees and assigns them to clients to support or supplement the client's workforce in special work situations, such as employee absences, temporary skill shortages or seasonal workloads. These workers are traditionally only a small portion of the client's workforce. 
PEOs do not supply labor to worksites. They co-employ existing permanent workforces and provide services and benefits to both the worksite employer and the employees.

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, 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.

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.

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.

Many states recognize the PEO as the employer of worksite employees for purposes of providing workers' compensation coverage.

Any business can find value in a PEO relationship. An average client of a NAPEO member company is a business with 19 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.

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.