What is a PEO? PEO stands for Professional Employer Organization and it promises numerous benefits to small and mid-sized businesses.
But, how can a business take advantage of leased employees and why many companies chose to do so?
In this article, we are taking a closer look at this kind of co-employment to help you decide if this type of arrangement is right for your company.
What Is a PEO?
Professional employer organizations (PEOs) are organizations that hire employees and then lease them to small and medium-sized companies. PEOs enable small and mid-sized companies to utilize employees without having to pay exorbitant taxation, insurance or other fees.
PEOs are legally responsible for the employees they lease to their business partners. You as the employer pick the employees, hire, train and fire running the day to day operations while the PEO manage all aspects of HR, Payroll, Employer Matching Taxes, Benefits and Worker’s Compensation while leasing those employees back to you in a co-employer arrangement.
By grouping employees together and working with multiple companies, PEOs are able to qualify for favorable benefit rates and even discounts on your worker’s comp premiums. These rates are beyond the reach of any single small company. This is because small companies never employ so many individuals at any given time.
When working with leased employees, the PEO remains the employer of record for all intents and purposes, including for work-related liabilities. PEOs still have to file employment taxes and reports.
The History of Professional Employer Organizations
Professional employee leasing is not a new phenomenon. In one form or another, PEOs have been around since the early 70s. Early PEOs offered an economic alternative to Standalone Worker's Compensation policies.
Before the introduction of PEOs, companies that could not afford Standalone Worker's Compensation had only one other alternative. They had to obtain worker's comp from state-sponsored sources like the Florida Worker's Compensation Joint Underwriting Association (FWCJUA).
Let's see the difference between a standalone worker's comp policy and a PEO below.
What is the Difference Between a Stand-Alone Policy and a PEO?
In Florida, you need to have worker's compensation insurance if you employee at least four employees. If you are a construction business, you need worker's comp even if you employ a single employee.
When you insure your employees through a stand-alone policy, you are essentially providing them with wage replacement and medical compensation if they are injured during work. In return, employees relinquish the right to sue you for negligence in case of an accident.
Stand-alone policies were created to protect employers in case of an accident. Litigation can be costly and employees can sue for a lot of different claims. These policies take care of that. With standalone policy, you are responsible to pay the insurance premiums.
With professional employer organizations, you get pay-as-you-go worker's comp. This means that your PEO will take care of the insurance and you will pay them instead. This is easier than it sounds.
With pay-as-you-go, the PEO will bill you for worker's compensation insurance with each payroll. The PEO will then take care of the insurance on your behalf and you will have no liabilities in case of an accident.
As PEOs employ many individuals, they qualify for better insurance rates. This benefits the PEO, as well as its clients, who pay less for the same worker's comp policy.
Without a PEO, you will have to obtain your own workers' compensation insurance policy. This requires a significant down payment.
Moreover, this down payment requires you to estimate the number of employees for the coming year. At the end of the year, companies have to pass an audit to determine the accuracy of these estimates.
A PEO takes care of all these insurance worries, as well as many other issues.
Why Choose a PEO?
As we have seen above, PEOs allow companies to offer employee benefits at reasonable rates. They can do so by leveraging the collective number of employees they lease across different companies. With many employees, PEOs can secure better rates.
PEOs also help companies by taking away all HR and payroll worries. Since PEOs take care of taxation and wage reporting, their clients can focus on development and growth instead.
Leasing workers through a PEO can be very economical in the long run. The fees for standalone worker's comp insurance policies are often too steep for small businesses. However, the cost of litigation in case of a workplace accident can be even steeper. In fact, these costs can shut a company down.
With a PEO, you just pay a premium based on how much payroll you report on each pay period to cover the PEO's own insurance policy costs. This is often less than what you would have paid for standalone worker's comp. Companies that work with PEOs technically have zero employees. This is a big benefit for taxation purposes, especially for small companies that are just starting out.
Finally, PEOs care about your success as much as you do. They care about the safety of your employees, minimizing claims by effective safety programs and keeping your cost low. This ensures a minimum level of worker competency for your company.
Get Reliable Worker's Comp Insurance
Knowing the answer to "what is a PEO?" is the first step to understanding your worker's comp insurance needs. Here at the National Workman's Comp Solutions, we have more than 15 years of combined experience in worker's comp options including hard to place companies such as contractors.
Our network of 45 different A+ carriers and PEO’s allows us to shop and tailor the best worker's comp solution for your company.
Contact us today and we will gladly help you find a tailored solution to the specific needs of your business.