The Payroll Book

CHAPTER 17Other Issues

PROFESSIONAL EMPLOYER ORGANIZATION (PEO)

Advantages and Disadvantages

PEO stands for professional employer organization. The trade organization for PEOs is the National Association of Professional Employer Organizations (NAPEO), which was known as the National Staff Leasing Association up to 1994, after 10 years in business.

According to NAPEO, a PEO allows businesses to outsource a number of employee-associated functions, including human resource management, employee benefit management, employee payroll, and workers' compensation insurance in a cost-effective manner, thus allowing a business not to have to spend time on those functions and freeing it to concentrate on other areas. The NAPEO goes on to say they relieve their clients of the burden of administering critical employee-related functions, which reduces liabilities, increases competitiveness, and improves the bottom line of their clients.

What PEOs really do is provide a way for employers to buy insurance products, payroll processing, and possibly some basic HR services in a single package with a high administrative cost added on top. PEOs will say that they “assume certain employer rights, responsibilities, and risk.” Many of the states they operate in disagree. Most states have rules that PEOs are co-employers, or joint employers, and that the actual employer retains all of the risk.

PEOs began in the 1960s as a way to escape federal ERISA requirements. If you had no employees, you were exempt ...