True to form, when an emerging business trend proves itself successful with lots of room for growth and improvement, there are many factions that eventually branch out as a result of that trend. A very concrete example of this is outsourcing, with PEO as the branching faction. The establishment of PEO, or professional employer organization, is one way of stabilizing the outsourcing industry through regulations and enforced compliance.
What is a PEO?
The PEO industry is a business model for outsourcing human resource services. PEOs, also known as employee leasing or staff leasing in some business circles, provide administrative services for tasks such as human resources, the handling of employee benefits, payroll, and workers’ compensations. The industry has consistently experienced 20% annual growth over the past decade as state and federal regulations continue to grow and become more complex. Particularly in specific states such as California, were labor laws are extremely complex and differ from federal guidelines, California PEO and California employee leasing firms have sustained consistent growth in the marketplace.
In a PEO relationship, the employees of the client worksite are “transferred” to the payroll of the PEO, which in turn reports all wages, taxes and benefits under its state tax identification number. In other words, a PEO firm hires a client company’s staff on paper, thereby making the PEO the employer of record, or Co-Employer, in all legal agreements or contracts. The PEO industry is currently estimated as a $51 billion industry serving an estimated 100,000 small to mid-sized businesses and 2 million to 3 million workers. With strong annual growth rates, about 700 authorized and recognized PEOs offering a wide array of employment services and benefits are operating in North America.
What to Consider When Looking at PEOs
Since its inception, there has been a series of abuses reported in regards to fraudulent PEOs or legal PEOs not performing the agreed services, such as non-payment of employee insurance premiums or misreporting taxes and workers’ compensation rates. In 1991, several laws were passed to protect workers from these abuses. At the same time, the development of such laws opened the doors for more global provisions to be made to ensure that prospective clients are not affected adversely at the other end of the spectrum.
As such, this led to the creation of trade associations that could deal with abuses from PEO companies; associations such as the National Association of Professional Employer Organizations or NAPEO, formerly known as National Staff Leasing Association or NSLA, and the Employer Services Assurance Corporation or ESAC. In our next post we will review the recommendations of NAPEO when selecting a Professional Employer Organization for your company.
