How does a PEO arrangement work?

Definition of a Professional Employer Organization

PEOs contractually assume substantial employer rights, responsibilities, and risk and, through the establishment and maintenance of an employer relationship with the workers assigned to its clients. More specifically, a PEO establishes a contractual relationship with its clients whereby the PEO:

• assigns workers to client locations, and thereby assumes responsibility as an employer for specified purposes of the workers assigned to the client locations;
• reserves a right of direction and control of the employees;
• shares or allocates with the client employer responsibilities in a manner consistent with maintaining the client's responsibility for its product or service;
• pays wages and employment taxes of the employee out of its own accounts;
• reports, collects, and deposits employment taxes with state and federal authorities;
• establishes and maintains an employment relationship with its employees that is intended to be long term and not temporary; and
• retains a right to hire, reassign, and fire the employees.

Businesses today need help managing increasingly complex employee related matters such as personnel management, health benefits, workers' compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. Businesses contract with a PEO to assume these responsibilities, which then allows the client to concentrate on the operational and revenue-producing side of its operations.

A PEO provides integrated services that more cost effectively manage critical human resource responsibilities and employer risks for clients. A PEO delivers these services by establishing and maintaining an employer relationship with the workers assigned to its client and by contractually assuming certain employer rights, responsibilities, and risk.

Copyright 2004 - NAPEO