A PEO (Professional Employer Organization) provides outsourcing of work compensation human resources and administration of employee benefits. It does this by hiring employees from the client company’s, in turn becoming their employer of record. PEO’s will hire them back, under the contract agreements. This practice of hiring them on contract basis is known as co-employment, employee or staff leasing.
A Professional Employer Organization generally generates a part of its income through various methods of tax arbitrage and insurance. Through insurance products, a PEO will purchase employees’ compensation, employment practices liability and employee benefits insurance at a set price. The PEO later adds a markup to the premium costs and bills those new rates to the client company, which would still be lesser than what the company would pay on its own.
The value proposition to client companies is, By the use of a PEO the client saves time and staff that would be used to prepare payroll and admin purposes. Thus enabling the client company to offer a better overall package of benefits, and thus attract more and better skilled employees. Hence The PEO model is therefore an attractive offer to small and mid-sized businesses and associations.
Abuses of PEO:
PEO have been linked with various types ‘of misuse of laws framed to protect workers. In 1991 the Texas State Board of Insurance estimated that only forty of the over two hundred staff leasing firms operating in the state were genuine.
• Fraudulent staffs leasing firms are set up by people who charge client companies for insurance payments and employee taxes, but deviate the finances instead of remitting it to the taxing authorities.
• Workers compensation fraud takes place when high-risk companies with lots of pending claims transfer staff to new PEO with no history of claims.
• PEO have also been utilized to evade minimum participation rules for pension and health care plans, which states, a minimum percent of workers must participate for the plan to be offered. Employers who do not want to offer such plans to its least-paid employees outsource those employees to a PEO so they are not responsible. This leaves the remaining higher-paid employees with a qualifying level of participation.
• SUTA arbitrage, commonly called as "SUTA dumping," occurs when an employer with a high unemployment insurance rate "dumps" employees to purchased or sourced subsidiaries with lower unemployment insurance rates.