What a PEO Can Do for You

By Katz, Bruce E. | Journal of Accountancy, July 1999 | Go to article overview

What a PEO Can Do for You


Katz, Bruce E., Journal of Accountancy


A human resources management tool for small and medium-size companies.

More than ever before, CPAs are advising their bottom-line-conscious employers to use outsourcing to cut costs and improve efficiency. Once confined to production-related areas, outsourcing has grown to encompass a broad range of business operations. Human resources and payroll are two areas companies traditionally kept within their control, but over time businesses have gradually begun to outsource payroll functions to service bureaus and turn over more employee-related responsibilities to professional employer organizations (PEOs). CPAs and other financial executives whose employers do not already use PEOs should understand how they work--and how to select the right one--so they can decide whether the PEO route is a good solution for their companies.

PEOs specialize in human resources (HR) management. They offer businesses a wide variety of services--including payroll management, employee benefit design and administration, tax filing and administration and compliance with state and federal workplace legislation. PEOs also take responsibility for developing and administering lawful employment policies and procedures; employee recruitment and disciplinary actions; recordkeeping; and unemployment, disability and workers' compensation claims and administration.

According to the SBA, PEOs control a 2% market share of the payrolls of small to medium-size companies (those with fewer than 100 employees). Many different types of companies use PEOs, since the benefits of doing so cut across industry lines. With the number of employees working for PEOs projected to grow at 30% per year, more and more CPAs may find themselves recommending that their companies consider using PEOs as their HR departments.

FROM EMPLOYEE LEASING TO PEO

In the 1970s, a safe-harbor provision in federal tax legislation enabled companies to maintain pension plans for management and key employees that differed from those for regular stag employees--provided the stag employees were leased. Although that safe harbor disappeared, in 1982 with the passage of the Tax Equity and Fiscal Responsibility Act, the trend it established toward employee leasing continued. Leasing companies extended their services to encompass the entire HR area, leading to the birth of the PEO.

PEOs now perform myriad t, asks. Some states recognize them as "coemployers" since they assume certain legal rights and duties related to employees who work at client locations. (The IRS does not use the term coemployer--it recognizes PEOs as employers.) The rights and duties PEOs assume are set forth in a contract between the PEO and the client company. Typically, a PEO's responsibilities include the general aspects of the employer's role--for example, paying employee wages and associated withholding taxes. (The PEO is responsible for paying these taxes whether or not the client actually pays the PEO.) The PEO also must provide employees with workers' compensation, federal and state unemployment and statutory disability coverage. In addition, the PEO administers any employee benefit programs including retirement plans; cafeteria and health care plans; life, disability, accidental death and dismemberment insurance; credit unions; fitness club memberships; child care; and tuition reimbursement programs.

When a PEO sponsors employee benefit plans, it assumes fiduciary responsibility for plan compliance with applicable federal and state laws. When a client company decides to maintain its own employee benefit plan, the company continues to have fiduciary responsibility as well as plan testing, filing and other obligations it might otherwise avoid through a PEO.

In most circumstances, the PEO also contractually assumes responsibility for compliance with the regulations of the Equal Employment Opportunity Commission, Title VII, the National Labor Relations Act, the Fair Labor Standards Act, COBRA, ERISA, the Americans With Disabilities Act (ADA), the Family Medical & Leave Act (FMLA) and the Immigration Reform and Control Act (IRCA). …

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