According to NAPEO, the National Association of Professional Employer Organizations:
The PEO relationship involves a contractual allocation and sharing of employer responsibilities between the PEO and the client. This shared employment relationship is called co-employment.
As co-employers with their client companies, PEOs contractually assume substantial employer rights, responsibilities, and risk 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:
- Co-employs workers at 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.
- Retains a right to hire, reassign and fire the employees.
Businesses today need help managing increasingly complex employee related matters, including employee relations, health benefits, workers’ compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. They contract with a PEO to assume these responsibilities and provide expertise in human resources management. This allows the PEO client to concentrate on the operational and revenue-producing side of its operations.
A PEO provides integrated services to 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 employees at the client’s worksite and by contractually assuming certain employer rights, responsibilities, and risk.
Both the PEO and the client company establish employment relationships with worksite employees. Each entity has a right to independently decide whether to hire or discharge an employee. Each entity has a right to direct and control worksite employees. The PEO directs and controls worksite employees in matters involving human resource management and compliance with employment laws, and the client company directs and controls worksite employees in manufacturing, production, and delivery of its products and services.
The client company provides worksite employees with the tools, instruments, and place of work. A PEO can assist in ensuring that worksite employees are provided with a worksite that is safe, conducive to productivity and operated in compliance with employment laws and regulations. In addition, the PEO provides worksite employees with workers’ compensation insurance, unemployment insurance and a broad range of employee benefits programs.
PEOs create an employment relationship with their workers. This relationship exists in fact, not just in form. PEOs can manage the risks attendant to the personnel functions that they perform only if they establish an employment relationship with their worksite employees. Unless a PEO has a right to direct and control, hire, supervise, discipline and discharge these employees, the PEO will merely assume liability without having a means to manage that liability.
PEOs manage their employment liability exposure by monitoring and requiring compliance with employment laws, developing policies and procedures that apply to worksite employees, supervising and disciplining worksite employees, exercising discretion related to hiring new employees, and ultimately terminating worksite employees who do not comply with requirements established by the PEO.