Do you know what a PEO is? Mike Periu tackles current legislation, and what it could mean for your business.
Professional Employer Organizations (PEOs) offer an innovative way for small businesses to outsource the headaches associated with certain elements of human resources management.
When a small business hires a PEO, the small business’ employees also become employees of the PEO. This is known as co-employment. From the perspective of the IRS and state governments, the PEO is the employer. From the perspective of clients, customers and managers, the small business is the employer. This allows the PEO to manage employee benefits, payroll, payroll taxes, workers’ compensation and more.
Benefits of working with PEOs
The logic behind working with a PEO is two-fold: first, PEOs have more experience in dealing with human resources issues and can therefore do a better job managing them than the small business client. This allows the client company to focus on what they do best—making and selling things—as opposed to preparing paperwork for state unemployment insurance. Second, the PEO can obtain better rates on workers’ compensation, SUTA and other human resources-related expenses due to their scale, scope and recency as an employer.
Less than 2 percent of U.S. workers are employed by companies that use a PEO. Even though PEOs have existed for many years, the concept of “co-employment” is difficult for many employers and employees to grasp. There also remains certain legal ambiguity and state-by-state differences in the treatment of co-employees, which has hindered their widespread adoption. Currently, only 35 states recognize PEOs.
Is voluntary certification the solution?
To help address this ambiguity, Republican Congressman Kevin Brady of Texas and Democrat Congressman Mike Thompson of California have recently introduced the Small Business Efficiency Act of 2011. The purpose of this proposed law is to create a voluntary certification process for PEOs that would provide additional reassurance to small business customers that the PEO is legitimate and is duly authorized to handle the collection and payment of employment taxes. The certification would be administered by the IRS and would open certified PEOs to liability related to the payment of employment taxes.
This addresses a key issue related to tax payments: how can a company that uses a PEO be certain that the PEO will indeed make timely tax payments? If for some reason the PEO fails, then who is responsible?
A similar problem occurs in the consumer-oriented debt consolidation and debt negotiation industries. These providers receive money from consumers and use a portion of these funds to manage debt payments. Many fly-by-night operations have popped up in these industries leading to missed payments, fraudulent activities and other mismanagement. In the case of consumers, they are left responsible for the mess. This legislation would allow small businesses to avoid a similar fate by requiring certified PEOs to accept legal responsibility for the payments they make on behalf of their clients.
