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  • Writer's pictureNick Andriacchi

Considering Using a PEO? – What Staffers Should Know

Updated: Aug 9, 2023

We all know staffing companies provide a great service to companies (and talent) throughout the United States. Without staffers, companies would have a very hard time with recruiting and maintaining a flexible workforce. In addition, they absorb the cost and administration burden of workers compensation, unemployment claims, etc. as part of their service offering.



Some staffers have considered moving their employees to a 3rd party employer of record (EOR) or more commonly to a Professional Employer Organization (PEO) in order to alleviate these burdens and hopefully reduce cost. They may also use PEO’s to possibly offer a better employee benefits package.


But in the end, did those companies choosing to go that route really solve anything? 

  • Can the PEO legally provide workers comp and liability coverage to staffing companies?

  • Does moving to a PEO create other issues with branding, employee / client confusion etc.?

  • Do they really drive down cost?

  • If a staffing company wants to exit the PEO, can they get loss runs for their employees only?

  • Were they fully informed before making the decision?

Before moving your employees to a PEO, consider the following four items:

  • · Stability

  • · Cost

  • · Control

  • · Brand


Stability


In a recent American Staffing Association publication, Ed Lenz, Senior Council writes:


PEO coverage of staffing firm employees particularly concerned insurance regulators. They viewed as “problematic” having to identify and track the risks associated with employees working at remote third-party work sites. As a consequence, the National Association of Insurance Commissioners published guidance in 2010 prohibiting PEOs from contracting with staffing firms to provide workers’ compensation insurance covering their temporary and contract employees. PEOs operating in states that have adopted the NAIC guidance, or similar provisions, are thus barred from providing such insurance to staffing firms. Likewise, firms operating as EORs (which some courts have held to be indistinguishable from PEOs) also could be barred.

Staffing firms covered by PEO or EOR insurance also may be at risk, depending on state law. Firms risk loss of coverage and even could face criminal charges. In 2011, the California State Insurance Fund charged a large staffing firm with fraud in connection with its use of a PEO to provide workers’ compensation coverage. Staffing firms’ liability coverage also may be in jeopardy—if the underwriter has not approved coverage for the firms’ temporary and contract workers or if the policy does not cover the risks.


Certified PEO vs PEO

This is a huge distinction. PEO’s tend to fail without warning (Service Provider Group, TS Employment to name a couple) and their customers may not be able to process payroll timely. In addition, they may be liable for previous payroll tax deposits since if they are non-certified PEO’s.

What separates a certified PEO (CPEO) from a non-certified PEO is that an IRS certified PEO CPEO provides clients with financial peace of mind by minimizing financial liability. A CPEO is solely liable for federal employment tax payments on wages that it pays to its worksite employees. Therefore, if the CPEO fails to pay payroll taxes, the IRS cannot go after the client to collect employment taxes. The liability falls entirely on the CPEO, not the client.


When dealing with a non-certified PEO, the IRS views that both the PEO and the client are jointly liable for the payment of payroll taxes.


This means that if a non-certified PEO fails to pay a clients’ payroll taxes, the I.R.S. can go after the client for taxes owed, even if the client has already remitted the payroll taxes to the PEO. This places a great deal of financial risk on a client, who may not be aware of any unpaid taxes or penalties until the I.R.S. sends a notice and a bill.

Cost Associated with PEO’s


  • Administrative – Most PEO’s bundle this as a total percentage charged on payrolls – remember they have to make a profit too.


  • Float – How soon in advance do they debit your account for payroll? Does that inhibit you from growing your company?


  • FUTA & SUTA Cap - Do they cap FUTA & SUTA once your employees reach the limits? For example, an employee earns $28,000 during the year. Your FUTA & SUTA costs are 4.0% of payroll. Assume the taxing limit in your state is the first $8,000 of wages. If the PEO continues to charge you for these taxes (any wages in excess of the $8,000 are not taxable to you) this will cost you an extra $800 per tax year per employee. 

  • Are you paying for services you don’t want or need?


  • PEO’s cost tend to rise annually and workers comp modifier's may adjust upward even if your company didn’t have any workers comp claims.

Control

Since the PEO is now the employer of record they may:

  • Limit the types of positions your company can fill. 

  • Have very little ability to control w/c modifier. A PEO does business with many companies and have little control over injuries & w/c claims. One customer with high claims can result in higher w/c premiums for your company. 

  • Employee benefits. Most PEO’s require minimum number of hours worked before temps can take advantage of the benefits. 


  • How are Sales booked? When using a PEO, the commission from the placement is considered top line revenue. For example, if revenue billed from contract labor is $10,000,000 and net the staffing company's commission is $1,500,000 - %1,500,000 is booked as total sales. In essence, your company is smaller than it is. This will hurt the staffing company in many ways from transitioning to cheaper financing options to hampering the potential sale of the company.


  • Exclusive Loss Runs. This is very important because without loss runs pertaining to only your company, it may not be able to obtain insurance - period. Or at the very best, limit your w/c option to the state pool – even if no employees were injured on the job after years of being in business.


  • What hoops does the PEO make you jump through when a w/c or unemployment claim is filed? Is it more work to explain to them what happened than it is to deal directly with the claim?


Brand

  • Whose name and logo appear on the employee’s check’s? How visible is the PEO to your customers?


  • In addition to the PEO's name appearing on the payroll checks, invoicing, even web presence thus diluting your ability to brand your company and potentially lose referral business.


  • Owner or Agent? Since a considerable amount of Cost, Control, and Brand are given-up, is it your company or are you really acting as an agent of the PEO?

This can cause much confusion with your employees, clients and the marketplace.


Additionally, a PEO can be a potential competitor of yours. Are you comfortable providing them the most vital assets of your company (account and employee lists, pay/bill rates etc.)?


While there are certainly situations where a PEO service would benefit a staffing company, but those are rare. It is so important to make a thoroughly thought out decision before making deciding which path to take.

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