Professional Employer Organization

from Wikipedia, the free encyclopedia

A Professional Employer Organization (PEO) is a company that offers business process outsourcing and personnel management services. The offer of PEOs is aimed particularly at small and medium-sized companies as well as particularly international organizations. Depending on the provider, the services offered, among others, include personnel controlling , payroll , reporting and payment of payroll taxes , fringe benefits , human resource planning , staff scheduling , parts of the risk management , advice on compliance , as well as global PEOs specialized services to personnel management , market entry , business creation and legal advice .

In the process, the PEO enters into a partnership with the customer, which is referred to as "co-employment". As a "co-employer", the PEO takes on the administrative tasks and most of the personnel management . The technical and operational authority to issue instructions as a core area remains with the customer in this model. The employee remains more firmly rooted in the customer organization, although the PEO acts as an administrative employer for tax purposes. In this way, the “co-employment” model of PEOs differs from the personnel service agencies , temporary work and personnel placement that are widespread in Germany .

In 2017, industry sales in the United States were estimated at over $ 174 billion per year. In the same year, there were 907 PEOs in the United States alone, serving 3.7 million employees spread across approximately 175,000 PEO customers.

Business model

A PEO essentially fulfills two main tasks. On the one hand, the PEO becomes the administrative employer for the employees concerned. Above all, this has tax, liability and labor law consequences. On the other hand, a PEO takes care of many HR processes such as payroll or compliance for its clients , thereby relieving them of work. In the USA , fringe benefits usually still play an important role. Because the accident insurance in the USA (worker's compensation) is taken out by the employer directly with insurance companies, a PEO can usually negotiate better and more favorable conditions for small customer companies.

There are several variants of the PEO model in the international context, which differ in the type of relationship between PEO and customer companies.

  • Global PEOs and international PEO services are enjoying growing popularity. Although the interpretation of the applicable rules and regulations differs from country to country (the USA is so far the only country that recognizes the PEO industry as such by law) different providers can offer services in 185 countries. Global PEOs act as "Employers of Record" abroad and enable companies to hire employees abroad without having to set up a company.
  • Administrative services organizations (ASO) are similar to PEOs, but they are not involved in co-employment. The employees remain legally under the control of the customer company. Tax and insurance matters are processed by the ASO, but under the tax identification number of the customer company. So ASOs are mainly an option for outsourcing .
  • Umbrella companies are mainly found in the UK and are most comparable to temporary employment agencies. A temporary employment agency hires temporary workers or independent service providers from different areas under one roof (hence also umbrella). Thus, the temporary employment agency alone remains the legal employer and the employees do not become permanent employees of the customer company at any time if the order is placed successfully. The use of umbrella companies has increased after the passing of the IR35 law, which aims to combat tax avoidance .
  • Pass-through agencies are temporary employment agencies that act as legal employers for service providers and contractors, but do not take care of job placement. They are largely unknown outside of the United States . Like temporary workers or employees of umbrella companies in the United Kingdom , pass-through agencies have no permanent employees at any time with the customer company.

Co-employment

The co-employment as a concept exists between the PEO, the customer company and the employee. It provides the legal framework so that the employee is administratively part of the PEO and thus this is also listed as an employer on the payroll. However, on an operational basis, the client company remains authorized to issue instructions. This changes for an employee who was previously employed directly at the customer company and after z. B. a restructuring or posting abroad is managed by a PEO nothing in everyday work. For the administrative management of the employee, the customer company usually transfers a monthly sum as part of a service agreement.

Co-employment relationship between PEO, customer company and employees.

Employer of Record

A company is considered an official employer or employer of record if it employs an employee who is subject to social security contributions. It is therefore also responsible for tax and labor law matters and is liable for them. This includes activities including dealing with taxes , social benefits , insurance , visa and sponsorship applications, and many other matters and procedures relating to human resources .

PEO and Employer of Record are closely related, but they provide solutions for two different needs. PEOs are usually part of a broader corporate HR restructuring and involve a larger proportion of the workforce. The benefits of an employer of record are often more interesting for companies that want to expand quickly into foreign markets. As part of global PEO solutions, the legal framework of an Employer of Record is used to legally employ employees abroad without having to set up a subsidiary in the respective country.

Target groups

Often times , small and medium-sized businesses are seen as the target audience for most PEOs. There are several reasons for this. Often it is precisely these companies that have to invest a lot of time in human resources because they have become too big to cope with the effort on the side, but also not yet big enough to benefit from economies of scale . The PEO model is still most widespread in the USA, since companies there are also confronted with a wide variety of laws at the state level in their home market. In order to act in this regulatory environment, which is demanding from a business perspective, it can often be worthwhile to outsource the expertise in these areas to PEOs .
Some PEOs have already used this expertise to expand the model on a global level. While it is not directly applicable in many countries, the offer has also been expanded to include "Employer of Record" services. This in turn makes the model more relevant again, especially for companies that are planning to expand abroad but have not yet built up enough knowledge and resources.

advantages

One advantage of PEOs, especially for American customers, is that PEOs, by bundling employees from several companies, can achieve better conditions for insurance benefits than the companies individually could through the number of their employees. This can also go hand in hand with lower ancillary wage costs, which is often viewed as a win-win situation . This is legally made possible by the co-employment relationship. This can also lead to the company being able to offer better fringe benefits, e.g. B. recruiting highly qualified employees.

Using a PEO could potentially save the time and manpower that would be spent on payroll preparation and administrative tasks. This frees up resources to focus on the company's core tasks and invest more time there. In addition, an employer can reduce the legal obligations towards employees that he would normally have.
In the international area, cooperation with PEOs (in conjunction with "Employer of Record" services) can be particularly worthwhile in order to save time and money when hiring employees abroad. Instead of dealing with foreign labor law, a company can develop business relationships with partners very quickly and save large investments and risk.

costs

PEOs charge a service fee for taking over the personnel and payroll functions of the customer company: this is usually between 3 and 15% of the total gross wage . This fee is in addition to the normal administrative costs for employees in the US , such as: B. the employer's share of FICA, Medicare and the withholding of unemployment insurance .

For international PEOs with an "Employer of Record" service, the fee depends heavily on the type and scope of the service provided. In addition, the location is still a very decisive factor here. Above all, wage costs , bureaucratic hurdles and the exchange rate of the currency play an important role here.

Early history and origins

So-called " employee leasing " has its origins in the USA in the late 1960s. It was coined by the three businessmen Eugene Boffa, Louis Calmare and Joseph Martinez. The concept was further popularized by Marvin R. Selter, who began "employee leasing" of employees to a medical practice in Southern California. Another reason for the popularity of "employee leasing" were specific laws such as B. the Employee Retirement Income Security Act of 1974 (ERISA). This contained exceptions for social security contributions with multiple employers ( multiple employer welfare arrangements (MEWA)), which effectively represented a tax loophole for employers who borrowed employees and found themselves exempt from the ERISA conditions. Additional laws such as the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) gave this form of agency work even more tax benefits by granting further tax breaks for employers who paid a minimum of mandatory social security contributions. However, these types of benefits from TERFA were quickly removed with the stricter legislation of the Tax Reform Act of 1986 .

By 1985, there were already 275 companies in the USA that dealt with employee leasing.

Compared to the USA, PEOs and the concept of "employee leasing" are less common in German-speaking countries. There are other forms of employment such as B. the temporary employment, which comes close to the American concept, but is fundamentally different in essence. In the case of temporary employment, the focus is usually on the temporary nature of the employment. In addition, almost exclusively external employees are won for the company and hired in their home country or location. This is the difference between temporary employment and the PEO, which is often used in the American market to reduce administrative work for companies that want to employ employees in different states with different laws. So-called "Temporary Employment Agencies" would tend to take care of temporary employment in the German sense.

Legal

Germany

Any kind of agency work, temporary work, personnel leasing or PEO relationships are regulated in Germany by the Temporary Employment Act (AÜG). The law serves to implement the European Directive 2008/104 / EC on temporary agency work. In principle, the provision of workers is therefore subject to a permit, whereby the Federal Employment Agency must be consulted. Important points of the Temporary Employment Act (AÜG) include:

  • Maximum period of 18 months: Temporary workers may only be employed by an employer for 18 months at a time. Thereafter, the employment relationship must either be increased to full-time level or terminated.
  • Ban on chain contracts: A contract may only be concluded directly between the customer company (borrower) and the formal employer (lender). Middlemen or sub-lending are not permitted in this relationship.
  • Equal treatment: All employees who are loaned to a customer should receive the same benefits as the customer's core workforce. This is part of the contract and both the lender and the borrower must exercise due care.

Austria

In Austria the Temporary Workers Act (AÜG) applies.

Switzerland

Art. 19ff apply in Switzerland. AVG (Employment Agency Act). In addition to private employment agencies and public employment agencies, it also regulates the personnel leasing mentioned there. In Switzerland, a distinction is made between temporary work, agency work and occasional hiring out. Only temporary work and agency work require a permit and various provisions must be met.

United States

Every state in the US has its own laws on labor law, accident insurance, unemployment insurance, and social security contributions, so PEOs are typically state regulated. This allows employers to use other tax rates from other states that appear cheaper, such as B. with unemployment insurance or State Unemployment Tax (SUTA). In 2004, then President George W. Bush signed the SUTA Dumping Prevention Act of 2004, which calls on all 50 states to initiate anti-SUTA dumping by 2007. Most states have followed suit; however, federal law does not prohibit companies from working with PEOs to benefit from cheaper SUTA contributions.

In the meantime, however, the PEO industry itself has also taken steps to curb critically viewed business models. To this end, the first trade association, the National Staff Leasing Association, was founded in 1985. The association changed its name to the National Association of Professional Employer Organizations in 1994 to better reflect the correct use of the terminology.

As part of the industry's drive to self-regulate, an independent accreditation body, Employer Services Assurance Corporation (ESAC), was established in 1995. ESAC reviews accredited PEOs and their compliance with important ethical, financial and operational standards and provides financial collateral for the performance of the most important employer obligations by these PEOs. Backed by more than $ 15 million in pledges, this financial collateral reassures customers, employees, insurers and government agencies that accredited PEOs are meeting their contractual and fiduciary obligations.

PEOs can also undergo a certification process carried out by the Independent Certification Institute (CI) founded in 2002. This certification confirms that a PEO's personal accident insurance service meets proven insurance industry risk management best practices to reduce work-related accidents and health risks, and to control accident insurance losses.

Individual evidence

  1. ↑ Heidi Diehl: IBISWorld Industry Report 56133: Professional Employer Organizations in the US . In: IBISWorld . September 2018.
  2. ^ Laurie Bassi: An Economic Analysis, The PEO Footprint 2018 . In: NAPEO Whitepaper . September 2018.
  3. ↑ Insurance for the boss's duty of care? - bocquell-news.de. Retrieved June 20, 2020 .
  4. ↑ Global Hiring | Hire global employees. In: Universal Hires. Retrieved June 20, 2020 .
  5. ^ "How an Umbrella Company Works" . bytestart.co.uk. Retrieved July 3, 2007.
  6. ↑ Meredith Little in Banking: Need the benefits and perks of an employee? A pass-through agency can help. January 3, 2001, accessed June 22, 2020 .
  7. ↑ What is a PEO? - Professional Employment Organization. In: New Horizons Global Partners. October 31, 2018, accessed June 20, 2020 .
  8. ↑ a b What is an Employer of Record - An Overview of a Global Expansion Tool. In: GlobalizationPedia. November 7, 2019, accessed June 20, 2020 (American English).
  9. ↑ a b Sloan, Julie. "Cure Your HR Ills" . Fortune, March 28, 2007.
  10. ↑ Katja Gelinsky: American conditions: You can pack your things! In: FAZ.NET. Retrieved June 20, 2020 .
  11. ↑ PEO & Benefits. In: PEO & Benefits. Pratura Group, accessed August 27, 2017 .
  12. ^ Roberts, Harold S. (1994). "Employee Leasing" in Roberts' Dictionary of Industrial Relations (4th ed.). Washington, DC: The Bureau of National Affairs, Inc. ISBN 0-87179-777-1 . Google Book Search. Retrieved June 20, 2007.
  13. ↑ Hoovers. Hoover's Profile: Administaff, Inc. . Retrieved June 30, 2007.
  14. ↑ AÜG - unofficial table of contents. Retrieved June 21, 2020 .
  15. ↑ The Employment Placement Act - what is regulated? In: Arbeitsrecht-Aktuell. January 21, 2020, accessed on June 21, 2020 (German).
  16. ^ "PEO - Professional Employer Organizations Licensing by State" . StaffMarket.com. Retrieved July 3, 2007.
  17. ↑ SUTA dumping and Unemployment Insurance rate manipulation. Retrieved June 22, 2020 .
  18. ^ State of California, Employment Development Department. SUTA Dumping and Unemployment Insurance (UI) Rate Manipulation . Retrieved June 30, 2007.
  19. ↑ Tax Evasion (SUTA Dumping) | Arizona Department of Economic Security. Retrieved June 22, 2020 .
  20. ^ Employer Services Assurance Corporation
  21. ↑ Certification Institute WC Risk Management Best Practices