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What is a PEO?

Employee leasing is a contractual arrangement through which a business (generally small) out-sources and transfers its payroll and human resource responsibilities to a firm specializing in these functions. The leasing firm usually provides health, unemployment, workers compensation insurance, and safety training, while the workplace employer retains full operational control over the employee's activities.

Although these services are attractive to small business owners, the primary appeal of leasing is that it can save them an average 3% to 5% of their payroll expense. These savings are primarily due to lower workers' compensation, unemployment, and health insurance costs.

The Small Business Administration has estimated that the average small to medium sided business spends between 7% and 25% of its time handling employee-related paperwork. The increasingly complex tax code, workers' compensation laws, anti-discrimination statutes, and occupational health and safety laws have added to the administrative complexity and legal exposure of being an employer. Moreover, the increasing incidence of employee lawsuits threatens not only management's ability to focus on other aspects of the business , but the financial condition of the firm as well. Professional employee organizations fill the niche created by this large drain on business managers' attentions.

All of this has created a significant opportunity for clients of PEO firms which offer, as a bundled service, benefits administration, payroll, processing, and other traditional Human Resource capabilities.

This practice is generally referred to as employee (or staff) leasing. While the term leasing suggests an impersonal and temporary employment relation, the intent is quite the opposite. Leasing is used to outsource human resource needs, a way of organizing the work force to obtain administrative and benefit efficiencies that are difficult, if not impossible, for a small firm to obtain on its own.

From a legal and practical point of view, arrangements like this are described as co-employment. Employees have, in essence, two employers: one is referred to as the Client Company or Workplace Employer that directs their actions in the workplace, and the other is legally considered the Employer of Record that generates paychecks, provides health and workers' compensation insurance, and assists in work-related interpersonal and legal issues. Firms specializing in the Employer of Record role have come to be know as professional employer organizations (or PEOs), and the number of such firms has grown rapidly over the past decade. From fewer than 100 firms employing a total of 10,000 individuals in 1985, the industry today is estimated to include over 2,000 companies representing more than 2 million employees.