The employee leasing or co-employment model has been popular since the mid 1980s. The term “Professional Employer Organization” or PEO for short was introduced during the 1990s.
Today PEOs are a common solution for small businesses all around the U.S.
In a nutshell, PEOs contractually hire everyone in your firm, from owner to janitor, put them on their payroll, pay taxes through their FEIN (tax ID number), and may secure benefits and workers compensation through their FEIN. They then contractually “lease” your employees back to you. In the early days, business owners were concerned they would lose some element of control over the workplace. This was and still is not the case.
PEOs handle back office administration and compliance; you run your business as you did the day before the PEO contract was signed.
The following description is from the National Association of Professional Employer Organizations (NAPEO)’s Web site.
"Professional employer organizations (PEOs) enable clients to cost-effectively outsource the management of human resources, employee benefits, payroll and workers' compensation. PEO clients focus on their core competencies to maintain and grow their bottom line.
Businesses today need help managing increasingly complex employee related matters such as 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.