Professional Employer Organisations & its Origin

A professional employer organisation (“PEO”) acts as a co-employer and it takes care of various HR functions such as payroll, benefits and employment-related taxes. Whilst the business itself will still have control over all staff, they legally appear on the PEO’s books for tax and compliance purposes. 

The global PEO market has been valued to be worth more than USD 60 billion in 2023. Where exactly did this catchy phrase and trendy workforce engagement originate from?

Limited literature exists to capture PEO’s precise origins. One of the earliest documented manifestations of this concept, was by the late Marvin R. Selter, who leased staff of a doctor’s office in Southern California during the 1970s. During the early days, such arrangements grew as many businesses saw the benefits of bringing down labour costs. Local regulations also smiled on the industry. The Employee Retirement Income Security Act of 1974 had therein a loophole for employers with leased staff to claim various exemptions. In the 80s, the Tax Equity and Fiscal Responsibility Act of 1982 further encouraged staff leasing by providing further tax credits.

The industry grew tremendously and unfortunately, there were a couple of black sheep amongst the herd. There were people who saw this as a money scheme and were not concerned about doing the right thing. Proper taxes were not paid and workers’ compensation claims were not honoured (in the past, these leasing companies were offering self-funded workers’ compensation plans which were, at best, poorly managed).

Key industry leaders rallied together and formed the National Staff Leasing Association in 1984. In 1993, the association changed its name to become the National Association of Professional Employer Organisations (“NAPEO”).

Fast forward to today, PEOs are recognised nationally in all 50 states across the US. Many, but not all states, also provide specific licensing, registration and regulations for PEOs. These PEOs are recognised as either the employer or the co-employer for many purposes, including workers’ compensation, as well as insurance and taxes.

More significantly, 10 years ago the US Congress enacted sections 3511 and 7705 in the Internal Revenue Code to specifically deal with PEOs. Section 7705 confers and defines the term “Certified Professional Employer Organisation”. The IRS has recognised the right of a PEO to withhold and remit federal income and unemployment taxes for worksite staff per section 3511 of the IRS Code. The IRS also maintains a list of IRS certified PEOs which is updated quarterly. As of Q1, 2024, there are 124 IRS certified PEOs.

References

1. https://www.napeo.org
2. https://www.fapeo.org
3. https://www.irs.gov
4. Roberts, Harold S. (1994). “Employee Leasing” in Roberts’ Dictionary of Industrial Relations (4th ed.). Washington, D.C.: The Bureau of National Affairs, Inc. ISBN 0-87179-777-1