PEOs Explained

PEOs can be described as a company who provides businesses with assistance in all aspects of Administrative Employee Management. There are various types of PEO arrangements, but the three most common are the Traditional PEO, ASO, & PEO with Carve Out. They are explained below.


Professional Employers Organization (PEO) provides the company with a co-employer relationship by hiring the company’s employees and becoming the employer of record. The employees are paid under the PEO’s FEIN and are “leased” back to the original employer, hence the term Employee Leasing or Co-Employer. The PEO is the Employer On Record, providing Human Resources Administration, Workers’ Compensation, Benefits, and Payroll Services. The client company retains the same rights to supervise and manage the employees as before, hence the Co-Employment Agreement.

This Co-Employment agreement transfers Payroll and Employee Liabilities from a client to a PEO. These include IRS Payroll Audits, Workers Compensation Injuries & Case Management, Sexual Harassment and Discrimination Claims, FMLA, FSLA, Employment Practices Liabilities, Labor & Wage disputes, including Overtime and Exempt v/s Non Exempt claims.

The PEO has a lower SUTA & FUTA Rate, and a low Workers Compensation Modifier (E MOD). Payroll is reported to the IRS under the PEO FEIN. This arrangement also has the added benefit of becoming a “pay as you go” Work Comp Insurance program, eliminating the need for large premium deposits.

PEO With Carve Out Option.

This variation of the PEO relationship is very similar to the traditional PEO arrangement, with one exception. The client company retains their own Workers’ Compensation Insurance. This situation is ideal for companies with low Work Comp Losses or those in high risk occupations. Under this Co-Employment arrangement, the client retains their own Workers Compensation Insurance Policy, while the PEO company will remit payment to the Insurance company as part of their client agreement. This arrangement can be very beneficial to client companies, as it eliminates large Work Comp Insurance deposits.

Alternatively, some clients are enrolled in dividend programs with Texas Mutual Insurance, which can offer rebates of up to 30% on their overall premium. The Carve Out program allows the client to remain in the dividend program and continue receiving the rebates, yet enjoy the advantages provided by the PEO relationship.

Administrative Services Organization (ASO). NO CO-EMPLOYER RELATIONSHIP

The biggest difference between the PEO and ASO is that there is not a co-employer relationship between the ASO and the client employees. ASO services such Payroll, Tax Services, Workers Compensation Insurance etc, are all provided under the client’s FEIN. The ASO provides administrative support, Payroll Tax Reporting, Legal, & HR Administration. However, all these are provided as a service directly to the client company, with the client company being the Employer On Record .

ASO products are ideal for clients who do not have adverse FUTA, SUTA, or E MOD rates, but would still like to outsource Payroll & Tax services, HR Functions, Workers’ Compensation, 401K, Health Benefits, and other services under their own FEIN. The PEO company typically provides benefits such as Health, 401K, and Claims Management Assistance as part of their services.

Under this agreement, the client company bears the burden of IRS Payroll Tax Audits, and employee legal issues, such as sexual harassment and wrongful termination claims.