| You like the idea of
a PEO. You love the cost savings on health insurance. You're relieved that
you don't have to deal with the IRS ever again. Then you see words in the
contract that make your heart sink. Something along the lines of …"'the
PEO is recognized as the employer of record. No employee may be hired or
fired without the PEO's permission."
Take a deep breath. It's not half as scary as it sounds. But why is that
language there and what does it really mean?
The contract language is a requirement of the IRS. When it defined the
relationship between the PEO and client, the IRS stated that the PEO must
be the employer of record for tax purposes. And the IRS definition of
an employer is that it retains the right to hire and fire employees on
and off its payroll.
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In practice, this means that you notify the PEO that you want to put
someone on the payroll, and PEO does that for you. Same when you want
to terminate someone. The PEO prepares all the correct paperwork, so you
don't have to. A good PEO will also check in with you regarding the circumstances
of the termination, to be sure that you're not about to fire someone in
a way which contravenes employment law.
Having the PEO as the employer of record significantly reduces your risk
as a co-employer. If a disgruntled employee decides to sue over
anything, the PEO will defend that action on your behalf. As it
is named as the employer of record and not you, and acts as first
line of defence. So the PEO assumes a significant element of risk
on your behalf.
Co-employment, which is the modern definition of a PEO relationship,
means that you also accept and hold certain rights and responsibilities
towards your employees. You decide your employees' objectives and manage
their performance, turning to the PEO when you have legal or contractual
issues with an employee.
In fact, you should hear warning bells if you don't find employer of
record language in your PEO contract. It's there to protect you, not get
in the way of your business.
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