What is a Professional Employment Organisation (PEO)?

What is a Professional Employment Organisation (PEO)? Having originated in the US, the PEO is an increasingly popular employment model in the UK today, writes Crawford Temple, chief executive of compliance specialist Professional Passport.

Just like an umbrella company, when a contractor engages with a compliant PEO, they are fully employed under PAYE according to the rate agreed by the hiring agency and the end-client.  

But both models are often misunderstood and have attracted negative media headlines over the past few years, most often when they purport to be an umbrella or PEO and are in fact other non-compliant dodgy schemes.

What is the difference between an umbrella company and a PEO?

So let’s outline the differences between a PEO - sometimes also referred to as a Professional Employer Organisation - and an umbrella company while remembering that what’s most important with either model of employment services, for contractors and others who engage them, is that they are compliant.

Rightly or wrongly, umbrella companies have come under much scrutiny lately. The model has become an increasingly popular employment route, but many workers have been questioning their legitimacy based on a common misconception about their rates of pay and the deduction of employment costs from the rate paid to the umbrellas. 

To clarify, all employers (including umbrellas) are legally required to pay employers’ national insurance as well as process employee deductions.

But good umbrella companies explain how the deductions work so that the confusion doesn’t arise.

Still ongoing now, covid-19 has also shone a big spotlight on umbrella companies, partly because the Coronavirus Job Retention Scheme threw up complexities around furlough arrangements for those working through an umbrella model.  

The combination and some might argue, confusion, has seen many recruitment companies turning to a PEO arrangement as an alternative to umbrellas.

Are there any similarities between an umbrella company and a PEO?

In truth, there are many similarities between umbrellas and PEOs.  Both models mean that the worker is employed by the provider and benefit from the same employment rights, such as holiday pay and sickness pay, as well as pension provision. A PEO is also responsible for all HR support and pay processing.

The big difference, at this stage, lies in the rate offered to the worker. In a PEO arrangement, the recruitment agency offers the worker a ‘PAYE’ rate, which means the rate offered is what the worker will receive for each and every hour worked. The additional employment costs, such as employer National Insurance, Apprenticeship Levy, holiday pay and employer auto-enrolment contributions are charged back to the recruitment agency, in addition to the rate.  The PEO’s fee for facilitating the arrangement is also charged back to the recruitment company. Additionally, VAT must be charged on the full invoice sent to the recruiter and this is where some confusion lies.

As the rate offered is what the worker receives, this helps remove the misunderstandings and complexities that can arise by using umbrella companies, as well as providing a simple payslip to the worker.  The result is that the worker is unaware of the employment costs associated with employing them. The structure of pay in the contract should also make arrangements clearer in relation to furlough -- an important factor in the current covid climate.

Which one is right for me? An umbrella company or a PEO?

At the time of writing, a growing number of recruitment companies are recognising that ‘one-size-fits-all’ umbrella arrangements are not their only options and are developing a more bespoke approach that aligns better with their markets and sectors, as well as the rates on offer. The PEO is not a replacement for the umbrella model, but it does have a role to play in the market. 

So ‘the answer is umbrella’ to the question of non-limited company working is far from the no-brainer it once was, because we are seeing a wide and varied range of offerings entering the market. 

It is critical that recruiters fully understand the new choices and ensure that they only engage with compliant firms. And, as we will see an increasing number of contractors being required to work through these models when the Off-Payroll legislation takes effect in the private sector from April 6th 2021,  never has it been more important to carry out due diligence when choosing a provider. By choosing a compliant firm, workers, recruiters and hirers will get all the assurance they need that providers have been rigorously checked and accredited and are good to do business with, whether they are genuine umbrella or a bonafide PEO.