Many small-group employers find that engaging a professional employer organization (PEO) to administer employee benefits is an appealing option. For starters, hiring a PEO can relieve companies of many administrative burdens, including benefits management, recruiting and hiring, payroll, unemployment, workers’ compensation, compliance assistance, drug testing programs, and the Family and Medical Leave Act. Additionally, engaging a PEO can be a cost-savings tool for smaller employers, particularly in the area of health insurance coverage, because the PEO can leverage its large number of employees to negotiate better rates for its client company than a small company can negotiate on its own.

Sharing the Load

A PEO can help your company in a number of ways, from pricing to administrative assistance and much more. Some of the more prominent benefits include:

  1. Better rates. You will likely get better insurance rates on health insurance and workers’ compensation through a PEO.
  2. Easing of administrative burdens. The PEO will usually do most of the heavy lifting when it comes to paperwork and other administrative burdens, saving time and resources for you to focus on day-to-day business. Background checks and other hiring services are usually done through a PEO, as well.
  3. Broader array of benefits. The PEO should be able to offer your employees a wider selection and breadth of insurance options than you would be able to on your own.
  4. Taxes. The PEO, not you, will be responsible for collecting and processing all employment-related taxes for your employees.
  5. Resource for advice. Many PEOs provide guidance on employment law issues and workplace regulations.

ACA Muddying the Waters?

With the advent of the Affordable Care Act, some potential complications have arisen with respect to PEOs. For purposes of the ACA, employee status is determined under the common-law standard. It is thus crucial to identify who the common-law employer of a specific employee is in order to determine the entity that bears responsibility for offering coverage to that individual and to determine the entity that would ultimately be liable for penalties if that employee is not offered proper coverage.

In a typical employment arrangement, identifying the employer is fairly simple. However, this analysis can get complicated when the employee is instead hired through a staffing firm or professional employer organization.

The ACA regulations, as currently drafted, do not provide any rules that directly address the status of PEOs; therefore, questions may arise. There is some indication (based on the legislative history and leading commentaries) that the ACA obligations will attach at the client level, thus making the client company the common-law employer for this purpose. However, until guidance is issued on the applicability of the ACA with respect to PEOs, these organizations should use the common-law standard to determine whether an employment relationship exists.

The determinations in terms of compliance can get convoluted. Until the ACA is officially tied to common PEO operation, companies will need to adhere to common-law protocol, meaning that an attorney well versed in these particularities is your best ally.

Despite any ongoing uncertainty about PEOs in relation to ACA regulations, there’s no question that a PEO can provide your business a boost, allowing you to focus on running your company and not getting in the weeds in terms of administrative duties. A little extra support can go a long way for a small business, making PEOs a very worthy consideration.

This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.

Avi Sinensky is an attorney at Meltzer, Lippe, Goldstein & Breitstone LLP in New York, where his practice focuses on corporate and employee benefits law. He advises clients on strategies to overcome Affordable Care Act challenges and to capitalize on related opportunities.