The Professional Employment Organisation model recently started to grab the attention of UK employers. The PEO model enables small and medium employers to offer workers unprecedented benefits. It also makes business operations smoother for larger employers. It was created because smaller employers found it difficult to compete with the purchasing power of larger employers. 

What is a PEO Model?

A PEO is a business that engages with other businesses (End User) and offers an ‘intermediary solution’. It means that the End User can outsource vital HR tasks such as:

• Payroll management
• Compensation
• Employee benefits
• Employment claims risk
• Compliance with regulations and more

In the UK, a specific solution has emerged which is often referred to as a ‘joint employment’ solution – where the End User and the PEO are both employers of a single worker. In these circumstances, the PEO can recharge labour costs without the need to charge VAT – this is useful in markets where an End User can’t recover VAT (e.g. NHS, banks and charities).

How does the PEO model work?

The PEO will hire the End User’s workers, becoming their ‘employer of record’ for tax and insurance purposes. The PEO becomes responsible for payroll and payroll tax compliance, benefits administration and other HR related administrative tasks. The End User continues to be the ‘worksite employer’ and manages the workers’ day to day activities and core job functions.

The PEO also handles pay and tax liabilities, attendance recording and pensions.

The End User can then focus on operational management and rewards, incentives and directing their daily jobs.

What are the advantages?

Engaging with a PEO saves the End User both the financial and human cost of handling payroll administration and pensions. It also adds reliability, accuracy and compliance to the process. It’s conducted by professionals dedicated to this kind of service and with access to specialist legal and payroll expertise. This is like engaging a software specialist rather than employing an in-house IT team!

This is like engaging a software specialist rather than employing an in house IT team!

Another big attraction of PEO structures is that the Pay Rate to the worker is guaranteed and the payslip provided has the appearance of a ‘normal’ employee payslip. Employment Costs get absorbed by the PEO because a separate ‘limited charge rate’ is agreed between the End User and the worker. This provides clarity for the worker and is favoured by trade unions as ‘Employer Costs’ aren’t seen as deductions from the worker. The PEO also has the opportunity to make extra margin, if, for example, the worker chooses not to enrol in a pension scheme and the PEO doesn’t have to make a pension contribution.

The PEO payrolls have a large number of workers. Because of this, it gains purchasing power and can offer workers access to a range of blue-chip benefits. Normally these are only available to larger companies.

Who is using the PEO model already?

The common complaint from Umbrella contractors, “why am I paying Employer Costs like National Insurance,” will become a thing of the past.

There are around 1,000 PEOs operating in the US. They provide services to around 250,000 small and mid-sized businesses and employ 3.5 million people. A similar model is also present in Germany and Sweden and it’s becoming an increasingly popular model in the UK. Umbrella payroll companies continue to evolve offering additional advantages to workers and customers other than just tax benefits.

The structure provides greater transparency as End User and worker charge rates are clearly agreed. It’s no wonder that PEO models are becoming more and more popular in the UK.

The common complaint from Umbrella contractors, “why am I paying Employer Costs like National Insurance,” will become a thing of the past.

Check out the explainer video below for a brief summary of how the PEO model works: