What is PEO?

PEO stands for Professional Employer Organization and it originates from the USA where it’s an established workforce engagement model that is quickly being adopted in the UK by both agencies and end hirers. With the IR35 off payroll rules in force from April 2021 agencies and end hirers  are looking to PEO as a simple solution that’s popular with contractors. So what is behind the success of PEO?

In the USA, a PEO is a party (alongside the end hirer) in ‘co-employment’ or ‘joint employment’.  It is an outsourcing firm which provides various employment related services to small and medium sized businesses, aimed predominantly at their permanent employees. Most important of these is health care provision due the lack of a state funded system.

But UK employment and tax law is quite different and UK PEO’s are predominantly adopted to support end hirers and agencies with engagement, employment and payment services. But they also provide significant employee benefits and these may exceed those that can be provided by small or medium sized end hirers. These benefits certainly aren’t available to the large number of contractors who are being referred to PEOs as a result of the IR35 off-payroll rules.

Payment through a UK PEO is under PAYE, in common with umbrella, but without the confusion associated with umbrella payslips. Furthermore, there is no margin deducted from payments made to the worker.

Benefits to end hirers and agencies

Employing, engaging and paying contractors has never been so complicated or burdensome and the PEO model eradicates employment risk whilst enhancing contractor engagement. Compass PEO enables end hirers and agencies to drive internal efficiencies, whilst reducing employment costs and tax liabilities.

This is all made possible through use of the next generation of innovative payroll software which ensures compliance and transparency throughout the supply chain.

The PEO model works for all contractors regardless of sector or rate of pay, even those on National Minimum Wage. The simplicity and transparency of PEO makes it an ideal antidote to the complexity of umbrella. It’s also more acceptable to employee representation groups.

Benefits to contractor

Aside from the simple PAYE payslip and lack of umbrella margin, contractors enjoy the benefits they would receive under the umbrella model – so best of both worlds. These benefits include continuity of employment, full employment rights such as statutory sick pay, paternity/maternity pay and holiday pay.

Compass PEO also provides a whole host of other additional benefits such as an employee reward schemes, access to an online GP, finance support through our trusted IFA partner, health & well-being support including access to private healthcare. Compass PEO is more than just a way to get paid.

 Why now?

Compass introduced its PEO solution in response to two substantial developments in employment and tax legislation. Its enables end hirers and agencies to ensure compliance without i) disadvantaging skilled and valued contractors, and ii) suffering a significant new administrative burden.

Firstly, the extension of IR35 ‘off payroll’ rules to the private sector will impact on the way over half a million contractors operating their own Personal Service Company can be contracted after April 2021, with liability for non-compliance passing up the recruitment chain to end hirers.

Secondly, the Government’s response to the Taylor Report (referred to as the ‘Good Work Plan’) has introduced significantly more complex legal and administrative requirements for recruitment agencies and end hirers who have direct relationships with contractors.

Two key compliance risk for recruiters and end hirers are:

1. the need to meet new transparency of employment particulars, through provision of a Key Information Document (KID) to all workers on every assignment
2. enforcement of rules to ensure contractors receive all holiday pay due from an assignment. With financial penalties where employee complaints have been raised. (Compass manages contractor’s employment – paying all taxes and managing holiday pay).

How does it work?

It’s very simple. The end hirer remains responsible for managing the worker on site, but Compass PEO becomes the employer of record.

Compass provides the contractor with a full contract of employment and is responsible for all statutory employer obligations, such as establishing Right to Work, deducting all employer and employee taxes and paying to HMRC, whilst also handling any disputes which result in employment tribunals.

This arrangement provides flexible employment for the contractor, but with a simple service charge to the agency or end hirer.

Adopting Compass PEO supports a happy and more engaged workforce and frees up end hirers and agencies to focus on their core business.

For more information on PEO please contact Compass on 03333 66 00 28