Explained: What is a Professional Employment Organisation (PEO)?

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In the UK, a Professional Employment Organisation (PEO) is a relatively new PAYE option for contractors. PEOs are intermediaries that allow the end client to outsource HR elements like payroll, benefits, and compliance. Simply put, it’s PAYE for a contractor and outsourced HR for agencies and clients.

The model is sometimes known as co-employment, as both the end client and the PEO employ the worker for different purposes. It’s a popular employment model in the United States as it allows employers to simplify the processes involved with hiring.

How does a PEO model work?

The PEO will hire the end client’s workers, becoming the contractor’s employer of record. The end client continues to employ the worker, but each party maintains different roles. The PEO is responsible for payroll and HR administrative tasks, like timesheets, holiday, pension, statutory payments and grievances, while the client manages the worker.

How a PEO works

This setup makes it ideal for small to medium businesses as HR is outsourced and managed by the PEO. A PEO simplifies payment for both the client and the worker while supporting the existing HR team. It also means employment responsibilities rest with the PEO.

Under a PEO, a worker will receive employee tax and National Insurance deductions from their gross pay – as well as other necessary deductions like student loan repayments.

There’s no fee for the service to the contractor – only the contractor’s agency. An advantage for agencies is that there is no VAT on payroll costs – it’s only payable on service fees.

How’s a PEO different to an umbrella company?

Both umbrella companies and PEOs offer outsourced HR and payroll, but they’re slightly different.

Workers under a PEO will be quoted with a fixed gross pay rate, and employer costs are agreed between the employer and agency. Umbrella companies are obliged to outline their deductions, but payslips can sometimes be trickier for contractors to interpret. However, with modern payroll solutions, this is usually no longer an issue.

An umbrella company will provide a pay rate to the contractor, agreed with the client or agency, with umbrella agency fees, taxes, and National Insurance deducted. Meanwhile, under a PEO, pay is agreed between the worker and client, and PEO fees are not charged to the contractor.

Find out more about what an umbrella company is and its benefits.

How is PEO impacted by IR35?

A PEO becomes the worker’s named employer of record, meaning they remain off payroll to the end client or agency. In other words, it’s unaffected by IR35, and the client can direct and control the worker without penalisation.

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