PEO – Simplifying the Process

In a world of changing payments and regulations, the professional employer organisation is here to help.

The word ‘nuanced’ could have been created for the contracting and freelance workforce in the UK, especially when it comes to payment with differing rules, exemptions and requirements to contend with.

And a nuance is one short hop from a grey area, which in the temporary work market, can easily turn into a lack of transparency.

Turning to an intermediary to take care of matters, such as an umbrella company, has hence been a natural step for contractors and the agencies and employers who manage and pay them.

But, in a sector that continues to be unregulated, the bad as well as the good stories are well documented.

What is a PEO?

Enter the professional employer organisation (PEO), which aims to bring more transparency for all parties involved.

Like an umbrella, a PEO is an employment intermediary, which provides recruitment agencies, contractors and small to medium-sized businesses with an outsourced HR and payroll solution.

The PEO, which first became popular in the US, takes on responsibility for all the typical employer services like tax, National Insurance Contributions (NICs), compliance and all other legislative and administrative requirements. This includes contracts of employment and in some cases, if operating a worker model, contracts for service.

Steve McDermott, business development manager at New Red Planet:

“We understand the growing demand in the temporary labour market for a range of payroll options, and that is why we have taken the decision to work with the FCSA to be accredited for both our umbrella and PEO models of pay”

PEO Compared to an Umbrella set-up

Where it differs from an umbrella set-up is that it provides the contractor with a simplified picture of how their pay is presented.

Under a typical umbrella model, the employee would see deductions such as Employer NICs, Apprenticeship Levy and the margin amount retained by the umbrella for its services on a reconciliation statement, which if not properly made clear – as is required by the Freelancer and Contractor Services Association (FCSA) – can cause confusion.

Under the PEO model, these deductions are charged to the hiring company separately.

Hence the contractor sees just their gross pay rate rather than the increased amount or “the uplifted rate”, usually called “the assignment rate”, which is charged by the umbrella to cover these extra costs.

In some cases, but not all, the agency may advertise the uplifted rate to the contractor who then doesn’t always understand why the received rate is lower.

Deborah Murphy, head of operations of the FCSA explains;

“Under the PEO model, the contractor should know exactly what rate they will be getting as it’s not advertised at a higher rate. If operated correctly, it can be a clearer model, but that being said, if the umbrella model is operated correctly and transparently that, too, shouldn’t cause confusion.”

Julia Kermode, CEO of payroll compliance service provider, PayePass Solutions, explains that recent off-payroll changes have caused confusion for contractors who are now being engaged via umbrellas, particularly in relation to assignment rate versus gross pay rate.

She agrees the PEO model simplifies these financial arrangements.

“Umbrellas can be confusing by comparison as their payslips are accompanied by a breakdown of the assignment rate (the uplifted umbrella rate), which shows all employment costs and overheads in addition to the worker’s gross pay.

 

“The PEO model brings extra clarity to the pay rate for temps and contractors. It is very logical as it charges overheads to the recruitment company on top of workers’ gross pay.

 

“The main advantage of a PEO is that temps and contractors should always know how much their gross pay rate is. This clarity is important because it should mean that there are no surprises when it comes to payday.”

HMRC Guidance 

HMRC provides guidance on the supply of staff and VAT on the GOV.uk site. These two links in particular may be useful for recruitment agencies considering using an umbrella or professional employer organisation (PEO).

HMRC’s policy on supplies of staff is set out in VAT Notice 700/34 (see information on joint employment in section 3.2.)

In the medical sector, a relief applies for some of these employment businesses and you can find out more about this in VAT Notice 701/57 (Section 6).

New Red Planet (NRP), which is also FCSA-accredited, has seen demand for the PEO model continue to grow over the past couple of years.

Steve McDermott, business development manager at NRP explains;

“This is especially the case in public sectors, such as education and social care, where contractors and the supply chain in general prefer the simplicity provided by the PEO model to the worker,” 

He explains that crucial to the ethos of NRP is having an understanding and acting upon the needs and demands of all parties – agencies, contractors and end clients – so it works to ensure it understands the nuances within the different sectors.

Many of NRP’s PEO clients operate in the public sector where there is an increasing desire for workers to be paid through a standard PAYE model, explains McDermott.

“Rather than this forcing an agency to run in-house PAYE, the PEO model allows the agency to continue their main focus on recruitment while working with a payroll partner to provide the employment and payroll solution that is perfect for their supply chain.”

NRP managing director Phil Whelan, was a teacher and headteacher for 15 years prior to taking the helm.

He maintains regular contact with his public sector colleagues to ensure the company maintains an understanding of current legislation and requirements within education and beyond.

“Having worked with schools, agencies and workers on both sides of the fence gives a unique insight into what is desired and required in the public sector environment. PEO gives teachers, and many other such contractors, agencies and end clients, the payroll choice and solution that meets the demands of the whole supply chain.”