Who Handles Compliance in a PEO? Understanding Shared Obligations

When you work with a Professional Employer Organization (PEO), you are in a co-employment arrangement. This implies that you and the PEO are both responsible for certain things about your employees, like payroll and benefits, as well as following employment law. But here’s where things might become confusing: who is really responsible when it comes to compliance issues?

Many firms think their PEO takes care of everything, but they learn too late that they still have some obligations. Imagine getting a letter from the Department of Labor saying you might have broken the law, only to find out that your team and your PEO both thought the other was in charge of that portion of compliance. This is a very common misunderstanding that costs a lot of money.

This article explains what compliance looks like in a PEO relationship, including who is responsible for what, how certifications like ESAC or IRS recognition affect responsibility, and what you can do to be fully protected.

The Co-Employment Model: Shared Roles, Separate Liabilities

In a PEO setup, the client is still the employer of record for everyday tasks, including recruiting, terminating, and supervising employees. The PEO becomes a co-employer for responsibilities connected to administration and employment, such as processing payroll, managing benefits, and sometimes even withholding and submitting taxes. That split makes a shared picture of compliance:

• The PEO is frequently in charge of making payroll tax deposits, submitting payroll taxes, sending in benefits premiums, and managing workers’ compensation.
• The customer usually retains control over things like workplace safety, staff discipline, job requirements, and daily compliance measures in the area.

That divide sounds good on paper. In real life, there are gray areas. For instance, a PEO may handle OSHA recordkeeping, but the client is still responsible for running safe operations and reporting issues right away. So, it’s important to know what the compliance is under a PEO agreement.

What PEO Employer Obligations Typically Include

Your PEO partner takes on a lot of PEO compliance duties that you would have to do all by yourself. Knowing what they really do lets you see how valuable they are and where you still have to do your part.

Federal Tax Compliance and Payroll Processing

Your PEO handles federal and state tax payments using technologies like EFTPS (Electronic Federal Tax Payment System). They take care of Form 940 for federal unemployment taxes and Form 941 for quarterly tax filings. This means figuring out how much to withhold, making sure payments are made on schedule, and keeping proper records.

Your PEO’s systems are immediately updated when Connecticut changes its tax rates or the IRS changes its withholding tables. This automation stops the mistakes that lead to costly fines. A manufacturing business in Hartford didn’t have to pay $18,000 in fines because its PEO found a mistake in the withholding computation before filing.

Employment Law Monitoring and Updates

PEO regulatory compliance includes keeping an eye on changes to employment regulations such as the Fair Labor Standards Act (FLSA), the Equal Employment Opportunity Commission (EEOC), the Americans with Disabilities Act (ADA), and the Family and Medical Leave Act (FMLA).

Your PEO keeps an eye on these rules at the federal, state, and municipal levels. When Connecticut makes changes to the minimum wage legislation or adds new paid family leave regulations, your PEO improves its rules and processes to reflect these changes. They tell you how to make these changes in your job.

Benefits Administration and Compliance

The Affordable Care Act (ACA), the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Health Insurance Portability and Accountability Act (HIPAA), and the Employee Retirement Income Security Act (ERISA) all have rules that make it hard to manage employee benefits.

Your PEO takes care of benefits administration, which includes enrolling people, figuring out qualifying life events, calculating premiums, and sending out needed notifications. They make sure that benefit programs follow the law and that the right procedures are followed when they are run. This includes keeping track of who is eligible, handling COBRA rights, and sending in reports that are required.

Workers’ Compensation Management

Part of PEO compliance management is making sure your workers have workers’ compensation insurance, processing claims, and following state rules. Your PEO knows and follows Connecticut’s specific rules for workers’ compensation.

They take care of claims reporting, set up medical treatment, run return-to-work programs, and keep the necessary paperwork up to date. This makes your job easier while yet making sure you follow state rules.

OSHA Compliance and Workplace Safety

One important area where PEO employer requirements are quite helpful is making sure that the Occupational Safety and Health Administration (OSHA) rules are followed. Your PEO helps you make safety plans, do audits of your workplace, give employees the training they need, and keep the records you need.

They make the needed OSHA posters, keep track of workplace injuries using Forms 300, 300A, and 301, and help with reporting incidents. The PEO for a construction company in New Haven found safety breaches during a routine audit, which saved the company $50,000 in OSHA fines.

Typical PEO Vs. Client Compliance Areas

Below is a pragmatic allocation you’ll see in many agreements. I’ll bold the areas so they’re easy to scan.

PEO compliance responsibilities (commonly handled by the PEO)

• Payroll tax withholding, remittance, and federal/state filings
• Benefits administration, carrier payments, COBRA notices
• Workers’ compensation insurance purchasing and claims management
• Employment tax reporting under the PEO’s EIN (for many PEOs)
• HRIS document retention and standard compliance reporting
• Some parts of the labor law guidance and compliance updates

Client responsibilities

• Day-to-day supervision, hiring, firing, promotions, discipline
• Maintaining safe workplaces and implementing safety programs
• Notifying the PEO of workplace incidents and providing timely information
• Following leave policies (e.g., approving FMLA requests) and communicating with employees
• Local permits, licenses, and industry-specific operational compliance

Shared or conditional duties

• PEOs help clients figure out how to classify employees (exempt vs. non-exempt), but the facts about the customer dictate the categorization.
• When you get an audit or notice, the PEO may handle the filings, but the customer usually has to give proof and work with them.
• The contract and who broke the law will determine who is responsible for legal defense and liabilities.

Why The Contract (CSA) Matters More Than Impressions

The Client Services Agreement (CSA) and the exhibits that go with it spell out what it means for PEO to follow the rules. Don’t agree to things that aren’t clear, such as “PEO will help with compliance.” Instead, demand details:

• Which agency filings will the PEO submit (940, 941, state unemployment, local payroll taxes)?
• Under whose EIN will payroll taxes be filed? (This affects IRS-level liability.)
• What are the timelines and SLAs for remitting taxes and premiums?
• Who will appear as the employer on government forms when required?
• How are audit notices handled—who pays penalties or settlements?
• What access do you have to payroll and tax records? Can you export them easily?

A clear CSA turns uncertain PEO employer obligations into measurable duties you can check quarterly.

Certifications And Why They Matter For Compliance Risk

Not every PEO is the same. Some industry credentials lower risk and make PEO compliance management more dependable:

• CPEO (IRS Certified PEO): qualified providers take on federal employment tax liability in certain instances, which lowers the tax risk for clients when those criteria are met.
• ESAC accreditation: signals financial assurance and ongoing monitoring around premium and payroll payment reliability.
• SOC 1 / SOC 2 reports: demonstrate internal controls for financial reporting and data security.

If your business can’t handle the risk of paying taxes or benefits, look for PEOs with the right qualifications and ask for proof during due diligence.

Practical Due Diligence Checklist: What to Demand Before You Sign

Use this when you evaluate a PEO or review your existing partner:

1. Request recent CPA attestation and proof of ESAC/CPEO status (if claimed).
2. Get a list of filings the PEO handles and the EIN(s) used for tax remittance.
3. Ask for SLAs on payroll tax deposits, premium payments, and audit responses.
4. Obtain sample reports and raw data exports (payroll register, tax filings, benefits remittances).
5. Confirm workers’ comp coverage details by state and review loss runs for your industry.
6. Review insurance and EPLI (Employment Practices Liability Insurance) limits and who is named as insured.
7. Request references specifically about audit responsiveness and dispute resolution.
8. Agree contractually on incident handling: who notifies regulators, who pays fines, and timelines for remedy.

If a provider hesitates on any of these, treat it as a red flag.

What to Do If Something Goes Wrong

If you receive a government notice (IRS, state tax agency, OSHA, etc.):

1. Notify the PEO immediately and request a written action plan.
2. Gather and export relevant payroll and benefits records right away.
3. Ask for a point person at the PEO and escalation contact info.
4. Review the CSA for liability and remediation clauses.
5. If the PEO’s response is unsatisfactory, consult legal counsel experienced in co-employment disputes.

Document every interaction. Timely, documented cooperation is often your best defense.

Book a Meeting with an OEM America to Strengthen Compliance and Protect Your Business

In a PEO partnership, everyone is responsible for compliance, and this must be explicitly established, written down, and monitored. Knowing who is in charge of what, from filing taxes to employee benefits and wage laws, helps your business avoid costly surprises. A good PEO partner should give you full transparency, specific SLAs, and proof of compliance controls so you can be sure business can focus on growth.

It’s easy for Connecticut businesses to find the right balance when they work with a trusted PEO like OEM America. OEM America is a member of NAPEO and an accredited business by the Better Business Bureau. They have a lot of experience with regulations and have systems in place that protect your business from compliance risks while making payroll, benefits, and HR processes more efficient.

Want to save money, lower your risk, and feel better? Set up an appointment with an OEM America expert right away. You will get up to four hours of free consulting, a custom study that shows you how to save money (up to $1,000 per employee), and a clear compliance plan to help you stay safe while growing your business.

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