When your organization is in it's earlier infancy stages, you may not have the resources to manage the full scope of HR/payroll functions, so you may want help managing your escalating workload. Using a Professional Employer Organization (PEO) could be the solution, allowing you to outsource aspects of these roles. Here, we look at the role of the PEO to help you decide if it is the right choice for your business.
What is a PEO?
A PEO offers what is known as “co-employment,” meaning the PEO becomes the employer of record, with your payroll operating under the PEO’s tax ID numbers. As a result, they take on the responsibility for liabilities associated with your company’s HR role and create HR policies and procedures your company follows.
What are the Functions of a PEO?
When you outsource to a PEO payroll partner, they focus on functions such as:
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- Payroll
- Tax withholding
- Paying payroll taxes
- Maintaining workers’ compensation coverage
- Administering employee benefits
Meanwhile, your team can focus on managing business-critical operations and functions such as improving your recruitment process, managing internal talent to help improve engagement, and helping to reduce employee churn. You also avoid fines and penalties associated with non-compliance with tax and employment laws.
What PEOs Don’t Do
PEOs do not manage the following:
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- Making critical business decisions
- Dictating pay rates
- Determining workforce hours
- Managing schedules
Why Not Use a PEO?
There are some convenience advantages to outsourcing work to a PEO, but there are some drawbacks as well:
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- Cost - PEO's charge per employee administrative fees that become more expensive than the alternatives pretty quickly as your organization scales. PEO's also get to take advantage of tax benefits your organization would otherwise receive.
- Service and Support - covering such a wide range of functions PEO's tend to not be very flexible to individual organizations that are part of their collective.
- Technology - PEO's tend not to have technology platforms on the same level as the more cutting edge HR software tools that are on the market today.
These disadvantages may be worth it if you are a smaller organization, though as you scale up maintaining them as your business gets more complex can be a challenge.
When PEOs Make Sense
A PEO payroll service can step in to assist organizations experiencing growth yet can’t afford to expand their HR/payroll team. This tends to be small business owners who need their team to focus on their core competencies. With a PEO partnership, you can mitigate risks of unintentional non-compliance across all areas of payroll and HR and explore common scalability issues such as:
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- HR tasks like Employee Handbooks
- Hiring procedures
- Securing employee benefits you might not otherwise be able to get because you are too small
As a result, you can align your HR/payroll management with your business growth strategy to remain scalable and compliant.
Types of PEOs
There are two types of PEOs to choose from:
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- Traditional PEOs: Traditional PEOs take on the role of employer, sharing and managing employee-related responsibilities and liabilities.
- Industry-Specific PEOs: These PEOs specialize in meeting the compliance needs of specific industries.
Differences Between Standard Payroll Services and PEO Payroll Services
The main differences between a standard payroll service (or ASO model) and a PEO payroll service include:
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- Traditional HR Platform providers will typically have much better cutting edge technology than a PEO.
- Comprehensive Service Model: A PEO oversees workers’ compensation insurance, hiring/firing, health insurance plans and more, but generally the service can be lacking and they don't have as much domain expertise as the best ASO's.
- Employment Tax Handling: A PEO files and remits all taxes under its employer identification number (EIN), while some payroll companies will do that and some wont, so that is an important question to ask.
Cost of PEO Payroll
PEOs charge based on a percentage of payroll and/or the number of employees. Always ask for a cost analysis to understand how payments are allocated to the services provided, as some PEOs charge more for services like managing talent or providing reporting and analytics. While there may be some initial cost efficiencies when a PEO is trying to win your business, as your organization grows those per employee fees tend to add up and become inefficient. Your organization may also see rising healthcare benefit costs depending on how the PEO's other partner organizations submit claims since you are all on a plan together.
Pros and Cons of PEOs
There are both pros and cons when outsourcing to a PEO:
Pros
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- Purchasing power - Since PEOs are larger, they have buying power which can provide more competitive benefits and health insurance plans for your team. They negotiate the best rates and can provide healthcare plans that can help attract top talent in your industry.
- Liability assurance – Because the PEO takes on risks and liability they have strong teams of licensed HR professionals and attorneys. In the case where issues arise, you have access to these professionals to mitigate common risks associated with employment.
- Outsourced HR – with some functions off your hands your organization may be able to focus more on operations, however you need to make sure the PEO is handling everything correctly because at the end of the day your organization has the responsibility to operate compliantly.
Cons
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- Cost: PEOs charge a percentage of payroll, which not only gets expensive but can also make it hard to tell what you’re paying. PEOs tend to invoice everything together, so you aren’t sure what makes up their administrative fees and what money actually went towards things like payroll and taxes, workers’ comp, and EPLI. There are also set-up fees to consider and then they charge a rate per employee.
- Stuck with their Healthcare plan: Although these companies do have buying power, it doesn’t always mean they’ll use it for the healthcare plan your employees need. This can lead to inflexibility as the insurance plans tend to come from one or two carriers. So your team is at the mercy of their selections without any say in the process. This can lead to limited plans that fail to provide adequate coverage.
- Obeying Policies: Your staff has to obey their policies, adhering to the rules and regulations set forth by the PEO. This adds an additional layer of compliance that your employees must navigate, potentially affecting their day-to-day work routines and operations.
- Customer service issues: PEOs don’t just serve your employees. They provide support to every employee for each of their clients. This can lead to less than personal service for your team, as well as a loss of engagement your own HR department shares to help employees feel important. There are no real relationships nurtured which can lead to employee dissatisfaction with your company.
If the cons outweigh the pros, HR management software can help perform some of the duties of a PEO while allowing you to maintain control.
Choosing Between Standard Payroll Service and PEO
If you can live with the setup and monthly fees, as well as the amount of control handed over to a PEO, that can be an option for you. Otherwise, standard payroll service might be better. An ASO like Paypro can be the best of both worlds with the ability to partner with your organization across all the functions of an PEO, but with better technology and support.
If you feel the cons outweigh the pros, it makes more sense to look into HR management software. The software helps perform the same duties as a PEO, without taking away control or forcing specific, inflexible healthcare plans on your team.
About the Author
Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.