When your organization’s growth puts increasing demands on your HR/payroll functions, you need a cost-effective solution to manage your escalating workload. Using a Professional Employer Organization (PEO) could be the solution, allowing you to outsource aspects of these roles affordably. 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:
- 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.
Why Use a PEO?
There are several advantages to working with a PEO payroll/HR partner, especially from a payroll standpoint, including:
- Payroll and tax filing: A PEO can create a streamlined process that includes withholding, paying local, state, and federal employment taxes, etc. to ensure compliance.
- Payroll integration: PEOs leverage leading-edge platforms that make it easy to integrate payroll with time and attendance, benefits administration, etc., reducing errors related to duplication, eliminating overtime non-compliance, creating DIY benefits administration, and more.
- Compliance: As compliance experts, a PEO will avoid fines and penalties with a keen understanding of the latest laws regarding areas such as payroll tax law, reporting requirements, unemployment insurance, workers’ compensation, etc.
These advantages translate into streamlined processes and cost efficiencies, allowing you to remain scalable.
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. A PEO can make sense if you want to grow your business without experiencing undue strain on your budget. This tends to be small and midsized business owners who are at a critical stage of growth and 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:
- The right wage levels to remain competitive
- Identifying core competencies when hiring new team members
- Determining when new hires are required at critical moments of workload increases
- Reducing turnover due to overworked key team members related to growth
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 three types of PEOs to choose from:
- 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.
- ASO (Administrative Services Only) PEOs: An ASO only provides the day-to-day administration function of a PEO without sponsoring benefits or taking on the role of the employer.
Differences Between Standard Payroll Services and PEO Payroll Services
The main differences between a standard payroll service (SPS) and a PEO payroll service include:
- Comprehensive Service Model: A PEO oversees workers’ compensation insurance, hiring/firing, health insurance plans and more, while an SPS focuses strictly on aspects of payroll.
- Employment Tax Handling: A PEO files and remits all taxes under its employer identification number (EIN), while payroll services do not. As a result, a PEO can save you state unemployment (SUTA) tax costs and take on liabilities.
- Regulatory Compliance: A PEO manages all risks and shares the legal burden on non-compliance, while an SPS does not.
What Kind of Businesses Use PEOs
The businesses that typically use PEOs include small and midsized businesses across almost all industries, including:
- Real estate/property management
- IT/Technology startups
- Healthcare and legal services
- Construction and trades such as plumbing
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.
Overall, the right PEO is a cost-effective payroll resource that allows you to focus on the core HR functions contributing to revenue generation. However, remember the cost of using a PEO will increase as your workforce grows. Therefore, you need to recognize the tipping point where hiring internally makes more sense so you can set up your contract accordingly.
Pros and Cons of PEOs
There are both pros and cons when outsourcing to a PEO:
- Purchasing power -This is where the real impact can be seen on your healthcare plan. Because PEOs are larger, they have buying power which can provide far more competitive benefits and health insurance plans for your team. They negotiate the best rates and can provide an exceptional healthcare plan 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.
- Ongoing compliance – with payroll off your hands, you’ll be compliant with the latest payroll tax and employment laws across the states in which you operate.
- 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.
What PEOs Don’t Do
PEOs do not manage the following:
- Making critical business decisions
- Dictating pay rates
- Determining workforce hours
- Managing schedules
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. Also, if your team already manages the bulk of HR services a PEO offers effectively and your focus is more on improving payroll processes, a standard payroll service is best.
A PEO can be beneficial for businesses looking to streamline various HR functions having to do with risk mitigation. A PEO’s expertise in risk mitigation and HR compliance can provide a layer of security for your business.
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.