Many smaller companies opt to work with Professional Employer
Organizations (PEOs) to give employees access to health and retirement
benefits, provide them more human resource services and ensure timely
tax filing. While PEOs have some things in common with HR and payroll
software companies, there are key differences.
What’s the difference between a PEO and a payroll provider?
PEOs are co-employers, meaning that they share the employer’s
responsibilities. When a company enters into a contract with a PEO,
its employees become employees of the PEO. This allows the PEO to pool
the employees of many smaller companies together to get better rates on
health insurance, workers’ compensation and state unemployment. Many
also offer HR services, which allow the businesses to completely
outsource the HR management function. The PEOs will help to recruit and onboard new employees and administer programs to help increase employee retention rates. In addition, PEOs are typically
regulated on the state level.
Payroll providers, on the other hand, are not co-employers. While they
process payroll and file taxes on a client’s behalf, the client’s
employees do not become the provider’s employees. Many providers offer
HR software, but, unlike PEOs, the HR function remains in-house. The
key difference is that these tools help in-house employees become more
efficient. Also, most reputable payroll providers are endorsed by the
Pros of using a PEO company
The main reason many companies choose PEOs is to provide benefits to
their employees at a lower cost. However, it is important for the
company to consider whether working with a PEO will result in long-term
gains. The PEO is now in control of who else is in the same risk pool,
and can often feel pressure to add new clients (regardless of their
risk), which can result in increased rates and higher long-term costs.
Cons of using PEO companies
Some companies opt not to use a PEO because they want to remain in
control of benefit plans, carriers and risks. If their employees love
their current benefit carrier, but the PEO wants to move to a different
one, there isn’t much the company can do.
Many organizations also prefer to keep the human resources function
in-house, opting to invest in technology tools to increase the
efficiency of the team. Companies who are thinking of using a PEO for
HR services must ask:
- Will the PEO make a commitment on the number of hours a week theywill provide HR support?
- Would they come on-site for an emergency?
- Will they provide a dedicated contact, or will your employees have tocommunicate with several different people?
- Do they truly have the best interests of your employees at heart?
- Will they be able to make impartial recommendations, knowing thatthey could be legally liable for their advice?
The answers to the above questions will determine whether outsourcing HR
is the best choice for your organization.
In addition to these challenges, some companies struggle with the
delineation of employer responsibilities between them and the PEO. If
the PEO makes a mistake when filing taxes, is the employer responsible?
Who would the IRS penalize? What are the employer’s options for
The last disadvantage to working with a PEO is often the pricing
structure. PEOs frequently bundle services together and charge a flat
rate. Employers should be sure to ask about what services are included
in the bundle to ensure they are getting exactly what they need—no more
and no less.
What’s the right fit for your business?
Learn more about finding the right solution for your payroll and HR needs: check out our free Buyer’s Guide to HCM and Payroll Technology. If you have questions on specific challenges impacting your business, our team would love to help. Contact us today.
Get Buyer’s Guide