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 IRS.
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 they
will provide HR support?
- Would they come on-site for an emergency?
- Will they provide a dedicated contact, or will your employees have to
communicate 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 that they 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 recourse?
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.
Learn more about finding the right solution to your payroll and HR needs: check out our free Buyer’s Guide to Simplifying Payroll and HR. If you have questions, please feel free to reach out to a Paycor representative.
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