PEO Vs Payroll Service Provider: Which Is Best For Your Business?
You’re considering outsourcing payroll to increase accuracy, reduce your administrative burden, and free up your team to focus on more strategic activities. But unless you choose the right option for outsourcing, you’re not likely to see the full benefits of outsourcing. So how do you decide?
While there are various options available to outsourcing payroll, two of the most common approaches are:
- A payroll provider
- A Professional Employer Organization (PEO)
When deciding whether to outsource payroll to a payroll provider or PEO, you may be worried about the impact of your choice on your business’ budget, operations, and employees. In this article, we’ll evaluate the pros and cons of using a PEO or payroll provider for your business, including:
- What’s included
- Cost of the services
- The amount of control you maintain over your employees
- The effect on culture
- Your responsibilities under each arrangement
- Contractual obligations
After reading this article, you will have the knowledge and insight to help make a decision for your outsourced payroll needs that will be best for your business. For more guidance about understanding the scope of payroll services—and how they align with your organization’s needs, consider downloading our complete guide to payroll solutions.
What is a PEO?
A PEO is a professional employer organization. It’s also known as an employee leasing model, and that definition is pretty descriptive since a PEO will hire your employees and you’ll lease them back. In this way, you’re technically both co-employers.
Since the employees technically work for the PEO, the PEO will also be responsible for a wide range of workforce management functions beyond payroll, including HR, benefits and compliance.
What is an outsourced payroll provider?
An outsourced payroll provider handles the administrative and compliance functions involved with paying employees each pay period that normally include tax filing and employee pay options. Depending on the vendor you choose, they may also offer other solutions for your business such as HR, benefits, and compliance. So while you may initially just use a vendor to process payroll, you could have the option to outsource other functions as well as your needs change.
What are the pros and cons of a PEO vs payroll provider?
With a PEO, you’ll get more than just payroll processing. The full-service approach of a PEO frees you from having to take care of additional employee management functions yourself like hiring, terminations, health insurance, workers’ comp, and retirement plans.
By bundling everything together in one package, a PEO can alleviate your administrative burden and free you up to concentrate on the overall operations of your business.
An outsourced payroll provider will be responsible for processing your payroll and its related functions. However, many payroll providers also provide a complete suite of solutions to help you manage your workforce, including HR, benefits, and compliance.
If your vendor doesn’t offer these solutions, you’ll need to secure group health insurance and workers’ comp for your employees, set up a retirement plan, manage regulatory compliance, and more. Taking on these tasks yourself and piecemealing services together may end up costing you more or less than a PEO in fees and labor and take your focus away from running the business.
Cost Of Services
The biggest draw of a PEO is the potential cost savings on benefits compared to what you could get on your own since you’ll be part of a larger group of employers. This can help you spread the risk and gain more purchasing power.
For example, you may be able to see savings of 20% to 30% compared to what you’re currently paying in small group rates for health insurance. But these savings come at a price.
Most PEOs bill you additional administrative fees that are typically a percentage of your overall payroll costs. While each PEO may charge differently, you can expect to pay somewhere around 3% to 15% of wages to the PEO as an additional administrative cost. Others may charge you a per-employee-per-month (PEPM) fee.
In addition, depending on your needs, you may end up paying for services with a PEO that you don’t use.
If you choose to outsource just payroll, it will cost you significantly less than a PEO. While pricing for a payroll provider will vary, you can generally expect to pay about $150 to $200 per employee per year for payroll processing.
However, if you choose to add on services, your prices will go up. For example, for outsourced HR, you can generally expect to pay between $45 and $1,500 a month. But, since you have the flexibility to outsource only what you choose, you can control your costs and increase the services as your business grows.
The Amount Of Control You Maintain
Since the PEO is the employer of record, they control the benefits carriers and plans you offer your employees. So if you have a preference for your insurance offerings, you may not be able to pick and choose.
Another thing to think about is who remains in control of your employees. In reality, the PEO has the right to hire and fire your employees. While hirings are far more common than firings, putting that decision-making authority into someone else’s hands may be something you want to consider, especially if you’re used to running your business in a hands-on way.
When you choose to outsource to a payroll provider, you’re still the employer. That means you’ll continue to make decisions for your employees like benefits.
In addition, your employees remain yours so you can control who works for your company. Even if you choose to outsource other functions to your payroll provider like HR, you’ll still be the final decision-maker and be able to choose to accept the recommendations of your provider or not.
The Effect On Culture
As we mentioned earlier, when you sign on with a PEO, they’ll hire your employees and you’ll lease them back. While the PEO will handle the new hire documentation and onboarding of your employees, the arrangement may cause some confusion for your employees – especially because employees now will get paychecks from the PEO instead of you. You could even meet resistance if employees feel disconnected from the company.
In addition, because the PEO is responsible for handling a lot of HR responsibilities that were previously managed in-house, it could have a negative influence on your culture, especially if you have a tight-knit company. You’ll want to find a PEO that shares your values to ensure the transition is seamless.
On the other hand, once you get up and running with a PEO, you may see a positive impact on the workplace because employees may realize benefits such as on-time and accurate payroll each pay period. In addition, since you’ll be offloading a lot of your HR administrative tasks to the PEO, you may have more time to devote to improving the employee experience.
With a third-party payroll provider, you’ll only be shifting the administration of your payroll outside the company, unless you take advantage of any of the provider’s other offerings. So generally speaking, the payroll company will manage your employee pay options as well as self-service administration for employees – but that’s about all employees will notice has changed.
Since 63% of companies in North America outsource payroll, it’s likely many of your workers have been paid by a third-party vendor like ADP or Paychex before, so it shouldn’t be cause for alarm. And, similar to using a PEO, outsourcing to a payroll provider can actually benefit your culture because pay will be accurate and on time, which can go a long way towards boosting morale.
If you decide to use your payroll provider for other functions like HR consulting, like a PEO, you run the risk of disrupting the current dynamic and impacting morale by bringing in an outside vendor. To avoid this issue, it’s important to continue to keep communication, social activities, and traditions intact to maintain engagement.
Your Responsibilities Under Each Arrangement
Under your co-employment relationship with a PEO, you’ll maintain on-site responsibilities such as assigning tasks and providing your employees with the tools and places to work.
There can be some added work, however. When you join a PEO, you and your employees may need to deal with more compliance-related activities.
For example, as a small employer, you may otherwise be exempt from certain rules that only apply to larger companies. But as part of a PEO, you’ll now have to make sure your business is compliant with applicable laws and regulations like the ADA, which governs employers with 15 or more employees and can necessitate new policies or practices at your company.
A little more will also be expected of your employees, such as having to sign off on handbooks or other policies and procedures that may not have been required previously.
When choosing to outsource to a payroll provider, you still manage all your day-to-day operations and your employees. The vendor will simply process payroll unless you also opt to use them for other workforce support and services like HR.
With a PEO, you’ll need to sign a contract for a year or longer. While a contract gives you some stability and predictability, there are some potential downsides if you choose to terminate your arrangement.
Specifically, when you transition out of a PEO, you’ll have to rehire your employees, give them benefits, and find another option to handle payroll (yourself or another vendor). This can take a lot of time and effort.
In addition, some PEOs may charge a termination fee.
When you choose to outsource payroll to a third-party provider, you’ll also have to sign a payroll agreement that outlines both your and the vendor’s responsibilities. But you can likely find month-to-month options that don’t require lengthy contracts.
And if you’re not happy with your provider, it’s easy to switch. In fact, no matter what vendor you choose, getting up and running will happen pretty quickly – less than a week for a simple payroll.
Should I Choose a PEO or Payroll Provider?
Only you know your priorities for outsourcing payroll. As you consider what’s the best fit for your organization, you’ll need to decide what features of a PEO or payroll provider will best meet your needs.
Typically, PEOs fit companies that:
- Want the purchasing power of a larger organization to lower your benefit costs
- Prefer to have less administrative responsibility for your HR functions
- Are uninsurable for workers’ comp or your costs are too high
Payroll providers will work well for your business if you:
- Only want to outsource payroll and related functions and want to keep other HR tasks in-house
- Don’t want a long-term contract
- Want to customize and control the benefit options for your business
If you’re ready to realize the benefits of outsourcing payroll like improved accuracy and reduced administrative burden and think a payroll provider may be the right choice for you, the next step is to learn what outsourced payroll costs. Find out how much you can expect to pay for outsourced payroll in our next article.