From handling payroll and employee recruiting to managing paid time off and benefits, taking care of your company’s human resources responsibilities can be a daunting and time-consuming task for small business owners. An increasing number of organizations are turning to professional employer organizations (PEOs) for help.
Businesses that partner with PEOs can outsource payroll and other human resources tasks to specialists. But if you plan to outsource such critical responsibilities, it’s essential to find a PEO partner that can handle all your needs. Many PEOs have software platforms for conducting HR functions, including tracking employee time, processing payroll and accessing healthcare benefits.
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We’ll look at how PEOs function and PEO software capabilities, and highlight some of the top PEO service providers.
PEO software is different from HR management software. Some PEOs offer HR software online, while some HR software providers market their product as a PEO.
PEOs provide third-party HR, benefits administration and payroll support to small businesses. Running a small business is challenging, and it can be easy to get bogged down in administrative work. Running payroll, finding benefits options for workers, processing W-2s or 1099s, and ensuring you’re adhering to workplace compliance laws are all tasks a PEO can handle.
PEO software solutions can simplify your business’s HR tasks by providing a low-cost alternative to hiring an entire internal HR department. Additionally, PEO software doesn’t take sick days or ask for vacation time, and your business isn’t liable for the work it performs. You can tailor a software’s services to match your business needs.
PEOs offer numerous services for businesses, including these standard PEO services:
By outsourcing various HR tasks, you can free up time for building your business.
A PEO enters a co-employment agreement with your business and becomes an employer of your employees, according to Brian Cairns, CEO of ProStrategix Consulting.
“As a co-employer, they take over certain responsibilities from you,” Cairns said. “It varies depending on the agreement, but the most important distinction is that they pay your employees under their employer identification number.”
This co-employer arrangement saves your company money on benefits. Because it represents many companies, the PEO can negotiate better rates and benefits for insurance and retirement plans than what your business could offer on its own. The National Association of Professional Employer Organizations found that businesses in a PEO arrangement grow 7% to 9% faster, have more than 10% lower turnover, and are 50% less likely to go out of business.
Here’s a look at three top PEOs and their services.
ADP provides exemplary customer service to small businesses of all types and sizes. These are some of its other significant features:
Read our review of ADP TotalSource for more information on ADP’s HR outsourcing.
Insperity is an excellent PEO for small businesses. These are some of its features:
Read our review of Insperity for more information.
Paychex is a great PEO partner for larger businesses because it has extensive resources to meet your needs. These are some important Paychex features:
Read our Paychex HR outsourcing review for more information.
PEOs are similar to ASOs (administrative services organizations), but ASOs help arrange services like benefits and payroll processing without directly providing them.
PEO software solutions and services aren’t suitable for every business. Before you decide if working with a PEO is the right move, consider the pros and cons of PEOs.
When you work with a PEO, you give an outside organization access to your business’s sensitive financial and employee data. For this reason, it’s critical to vet the PEO thoroughly to ensure it’s a legitimate company that operates ethically and complies with HR regulations.
Make sure your PEO is accredited, and check with the Better Business Bureau to see if it has received any complaints. Be sure to review your legal liabilities and understand your business’s requirements within the co-employer agreement.
Here’s a look at some additional PEO risks.
There’s potential for workers’ compensation fraud with PEOs. PEOs have been used to reduce workers’ compensation fees for business clients, costing legitimate employers, employees and healthcare providers millions per year. Some cases of PEO fraud have involved filing taxes improperly, exaggerating workplace injuries and incorrectly classifying employees.
One example of a PEO misusing services to commit tax fraud was the case of Larry W. Kimes, former manager of AccounTex Financial Services LLC, and Charles Pircher, a manager of multiple PEOs based in San Antonio, Texas. Kimes and Pircher were each sentenced to more than 10 years in federal prison and ordered to pay $132 million in restitution for stealing client money instead of using it to pay payroll taxes and insurance premiums.
As the PEO’s co-employment partner, you share responsibility in ensuring that your business operates within the laws of its state. One common error is worker misclassification. Here are three steps you can take to avoid this error:
One of the most important tax-filing tips for independent contractors is to track deductions, such as costs for cell phone service, supplies, and materials.
The most significant risk of using a PEO is that you are entrusting your employees’ private information to another company, according to Will Ellis, IT security consultant and founder of Privacy Australia. Before choosing a PEO, ask the company how it protects its clients’ data.
“Ensuring that a private network is used rather than a public network and inquiring about encryption are two important things to consider so that you can further increase security and privacy for your employees,” Ellis said. “Security of your data and employees’ information should always be a priority.”
PEOs offer cloud-based small business HR solutions. That means all your company’s important information is accessible from any device at any time.
There are PEOs that cater to different business needs, so it can be challenging to figure out which one is best for a particular organization. The pros and cons of any given software package will not be identical to any other offering on the market. It requires specific inquiries and deliberate research to narrow the field and find the right PEO package.
These five tips can guide your decision-making process:
The main difference between these two types of HR solutions is the co-employment model: Only PEOs include the co-employment support. That means if you sign up for HR outsourcing software, you won’t have access to the same benefits options, although you’ll likely still be able to use payroll processing and time and attendance software.
Many PEO services also provide smaller HR solutions that include basic HR software. HR solutions are a good option for very small businesses that don’t meet the payroll or employee requirements for full-fledged PEO offerings.
HR outsourcing solutions are also a good fit for companies just starting to grow. Often, PEOs will start companies on HR software and then grow them into a PEO offering.
If you don’t need a full-fledged PEO solution, you may still benefit from the HR software PEOs can provide.
As small businesses evolve, it’s helpful for business owners to implement HR software that addresses their changing needs. Using HR software can allow a small business owner to focus on growing their business instead of devoting hours to HR management, financial and administrative tasks.
Here’s a breakdown of some advantages and risks of using HR software.
Other common complaints about HR software are complexity, an unfriendly user interface and the possibility of human error.
If you decide that a full-fledged PEO solution is right for your business, here are a few must-have HR services your PEO provider should include.
The PEO’s software solution should include payroll services or at least integrate with your existing service. When a business uses a PEO for payroll, the PEO becomes a co-employer and assumes the responsibility of managing your business’s payroll administration. This can help small business owners who may not have enough time to manage payroll-related tasks, such as paying wages, depositing employment taxes and issuing employee W-2s.
Employee benefits packages can help your business attract and retain top talent. The most popular employee benefits include health insurance coverage, paid time off and flexible sick leave. One of the primary reasons many small business owners use PEO software is to provide high-quality benefits to their employees at a lower cost. Your PEO benefit options will vary depending on your business’s size and goals.
A low-cost PEO generally charges a per-employee fee or a percentage of your total payroll. In many cases, there isn’t a free trial where you can evaluate the service. The contract length of a PEO depends on your business’s size and needs, as some PEOs offer long-term contracts, and others don’t require any contract at all.
Usually, 30 to 60 days’ notice is required before canceling the service. Some companies let you leave at any time and for any reason, while others charge you a fee for leaving. Search for a PEO that offers a money-back guarantee, especially if you’re a small business owner using a PEO for the first time.
Still unsure how to choose the best PEO software? Here are some frequently asked questions about a PEO’s processes and operations.
The best services PEOs offer for startups include risk and compliance management; health, vision and dental benefits; comprehensive HR software tools; time and attendance tracking; and payroll support.
A small business should look for HR help immediately. If your business already has an HR specialist on staff, additional HR support could be beneficial. Alternatively, if your business has no HR team, a PEO’s software could be the definitive factor in your business’s growth.
You’ll want to work with an accredited PEO because it indicates the company is financially stable, is ethical and meets regulatory requirements. This is important because it ensures that sensitive HR processes are handled correctly so that you don’t run afoul of the U.S. Department of Labor or the IRS.
The alternative to using a PEO is to hire your own in-house team to manage HR support and benefits.
Hiring a PEO may not be the right solution for some businesses. Here are three reasons why some businesses opt not to use PEO software:
Co-employment agreements can reduce HR and administrative issues, but the insurance, payroll processing and HR packages that PEOs offer come with additional fees for administrative services. In many cases, PEOs separate HR and administrative services, and may price each differently, according to the size of your business.
Generally, PEOs calculate their costs, add an administrative fee and profit margin, and then tally that as a percentage of your PEO payroll software costs. Once your timesheets are completed and submitted, the PEO will notify you of the required wire transaction so they can begin processing payroll. The administrative fee is a percentage of the actual cost.
Matt D’Angelo contributed to the writing and research in this article. Source interviews were conducted for a previous version of this article.