- Businesses that use PEOs grow faster, have lower turnover and are less likely to go out of business than those that don't, according to data from the National Association of Professional Employer Organizations.
- Implementing a PEO's software allows you to dedicate your time to other areas of your business that need attention.
- PEO software can become vulnerable to security breaches because it hosts your employees' data in one centralized location.
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 are able to outsource payroll and all of their other HR tasks to a company that specializes in these undertakings. However, if you plan to outsource such critical responsibilities, it is important to find a PEO partner that can handle all of your needs.
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When you become a client of a PEO, many of these companies have software platforms through which you conduct many HR functions, such as tracking employee time, processing payroll, accessing healthcare benefits and more.
As you consider whether you should hire a PEO, though, it's crucial to distinguish the software a PEO offers from online HR management software. Some PEOs offer HR software online, while some HR software providers market their product as a PEO.
How can PEO software help your business?
PEOs offer numerous services for businesses, such as recruiting, employee training, onboarding and offboarding, payroll, and health and welfare management. When choosing a PEO, it's important to understand your business's strengths, weaknesses and needs to identify the specific services (and software programs) that will best support your staff and workplace.
PEO software solutions can simplify your business's HR tasks by providing a low-cost alternative to hiring an entire HR department. Additionally, PEO software doesn't take sick days, ask for vacation time, and your business isn't liable for the work that's performed. You simply tailor a software's services to match your business needs.
The way a PEO works is that the 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 co-employer, they take over certain responsibilities from you," Cairns told business.com. "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 helps you save 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 (NAPEO) found that businesses in a PEO arrangement grow between 7% and 9% faster, have more than 10% lower turnover, and are 50% less likely to go out of business. With more than 900 PEOs in the U.S., this type of HR resource delivers services to roughly 175,000 small businesses, providing co-employment for more than 3 million people.
What are some of the top PEOs?
Here are three of the best PEO service providers.
ADP: Best PEO for customer service
ADP TotalSource can help your business with HR administration, talent management, employee benefits, payroll and regulatory compliance. As an IRS-certified PEO, ADP TotalSource meets the high standards set by the IRS and offers software which includes data-driven insights, according to Brian Michaud, senior vice president of ADP TotalSource.
"Additionally, ADP TotalSource provides added support with HR specialists who provide customized HR strategies and programs for clients, as well as access to Fortune 500-caliber benefits," Michaud said.
ADP TotalSource offers comprehensive 401(k) plans; employee wellness programs; and vison, dental, and health plans. TotalSource also offers regulatory compliance for all major safety, health and employment laws. ADP has a minimum payroll requirement which varies, depending on which state your business is incorporated in. (This requirement may be waived if your business employs a certain number of workers.)
Insperity: Best PEO for small businesses
Even though Insperity works with businesses of all sizes, it's particularly well-suited for small businesses. Its offerings include onboarding resources, recruitment tools, standard benefits packages, time and attendance tracking, payroll processing, employee training, and risk management services.
Insperity's pricing is based on a per-employee structure which allows you to predict costs as your business changes. This is ideal for small businesses looking to outsource HR and administrative tasks at an affordable rate.
Paychex: Best PEO for midsize businesses
Paychex is a full-featured PEO service that's ideal for midsize businesses looking for larger-scale coverage. With extensive HR support, Paychex provides onboarding and recruiting resources, handbook and policy development, termination and dispute assistance, and employee screening and training. Paychex offers great health, retirement, vision and dental packages.
Paychex's HR services are charged on a per-employee basis, which allows you to predict and budget for costs as your business grows. Also, instead of selling its services in preconfigured bundles, you can choose the specific services you need so you only pay for what you use.
What are the pros and cons of PEO software?
Before you decide if working with a PEO is the right move for your business, it's important to consider the pros and cons.
PEO pros
- If you can't afford to hire a human resources department, a PEO can be a cost-effective way to outsource HR duties. Or, if you have an HR specialist or a small HR staff that needs additional support or resources, a PEO can provide what they need.
- A PEO can take on your HR and administrative tasks. There's little room for human error in HR, and the service assumes liability for any complications or issues that may arise.
- Implementing the PEO service's software allows you to dedicate your time to other areas of your business that need your attention in order for your business to grow.
PEO cons
- While using the PEO's software, your business risks losing its interpersonal management of employees. There's nothing more important than face-to-face interaction and communication. Software can't pick up on anything beyond logic and data.
- Your PEO's software solution hosts all your employee data in one centralized location and can be a gold mine of data for hackers. If the PEO's network is hacked, your business could face severe consequences.
How to choose a PEO
There are enough PEOs that cater to different business needs that it can be difficult to know which is best for any particular business. The pros and cons of any given software package will not be identical to the rest on the market. It requires specific inquiries and deliberate research to narrow the field and find the right PEO package. These five focuses can guide the decision-making process.
- Consider the technology. What online services does the PEO offer? What software packages does it use for each service? How do those software choices integrate with your existing systems? One of the primary decisions to face is whether the PEO is worth overhauling the solutions you already deploy for payroll, accounting or any other services you want to offload to your PEO.
- Explore the PEO's benefits. The PEO is supposed to handle business-critical tasks, or at least partially automate them. There are three that are more common and important than most. The first is payroll. Employees need to be paid, and understanding how your PEO service handles payroll will help you decide if it is worth the investment. The same can be said for human resources. Are you just getting software, or do you get billable HR hours with the service package? The third major service is risk management. How well will the PEO help your business assess and manage risk?
- Compare how well the benefits suit your employees' needs. Aside from business benefits, PEOs can offer employee benefits. One of the most common is insurance packages. If the PEO will be handling your employees' insurance plans, make sure that the insurance options meet your staff's expectations as well as yours. Some PEOs also offer wellness programs, retirement plans and similar employee perks to make your business more appealing to top talent.
- Analyze the prices. It's obvious but inevitable – you have to compare prices. More specifically, you need to weigh prices against the benefits you'll get. It drives every business decision, and there is no PEO so amazing that you can completely ignore the price tag; it's always about trade-offs. Estimating your ROI is the best way to remove uncertainty from the decision-making process. Which services are the most important to you, and how little can you pay for them? What sacrifices would you make for a cheaper PEO? These questions can drive your price comparisons to make your PEO investment a savvy one.
- Check references. The best way to understand the PEO services you are considering is to hear from those who have already tried them. Online reviews are helpful, but true conversational references are worth more. Talk to business managers – especially ones in your industry or a similar field – who have worked with the PEO you're thinking about trying.
PEO software FAQs
Still unsure about how to choose the best PEO software? Here are some frequently asked questions about the processes and operations of a PEO.
What are the best services offered by a PEO for a startup?
The best services offered by a PEO for startups include risk and compliance management, health, vision and dental benefits, comprehensive HR software tools, time and attendance tracking, and payroll support.
At what point should a small business look for HR help?
A small business should look for HR help immediately. If your business already has a human resources specialist on staff, additional HR support could be beneficial. Alternatively, if your business has no HR team, using a PEO's software could be the definitive factor in your business's growth.
What does it mean if a PEO is accredited?
You'll want to work with an accredited PEO because it indicates that the PEO is financially stable, ethical and meets regulatory requirements. This is important because it ensures that sensitive HR processes are handled correctly so you don't run afoul of the Department of Labor or the IRS.
What other options do I have besides a PEO?
The alternative to using a PEO is to hire your own team in house to manage HR support and benefits.
Why might a business not use a PEO?
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:
- Some business owners prefer not to give up control. As a small business owner, it can be difficult to hand over a significant set of responsibilities and tasks to an outside company. It may also be challenging to comply with some of the policies; PEOs have strict policies regarding hiring, training and disciplining that you must follow in order to protect yourself from liability.
- PEO fees can be too expensive for small businesses. PEO software is ideal for startups and small businesses because it's less expensive than hiring HR staff. The average cost of a PEO is $1,000 per employee annually – but this may still be too expensive for small businesses with tight budgets. Also, as your business grows, the cost of maintaining employees can decrease while PEO fees remain the same.
- It's not the right fit for your business. If a PEO does not understand and address the needs of your business, then your company might not function the way you want. There must be a direct line of communication with the PEO and a precise understanding of where you want your business to be within the next several years. This concern can be removed by choosing PEO software that allows for customization.
What are the risks of using PEO software?
When you work with a PEO, you give it access to your business's sensitive financial and employee data, so it's important to thoroughly vet the company to ensure it's a legitimate company that operates ethically and complies with HR regulations.
Checking to make sure it's accredited, checking with the Better Business Bureau to see what complaints companies have registered against it, reviewing legal liabilities and understanding your business's requirements within the co-employer agreement are a few ways to do this.
Tax fraud
PEOs have been used to reduce workers' compensation fees to their business clients, costing legitimate employers, employees and healthcare providers millions per year. Some cases of PEO fraud that have involved filing taxes improperly, exaggerating workplace injuries and incorrectly classifying employees have raised concern about PEOs.
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.
Misclassification audit
As the PEO's co-employment partner, you share responsibility in ensuring that your business operates within the laws of its respective state. One common error is worker misclassification. Here are three steps you can take to avoid this error.
- Verify each employee's classification. To avoid being audited for employee misclassification, understand the legal distinction between employees and independent contractors. This includes reviewing all federal, state and local classification laws.
- Provide appropriate treatment. It's important to not treat contractors like employees. While the services of an independent contractor may be great and you may work with them on a regular basis, it's recommended that you establish an independent contractor engagement program.
- Enforce employer tax obligations. Tax evasion may occur when workers are misclassified. Employers pay taxes on employees, not independent contractors. If a worker is an independent contractor, they are responsible for paying their own self-employment and income taxes.
Security breaches
The largest 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 you choose a PEO, ask the company how it protects 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."
Co-employment payroll
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.
So, how does a PEO bill you?
Generally, PEOs calculate their costs, add an administrative fee, profit margin, and they tally that as a percentage of your PEO payroll software costs. Once your timesheets are filled in 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.
What are the advantages and disadvantages of HR software?
PEO software often includes online HR management or services that make hiring and retaining top talent easier; it also establishes benefits packages and enhances performance management for your small business.
Michaud says that as small businesses evolve, it's important for business owners to implement HR software that addresses their changing needs.
"For today's entrepreneurs, going at it alone is simply no longer an option, and scaling up their business requires new tools that allow them to focus running their businesses," said Michaud.
Michaud believes that small business owners should dedicate their time to growing their business rather than devoting hours to HR management, financial and administrative tasks.
Here are the advantages and disadvantages of online HR software.
Advantages of HR software
Instant access is the No. 1 advantage of using online HR management software. You don't need to have HR staff to use the software, and employees have portals that make it easy for them to complete some HR tasks themselves.
Using web-based software allows your managers and employees to connect to your HR software platform from anywhere. Many applications offer a mobile app, and managers and employees alike can complete many tasks using the app.
Cloud computing is another advantage, because it generally backs up all of your employee data stored in its platform; if a computer stops functioning properly, your HR data is not lost.
Automatic updates are another benefit of using cloud-based HR software. By offering automatic software updates, your business is up to date with new policies, terms and conditions, and new labor regulations.
HR software can eliminate many tasks that small business owners must handle. For example, software apps alert your staff of individual tasks that need to be completed, such as training, 401(k) enrollment and updating one's timesheet.
When it comes to recruiting, HR software apps offer tools so you can post new jobs on job sites for your open positions. In addition, they help you stay on top of candidate selection and onboarding.
Disadvantages of HR software
The biggest disadvantage of online HR software is that you are dependent on the internet. If a power or Wi-Fi outage occurs, your business loses access to data and can't perform regular HR tasks.
Integration may be an issue, too, when syncing your payroll with the HR software. Check with the PEO you're considering and notify them of every program you use so you can avoid a compatibility issue with all of your software programs. [Read related article: The 3 Most Common Complaints About HR Software]
Features to look for in a PEO Solution
Here are a few must-have HR services your PEO provider should include.
Payroll
The PEO's software solution should include payroll services, or at least integrates 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 all payroll-related tasks, such as paying wages, depositing employment taxes and issuing employee W-2s. [Read related article: Are PEO Payroll Services Worth It?]
Employee Benefits
Employee benefit 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 time. 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 software options will vary depending on your business's size and goals. [Read related article: Are the Benefits of Using a PEO Really Worth It?]
Affordability
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, a 30- to 60-day notice is required before canceling service. Some companies let you leave at any time and for any reason, while others charge you a fee for leaving. Search for PEO that offers a money-back guarantee, especially if you're a small business owner using a PEO for the first time. [Read our review: The Best PEO Service Providers of 2020]