As is becoming a theme around here, we’re revisiting an oldie but a goodie blog post: Explaining the differences between a payroll company and a PEO. While all the old chestnuts we trotted out when we first covered the topic ring true, revisiting this in 2020 — and in light of the pandemic — highlights yet more differences between the two.
As we noted in the original blog post, there is not a rivalry, per se, between payroll companies and PEOs. Rather, they both help companies, but to very differing extents. Below, we examine just a few of the key differences.
Co-employment
The biggest difference between a PEO and a payroll company is that with a PEO, you enter into a co-employment agreement. This agreement allows you to share some of the responsibilities of being an employer. While you remain in control of all the day-to-day decisions, your PEO provider will handle pretty much everything that an in-house HR team could do (and often times more!), whereas a payroll company will handle only the functions responsible for logging hours worked and paying workers for that time.
A significant perk of this co-employment agreement is that in addition to taking on the responsibilities of the HR department, your PEOs also take on the liability, meaning that they’re the ones on the hook if there’s a snafu with payroll, workers’ compensation claims, benefits administration, tax and regulatory compliance (more on that in a minute!), unemployment insurance claims, and other general HR functions. Think of it as sharing the work of running a business, but with really nothing on the line!
Legal lessons
One of the biggest perks of a PEO that we touched on above is that of regulatory compliance. This year, with the Covid-19 pandemic raging on, federal and state legislators were feverishly (no pun intended!) drafting legislation designed to respond to an ever-changing economy and even more quickly evolving rules on how businesses could conduct business.
For any business owner, keeping up with these ever-changing rules would have been a job in and of itself, but for companies that operate in multiple states, or that operate in overseas markets, it could have become an all-consuming endeavor.
Enter the PEO, which employs folks well-versed in employment laws, as well as federal and state legislature and regulations as it pertains to keeping businesses afloat. During this critical period, PEOs like Abel HR were able to keep their members in the know with the new rules and ensure compliance every step of the way, leaving business owners like yourself to focus on sustaining their business and evolving as needed to match the times.
Bang for your buck
If you compare PEOs to payroll processing companies on the dollar number, the PEOs will likely be the more expensive choice. However, if you’re looking for value and return on investment, you might want to give the PEO a second look.
You see, while a payroll provider’s duties start and stop with the administration of all things payroll, a PEO is very much involved in every facet of your business. Have a legal question? Without a PEO, you will need to hire a lawyer. Need to train your employees? If you’re only with a payroll company, you’ll need to hire someone to get the job done.
Another area where PEOs can save you money is because your employees become part of the PEO, and the PEO can thus use the combined purchasing power or all of their clients to negotiate the best possible prices (far lower than you could likely get on the open market) for all of your benefits (and often times offer a host of perks that would have been out of reach too). In short, while you might lay out a little more money upfront, with a PEO, you’ll get some serious bang for your buck.
Highly regulated
Now, this one gets a bit prickly to say, but the reality is that PEOs are highly regulated. Now, we will note that pretty much every state has its own process and as a PEO ourselves, we’d argue that some states are more rigorous than others, but for the most part, they hold us to certain legal and ethical standards and take steps to ensure that we’re always operating in the best interests of the company’s that we serve.
Payroll companies, however, are far less regulated and have been the subject of several inquiries by state and federal lawmakers regarding how they operate and whether additional oversight is needed. Now, doing your homework and researching the backgrounds of which ever company you choose to help your business will likely head off any problems, but we like the idea that PEOs are typically held to a higher standard.
Lightening your load
When you first made the decision to open your own business, chances are you did not see yourself spending literally hours a week working on the HR side of things! If you are pulled away from the important aspects of being a business owner, namely innovating and growing your business.
Sure, a payroll company can take some of that burden off your shoulders by handling the financial part of paying your employees, but a PEO can really shoulder so much more of the burden. Worried they’ll overshadow your in-house HR person? Think again! Instead, they’ll handle the most burdensome aspects of HR administration and give your HR rep the time they need to support YOU and think strategically about how to best staff and maximize the productivity of your business.
