Which is Better? PEO vs. HR Outsourcing Companies
When you're first starting to build your business, it makes sense to handle HR on your own. For small businesses with less than 10-15 employees, we typically recommend having a good payroll provider and benefits broker, and you should be in pretty good shape. Until then, you don't have to worry too much.
PEO vs. HR as your business grows
The more employees you have, the more your business must comply with various employment laws. For instance:
- Title VII kicks in at 15 employees
- COBRA requires 20 employees
- FMLA coverage starts with 50 employees
- Equal Pay Act covers all employers
Not to mention, healthcare reform has added an additional layer of compliance and has also increased costs for many employers. And let's not even get started on the federal regulatory requirements as a government contractor...
As you start growing, it's common that HR becomes too distracting for most CEOs. We know you didn't start your business to try to keep up with the various employment laws, nor should you have to worry about whether your Office Administrator is keeping up either.
Typically, when a small business hits around 25-50 employees, CEOs begin thinking about outsourcing the HR function. Two options to consider are Professional Employer Organizations (PEOs) and a dedicated HR outsourcing partner.
HR Management Outsourcing Services
We often get calls from leaders considering their options as there are many different types of Human Resources outsourcing companies and services. One of the most common questions we get from executives is the difference between a PEO vs. HR Outsourcing.
For some organizations, Professional Employer Organizations (PEOs) are the ideal solution as they assume much of the legal risk of employment through a direct payrolling arrangement. Employees are paid and receive benefits through the PEO. In addition to payroll and benefits administration, PEOs offer varying types of other management services such as training and education, compliance support, etc. The most popular providers of PEOs are Insperity, TriNet, Paychex, or ADP.
PEOs can be a cost-effective and low-risk alternative to growing your business. Their pricing is typically on a per-employee per year basis. This can make a lot of sense for an employer who plans on staying small, just remember if you grow to be over 100 employees, it can really add up compared to the cost of HR outsourcing.
Here are a few other areas to consider whether a PEO organization makes sense for your business below.
Co-Employment Risk with PEOs
One area we find a lot of CEOs have been misled by PEO services is revolving around regulatory risk. It's important for leaders to understand that transitioning employees off of your company’s payroll to a PEO does not absolve you of all of the responsibilities and risks of acting as an employer.
If you continue to direct the work of your employees, as is almost certainly the case, you would still be considered a co-employer for the purposes of most laws. This means that an employee could still make legal claims against your organization for anything from workers’ compensation to sexual harassment.tsourcingMitigating the risk involved with non-employees is a complicated issue and usually based on situational factors, so it’s critical to be aware that PEOs are not a silver bullet to solving this problem.
It’s also important to note that PEOs are not governed by any consistent state or federal regulations. Some states have passed laws that regulate their activity and establish licensing requirements, it's important to note that the requirements vary. For example, you probably assume your PEO carries workers’ compensation insurance, however, if they’re incorporated in a state that doesn’t regulate this aspect of PEO operations, you might be surprised to find out that they don’t carry it all.
It’s vital that you read the fine print in any contract you sign with a PEO to ensure they’re accountable for all aspects of employment.
PEOs and Corporate Culture
Another consideration with a PEO outsourcing arrangement is the impact that it can have on corporate culture. Study after study has confirmed the importance of mission and culture in retaining and motivating employees; moving them to another company’s payroll fundamentally undermines the ability to build culture. The HR function can, and should, act as the steward of your company’s culture. Calling a telephone number has a completely different feel than in-person attention.
Lastly, before we move on to another HR outsourcing solution, I wanted to mention that we do get fairly frequent calls from organizations who are trying to "unravel" from their PEO. It may have served them well for several years, but with increased insurance rates or headcount, they've decided they need a different solution or perhaps want to hire an HR Manager internally instead.
The process of ending the contract can cause quite a headache because you have your benefits, payroll, and HR all bundled into one.
HR Outsourcing Benefits
1. Personal Relationships
It's not uncommon for us to partner with organizations to provide full-service HR outsourcing in addition to their PEO services. In fact, we have worked with several of the large PEO providers I mentioned earlier to help with more strategic HR initiatives that they don't have the expertise in or as a local resource.
As a local HR consulting firm here in the Washington, DC area, we primarily work with clients who want to send a clear message to their employees that they are investing in their well-being. Our HR outsourcing service is an entirely different model and approach than what a typical PEO organization offers.
With Helios, for instance, clients gain seasoned HR subject matter experts who can do any or all of human resource functions with a personalized, hands-on approach. We are a third-party partner, all of our HR and Recruiting consultants are Helios employees, and your employees stay on your payroll. Our team members consist of seasoned HR professionals who have spent their careers in HR and Recruiting, are well-educated and certified as practitioners.
We don't provide payroll services, rather we recommend some of the best payroll providers we know to help you with that service. For benefits, we work with our partners NFP to help our clients' design benefits that meet the business need for cost-effective plans while still offering quality coverage to employees.
2. Subject Matter Expertise
Our expertise is purely in the realm of human resources and we don't just answer the phone or give you a blank template to figure out on your own. Within an HR outsourcing engagement, we may take on the role of your HR Manager or Director.
We may work at your office on-site, get introduced as the HR leader to your employees, have an office and company email account, and participate in your strategic planning meetings with members of your leadership team. We may focus on getting your HR department set up - ensuring you have compliant and accurate employee files, an employee handbook with policies that reflect your culture and beliefs, and processes that are aligned with your vision of how your business operates and performs. Or, we may focus on recruiting, hiring, and onboarding new team members, keeping you in compliance as a government contractor, employee relations, or helping you identify and develop future leaders.
Every HR outsourcing engagement we provide has a different focus, as we tailor our approach to what your business needs the most. We bring our talent, tools, and resources to ensure you are getting the best solution for your particular business.
Our expert HR consultants can also help your company come up with creative solutions to some of the common pain points that first motivated you to even look at PEOs. Outsourcing the HR function with Helios gives you access to a team of HR professionals who can both support employees and partner with managers. By contrast, most PEOs are set up merely as administrative personnel functions and lack the ability to truly support your business. This places an undue burden on managers who are left to assume a lot of day-to-day HR management activity, without the knowledge to effectively handle these situations. Yet, if you'd solely prefer the advice and counsel of senior HR advisors, we can offer that scaled-back solution to HR outsourcing too. Here
While every business has different needs based on its lifecycle and goals, I hope this article helped provide a little more insight into what you can expect with the HR outsourcing options available to you.