Should you opt for a PEO or a payroll company?

Joe Frazier versus Muhammad Ali, Boston Red Sox versus New York Yankees. Green Bay Packers versus Chicago Bears. PEO versus payroll companies.

Well, turns out one of these things are not like the other and not just because they don’t involve sports teams and packed stadiums, but rather because there really isn’t any rivalry, per se, between a PEO company and a payroll company. You see, while they both help you offload some of your HR responsibilities, they function in entirely different ways.

A payroll company really dials in and takes over just one facet of the human resources world. Specifically, they’re the ones you’d call if you need help with payroll processing as well as wage garnishments, tax liens, and other mandatory deductions; W-2, and federal, state and local tax filings and deposits; and all other tax calculations.

However, a professional employer organization (PEO) handles not just the payroll, but also all the other facets of the HR department, including administering top-of-the-line benefits (often at a bargain basement price!), manages workers’ compensation coverage and claims, and oversees the roll out and administration of a host of HR offerings designed to make your life easier. Whether it’s training your employees, making sense of the Affordable Care Act, succession planning, and even hiring and firing employees, among other tasks.

While the to-do lists are certainly different between the two, one of the biggest distinctions lies in the fact that when you join a PEO, you enter into a co-employment agreement. This means that as an employer, you are not only legally authorized to outsource far more tasks to the outside administrator than you could if you were simply linking up with a payroll company, but you also become part of the PEO. You sign on to use their benefits, their HR system, and may even need to jump through additional hoops to become part of the crew!

One other important difference and really the thought process that spurred this article is that PEOs are very highly regulated. PEOs currently operate in all 50 states, and almost every state has its own process for registering and licensing the PEOs that operate within them – with some even having their own certification requirements with regard to benefits and taxes handled through PEOs. Now, some states are certainly stricter than others but PEOs have to jump through a lot of hoops to prove that they are operating legally, ethically, and in the best interests of the companies that they serve.

Now, if you did a pre-thanksgiving deep dive in the news, you may have seen that this isn’t always the case with payroll companies. In fact, a recent article splashed across the front pages tells the story of MyPayrollHR, an upstate New York payroll management company whose owner “redirected” the payroll of thousands of its customers into his own personal account to the tune of $26 million! While 90 percent of those affected have since had the money returned to them (no word on the unlucky 10 percent!). This brazen move highlighted a distinct lack of regulation and oversight in the payroll industry. As a result, lawmakers have said they will be looking into the matter, with New York Governor Andrew Cuomo already calling for a thorough investigation of the incident, and others calling for more stringent legislation and oversight. Again, choosing a PEO to handle your HR needs is an exciting decision and one that should be based not only on your company’s needs, but also on the reputation and credentials of the person that you’re bringing into your business.