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One of the main contributing factors for high employee job satisfaction has continuously been compensation payment, says a Society of Human Resource study. Workers feel fulfilled and motivated when their efforts result in tangible, monetary, rewards. However, payroll administration for a small business can be time-consuming, costly, and riddled with regulations and deadlines. As a result, a growing number of companies are outsourcing payroll services in order to reduce payroll error risks, stay in compliance, and to keep employees focused on core competencies as opposed to administrative tasks. Payroll administration is a pillar of the Professional Employer Organization service offering, which can include a broad range of payroll related services ranging from personalized payroll reports to a robust HRIS system. These tools provide a one-stop-shop to ensure efficiency and compliance.

 

Why does having an accurate payroll service matter to your company?

One of employees’ greatest expectations is to be paid appropriately and punctually; as a result, the problems and costs of not paying an employee correctly can be great. Since the changes in the Fair Labor Standards Act (FLSA) in August 2004 allowed for opportunities to increase wage violation claims, payroll examinations and lawsuits have also increased. A non-compliant business must be able to provide accurate records of wages from as far back as three years, or face high fines, legal sanctions and owed back pay. PEOs constantly stay abreast of these regulation changes to ensure that their client companies’ payroll management is compliant.

 

What specific payroll services can a PEO provide?

Payroll services vary accordingly with each individual PEO. However, common services provided often include, but are not limited to:

• *24/7 access to a web based payroll platform and Human Resources Information System (HRIS)
• *Employment tax processing and payments
• *Preparation and delivery of W-2 forms
• *Bonus & Commission tracking and processing,
• *Paid Time Off (PTO) tracking
• *Customized reports such as employee data, job costing, standard payroll, billing and human resources reports
• *Specialized payroll consultation, data analysis and strategic compensation plan development

 

What are some benefits of outsourcing payroll administration to a PEO?

As a business owner, outsourcing your payroll management allows you to have one less thing to worry about, along with many of the following benefits

• *Reliable, accurate and time-efficient payroll data entry
• *Reassurance that your payroll taxes and required legal forms are compliant with federal, state and local regulations
• *Having your company’s payroll details backed up by an outside source
• *Organized and transparent records of wage payments, incentive plans, and pay rules
• *Comprehensive reports to help you gain insight on your business and employees’ growth
• *Reduced likelihood of employee fraud and wage violations
• *Ability to track and measure your pay programs and compensation strategies towards your goals

 

When should a company begin to consider outsourcing payroll administration to a PEO?

There are a variety of reasons why companies use PEO payroll services and specialists. Below lists several common situations

• *Limited resources: Whether it’s a company preferring to utilize their internal HR staff for other duties instead of tedious payroll keeping, or a small business without HR employees, many companies will outsource payroll functions to save resources.
• *Need for a payroll strategy: PEOs are able to provide in-depth and specialized compensation planning for a company. Many PEOS offer comprehensive payroll services, including strategies to establish a competitive wage rate to retain employees and analysis of a business’s productivity versus salaries.
• *Inexperience: Payroll administration is composed of much more than simply paying wages. Companies must also make sure their compensation management adheres to tax and compliance standards, accurate record keeping and knowledgeable reports, meaning either additional skill training for internal employees or the choice of employing a PEO.

 

Outsourcing payroll responsibility to a PEO can allow a business to utilize its time and employees much more effectively. Many Professional Employer Organizations have the expertise, experience and reliability to not only provide, but also protect their client companies’ payroll administration services. PEOs can offer data analysis, strategy development and payroll planning that best suits your business. The payroll services a PEO can provide, along with its resulting benefits, are important things to take into consideration when making a decision on a business’s payroll administration.

 

In this article, PEO Services 101, we will review three main services offered by Professional Employer Organizations; Employee Benefits, Payroll, and Tax Administration.

 

We will remain general in our description in order to account for the various ways a Professional Employer Organization can structure themselves, and how each structure can result in differences in how service is delivered to clients.

 

Also, in order to discern between how a PEO provides these services and how, for example, a company can use various vendors to piece all of these components together, we will explain how each service relates to coemployment, the concept that makes a PEO unique.

 

Big Company Benefits and Administration

Professional Employer Organizations usually offer an employee benefits package that is comparable to that of a Fortune-500 firm. The PEO originates the package, and manages all aspects of its administration including negotiation, payment and billing reconciliation with insurance carriers, employee enrollments, etc. In many cases the PEO’s customer service representative becomes the first point of contact for all employee questions about their benefits, this way the employer doesn’t get bogged down in administration, and can remain focused on their business. A good PEO will come to their client’s worksite(s) to explain all benefit programs to employees prior to enrollments.

 

Benefit packages most Professional Employer Organizations offer will include:

 

• Medical Insurance
• Dental & Vision Insurance
• Group Life Insurance
• Short-Term & Long-Term Disability
• Flexible Spending Accounts
• Qualified Transportation Benefits
• Employee Assistance Programs
• Employee Discount Programs
• 
  

Coemployment factor: Since PEOs combine their clients into one large conglomerate, they have more purchasing power than a smaller company when negotiating with health carriers; this usually means a reduction in health premiums. In fact, if a PEO properly manages their risk, they can save clients enough money on medical insurance that the savings will offset their fees, and perhaps more.

 

On the flip side, since a PEO is essentially one large company, the Loss Ratio of each one of their clients effects all of the others; so be weary of a PEO that performs minimal due diligence before accepting you as a client, if they simply let any company into their pool, they run of the risk infecting the entire pool, which means all clients suffer. Although most PEOs do not operate as such, there are always the bad apples. For more on coemployment, check out What is a PEO?

 

 

Payroll and Tax Administration

 

 

Many Professional Employer Organizations offer a payroll platform second to none, giving clients the ability to report payroll via phone, fax, or online. Many offer direct deposit, paperless checks, and access to state of the art time-clocks allowing employees to clock-in online, in person, or even through bio-metric scanners. The time-clocks should interface directly into an HRMS system, also offered by many PEOs. A good HRMS system should track all employee information including hours worked, over-time, vacation accruals, sick days, W-4 information.

 

Most readers are thinking, this isn’t so special, all of these payroll functions can be offered by a normal payroll company that charges cents on the dollar when compared to a PEO. However, the real value is driven through coemployment, specifically how it pertains to payroll taxes.

 

Coemployment factor: Through a coemployed relationship, a PEO is responsible for all payroll tax deductions and remittances to the appropriate authorities for all of its work-site employees (work-site employees = the total of all a PEO’s clients’ employees). As a result, the PEO maintains its own standing with each state as far as state unemployment tax is concerned.

 

This means that if one of your employees is terminated and takes unemployment, it is the PEO that must administer and/or fight the claim. If the unemployment benefit is granted to the employee by the state office, the PEO’s unemployment rate is effected, not the client’s. Why is that good? The PEO could have thousands of employees working in that state, therefore a single unemployment claim doesn’t effect the PEO’s future state unemployment rate quite like it would for a company of 20 employees.

 

However, as with medical benefits, there is a potential downside, if a PEO doesn’t manage claims well, or if they cater to an industry with historically high unemployment rates, it will effect the rates of the PEO’s entire client base.

 

A fun anecdote to understand this; if a rock is thrown into a bathtub (a single company’s state unemployment standing), a lot of water will splash out, and there will be a messy floor. However when a rock is thrown into a swimming pool (the PEO’s state unemployment standing), there is enough water to absorb the splash, and very little water is displaced!

 

For more information on Professional Employer Organization services, check out PEO Services 102 where we cover workers comp insurance and PEOs.