Originally published June 8, 2018. Updated September 19, 2024.
Managing the complexities of running a business, especially for small and mid-sized companies, can make deciding how to handle human resources (HR) challenging. Two popular options are partnering with a Professional Employer Organization (PEO) or a Human Resource Outsourcing (HRO) provider. While both services aim to help businesses manage HR tasks, they do so in different ways. Understanding the differences between PEOs and HROs can help you decide which service is right for your business.
The Role of a PEO
A PEO, or Professional Employer Organization, works as a co-employer with your business. This means that the PEO shares certain employer responsibilities with you, particularly those related to HR, payroll, benefits, and compliance. When you enter into a partnership with a PEO, your employees are technically employed by both your company and the PEO. This co-employment arrangement allows the PEO to manage various HR tasks on your behalf, making it easier for you to focus on growing your business.
PEO Services
PEOs offer a wide range of services that cover many aspects of HR management. These services typically include:
- Payroll Management: PEOs handle payroll processing, tax filings, and related compliance matters, ensuring that your employees are paid accurately and on time.
- Benefits Administration: PEOs provide access to comprehensive employee benefits, including health insurance, retirement plans, and more. They also manage the enrollment process and handle any issues that arise.
- Compliance Assistance: PEOs stay up to date with federal, state, and local labor laws, helping your business stay compliant with regulations and avoid costly penalties.
- Workers’ Compensation: PEOs manage workers’ compensation insurance and claims, reducing your administrative burden and potentially lowering your insurance costs.
- HR Support: PEOs offer HR guidance, such as creating employee handbooks, developing HR policies, and handling employee relations issues.
Benefits of a PEO
Partnering with a PEO to manage essential HR functions offers small and mid-size businesses a range of advantages that go beyond just handling administrative tasks. From cost savings to expert support, here are some of the key PEO benefits businesses can experience:
- Cost Savings: By pooling employees from multiple companies, PEOs can negotiate better rates for benefits and workers’ compensation insurance, often resulting in lower costs for your business.
- Expertise: PEOs bring a team of HR professionals with expertise in various areas, ensuring that your business receives top-notch HR support.
- Risk Mitigation: The PEO assumes responsibility for many HR-related compliance issues, reducing the risk of costly mistakes or legal troubles.
- Time Savings: By outsourcing HR tasks to a PEO, you free up time to focus on other aspects of your business, such as sales, marketing, and growth strategies.
The Role of an HRO
An HRO, or Human Resource Outsourcing provider, also helps businesses manage HR tasks, but it does so in a different way. Unlike a PEO, an HRO does not enter into a co-employment relationship with your business. Instead, an HRO acts as a service provider, handling specific HR functions that you choose to outsource. Your employees remain solely employed by your company, and the HRO operates as an external partner.
HRO Services
HROs offer a customizable approach to HR management, allowing you to outsource only the services you need. Common services provided by HROs include:
- Recruitment and Staffing: HROs can handle the recruitment process, from posting job ads to screening candidates and conducting interviews.
- Training and Development: HROs offer employee training programs, performance management, and leadership development initiatives to help your team grow and succeed.
- Payroll and Benefits: HROs can manage payroll processing and benefits administration, similar to a PEO, but without the co-employment arrangement.
- HR Consulting: HROs provide strategic HR consulting services, helping you develop policies, improve employee engagement, and navigate complex HR challenges.
Benefits of an HRO
Working with an HRO can be beneficial for businesses that prefer a more flexible, hands-on approach to HR management. Some of the key HRO benefits include:
- Customization: HROs allow you to pick and choose which HR functions you want to outsource, giving you greater control over your HR operations.
- Scalability: HRO services can easily scale with your business, allowing you to add or remove services as your needs change.
- Cost Control: Since you only pay for the services you use, HROs can be a cost-effective solution for businesses with specific HR needs.
- Expert Support: HROs provide access to experienced HR professionals who can offer valuable insights and guidance tailored to your business.
PEO vs. HRO: A Comparison
While both PEOs and HROs offer valuable HR support, there are key differences between the two that may influence your decision.
- Co-employment: The most significant difference is the co-employment relationship offered by a PEO. This arrangement can be beneficial if you want to offload more HR responsibilities.
- Access to Benefits: PEOs often provide access to more comprehensive and cost-effective employee benefits due to their larger employee pools. HROs can manage benefits administration but may not offer the same level of access or savings.
- Costs: PEOs typically charge a fee based on a percentage of your payroll, while HROs often charge a flat fee for each service. Depending on your business size and needs, one model may be more cost-effective than the other.
- Services: PEOs provide a broader range of services that cover all aspects of HR management, while HROs offer more specialized services that can be customized to fit your needs.
How to Know You Need One or the Other?
Choosing between a PEO and an HRO depends on your business’s specific needs and challenges. Consider the following questions to help guide your decision:
- What are you struggling with that you would like to offload to a partner? If you’re overwhelmed by HR tasks and want comprehensive support, a PEO might be the best fit. If you only need help with specific HR functions, an HRO could be a better option.
- How experienced is the team who will handle your account? Both PEOs and HROs offer expert support, but it’s important to evaluate the experience and qualifications of the team you’ll be working with.
- How do they select and manage insurance vendors? If access to quality benefits is a priority, a PEO may be a better fit for you and your company. PEOs select and manage insurance vendors by leveraging their large employee pools to negotiate better rates and favorable terms.
- Do you have the time and resources to handle the HR work yourself? If not, partnering with a PEO can relieve you of many HR burdens. If you have a strong internal HR team, an HRO might be enough to fill in the gaps.
- Do you feel confident handling compliance-related issues? PEOs take on more responsibility for compliance, while HROs provide guidance without assuming liability.
What Do They Not Do?
It’s important to understand that neither a PEO nor an HRO will take over your entire business. While they can handle HR administration, they won’t:
- Make decisions regarding your business independently.
- Help with marketing, sales, or product distribution.
- Dictate pay rates, hours, or schedules.
These areas remain under your control as a business owner.
Draw Your Own Conclusion
Ultimately, the choice between a PEO and an HRO depends on your business’s unique needs, goals, and resources. Both options offer valuable support, but understanding the differences can help you make an informed decision that aligns with your business strategy. Whether you opt for the comprehensive services of a PEO or the flexibility of an HRO, partnering with an HR provider can help you manage your workforce more effectively and focus on what you do best—running your business.
At FrankCrum, we are committed to providing the highest level of service and support, helping your business thrive in today’s competitive environment. Get started today with a custom quote and learn how we can tailor our solutions to meet your unique needs and drive your business forward.
