What Is the Difference between Hiring a PEO vs. HR Outsourcing?

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No matter how large or small your business is, if you have employees then you need someone to handle common HR functions such as payroll, benefits, compliance, employee relations, and more. Even if you don't have an actual HR department, these functions still require attention, preferably from someone with the expertise and knowledge to do the job properly.

If you choose not to house a dedicated HR team, you may consider outsourcing the function. You'll quickly discover that there are two main options, professional employer organizations (PEO) and HR outsourcing (HRO). Although both handle a variety of HR functions, the way they manage these is markedly different. To determine which option is best for you, it helps to understand how each operates.

PEO Definition

Professional employer organizations, or PEOs, partner with organizations to provide a variety of HR services. Through this partnership, the PEO becomes the co-employer of the business's employees. That means that these employees effectively have two employers: the company that hired them as well as the PEO.

The PEO typically provides payroll services, including compliance with state and federal employment laws, payment of taxes, and creating W-2s. It may also provide unemployment insurance, workers' compensation insurance, and handle any claims made against these. Additional services include providing benefits packages, assisting with administrative functions such as recruitment, employee performance management, training, creating employee handbooks, and terminations. The services provided depend on what the company needs and wants.

Typically, small and mid-sized companies choose to partner with a PEO to avoid the compliance headaches inherent in our complicated employment laws and to provide their employees benefits that are better than what the company could provide on its own. Since it's technically an employer, the PEO has the buying power of hundreds and sometimes thousands of employees. This allows it to negotiate far better rates than most smaller companies can manage.

HRO Definition

HROs also provide a variety of HR services as per the client's needs. However, it does not become a partner of the business, or co-employer to that business's employees. Instead, it operates as any other outsourcing company would, by simply performing the duties for which it was hired and supporting the company's human resource efforts.

Services available through an HRO include payroll, administering benefits, recruitment, administrative tasks, and training. The goal of the HRO is to support your decisions and it tailors its offerings to fit your particular needs, rather than offering one-size-fits-all packages. Most HRO models have the ability to scale along with your business so that, as your business grows and changes, your HRO adapts and changes with you.

What Are the Advantages to Hiring an HRO?

An HRO offers great flexibility in creating the perfect HR support package for your company. You may want advice or guidance on creating job postings and screening applicants, or assistance with a particular type of situation, or you may simply want someone to handle time-consuming functions such as payroll and compliance. Whatever your needs, you can likely fulfill them with an HRO provider.

The HRO does not become a partner in your business. Unlike a PEO, it doesn't have any say in who you hire or fire, or how you discipline your employees. If you only want someone to assist with payroll or similar administrative tasks, you can instead use an ASO – administrative services outsourcing.

HROs offer assistance in the following areas:

Affirmative action programs
Benefits management
Coaching and training
COBRA
HR support, either on-site or on-call
Insurance services
Investigation services
Payroll processing
Recruitment
Relocation and outplacement

What Are the Advantages to Hiring a PEO?

The main advantage of a PEO is that it gives even small companies the benefits buying power of a large corporation. This helps level the playing field so smaller companies can attract top talent. Not only that, but it brings in better offers from top tier providers and provides streamlined handling of your benefits program. The SHOP marketplace helps employers offer affordable health insurance (if they have fewer than 50 employees), but it doesn't include vision and dental plans, retirement savings, or flexible spending accounts, and these are the types of benefits the best employees look for in an employer.

The PEO also handles all things related to compliance, taking on those risks and protecting you against mistakes and the resultant fines and penalties. This includes filing taxes. Since the PEO is your employees' Employer of Record (whereas you are the Worksite Employer), all employee income is filed under the PEO's EIN, not yours.

Which Option Is Right for Your Business?

As a quick recap, the PEO assumes all risk and handles all of the hassles inherent in remaining compliant, including both state and federal laws. The caveat is that your partnership turns the PEO into a co-employer and, though you remain in complete control of company operations, you and the PEO share control over decisions affecting your employees. An HRO service doesn't assume responsibility for compliance, but it does provide a wide level of HR support, including nearly everything offered by a PEO. And, you don't have to partner with it; you maintain complete control over all aspects of your organization.

So, which is better? Unfortunately, there is no single answer to that question. However, if yours is a new company, or is growing rapidly, the PEO may be the better choice, as it allows you to focus your efforts on the revenue-generating aspects of your business while your partner handles the complicated, time-consuming HR functions. If your company is larger, or has an established HR team (or even single person), an HRO might be the better option, because you don't need the PEO's increased buying power or risk management. Instead, you benefit from the support and knowledge of the provider's HR experts.

Whichever option you choose, understand that neither results in you losing control over your business, not even the PEO.