30-Second Summary:

  • 59% of small businesses outsource their HR functions.

  • PEOs are co-employers and share responsibilities and compliance risks with client companies but HROs do not.

  • PEOs offer full package services while HROs are flexible, allowing client companies to select the services that they need.

  • Both PEOs and HROs have a similar pricing structure. Most charge a flat fee per employee per month.

  • Both PEO and HRO have risks. Some HR services providers offer both services and can prescribe the appropriate solution to small businesses.

 

Introduction

The HR department is a vital part of every business. The department takes care of employee benefits, onboarding, pre-employment selection, compliance, risk management, policy enforcement, and performance management.

It is a lot of work that requires a certain set of skills from seasoned practitioners. Some businesses may not have the talent or resources to put together a formidable HR team, especially startups. According to research, only 41% of small businesses handle their HR functions in-house. Reason?

Managing business growth and other strategic activities is challenging enough. Adding HR responsibilities can make a tricky mix. Therefore, a majority of businesses prefer to outsource their HR functions to a standard third-party organization.

There are two primary options for businesses looking to outsource their HR duties. They can either use a Professional Employer Organization (PEO) or a Human Resource Outsourcing (HRO) firm.

While these two organizations are poised at solving HR challenges for businesses, they are considerably different and can serve your business in varied ways. This article highlights the difference between both and how you can define which of them you need.

What is a PEO?

Professional Employer Organizations are firms that work as your co-employer, handling several HR activities on your behalf, including the financial and legal part of managing your human resources. This leaves you enough time to focus on running your business while overseeing the PEO at intervals.

Most PEO services offer full HR services, including

  • Payroll services
  • Taxation
  • Risk assessment and management
  • Maintaining compliance
  • HR administration
  • Employee onboarding, training, and development
  • Benefit negotiation and administration, and many other duties.

As a co-employer, PEOs register employees under their Employer Identification Number (EIN). As such, they bear the burden of legal compliance ensuring that benefits and taxes are paid in accordance with the laws of the country of practice.

Depending on the location of your chosen PEO, taxes can be significantly lower and the legally required benefits for employees can earn you millions in savings. 

However, there are risks. A lot of small businesses worry that having another organization as a co-employer gives it the power to potentially decide the fate of your company. Also, they worry about takeovers by the said co-employer.

The good news is that these instances have been thought about by regulatory bodies. So, a PEO certified by the IRS or the Employer Services Assurance Corporation has an obligation to comply with regulatory laws that protects the interests of their client companies (i.e. you).

Top Recommended PEOs for Small Businesses

What Is an HRO?

A Human Resources Outsourcing firm is a third-party organization that offers specialized HR services. Some of these services include benefits administration, recruitment and onboarding, pre-employment screening, performance management, HR consulting, safety training, and compliance.

This organization is highly flexible, providing customized services to small businesses in several ways. However, it leaves the burden of taxation, legal compliance, and direct employee management on the shoulders of the client company.

Top Recommended HROs for Small Businesses

Which Outsourcing Option is Right For Your Business?

The primary difference between these two types of HR service providers is the employer status. When working with PEOs, they share similar employer status with your company. This means shared responsibilities and risks among which maintaining legal compliance and appropriately filing for taxes are the PEOs’.

Working with an HRO, on the other hand, doesn’t share the ‘employer’ status. All employees will be registered using your company’s EIN and, as such, are your full legal responsibility. However, you don’t have to spend so many resources and time meddling with the day-to-day management of these employees. Those are handled by the HRO. But you have to actively ensure that these management practices are not violating any regulation.

PEO vs HRO

There are other crucial factors that you should consider when deciding whether to go with a PEO or an HRO. Some of these factors are highlighted in the table below.  

FACTOR PEO HRO
Flexibility Services are offered as a complete package. So, when you hire a PEO, you will be paying for all the services that it provides whether or not you need them all. Services are offered as an a la carte menu. So, you can choose the specific services that you need and the price will vary based on your choice.
Employee ownership As earlier mentioned, PEOs are co-employers. Therefore, they have as much ownership over employees as their client companies. This also means that have full access to employee data and are responsible for the security of this data. With an HRO, you own your employees. Payments are processed using your company name and EIN. This means that employee data belongs to only you and so is the responsibility to maintain its security.
Set up Setups are pretty straightforward since you will be requesting a service package. However, the paperwork may be quite bulky and you will need your legal team to have a look to ensure that you are satisfied with the terms. Setup can be a bit complicated because the services you choose to receive from an HRO will determine the information that you have to provide, the cost of the service, and the number of third parties involved.
Turnover Employee turnover is considerably lower when working with a PEO. This is because a PEO is the embodiment of their client company’s work culture and they ensure to remain compliant regarding benefits, taxes, etc. Turnover is higher with HROs. This is probably because they are not entirely liable for any legal penalties when they are non-compliant with regulatory laws as regards benefits, taxes, etc.
International recruiting Many PEOs have access to a global talent pool they can hire from hundreds of countries and manage these employees in compliance with their local laws. Since HROs are not directly responsible for the compliance, using them for international recruiting may not be a very good idea. Recruiting from multiple countries could force you to understand their local employment laws and ensure compliance. That’s extra responsibility that may require recruiting local experts.

Cost of PEO and HRO Services

Most PEO and HRO are priced the same way. Some charge 3-12 percent of your company’s monthly payment to employees.

Other providers charge a flat fee per employee per month. Ideally, this flat fee range from $40 to $160 per employee per month depending on the provider and the services provided.

Also, additional costs may apply to both services, like setup fees and cancellation fees.

Conclusion

Choosing between a PEO and HRO is a dilemma for many business owners. Although the prospect of a PEO looks attractive to many business owners, it is quite expensive for companies with a tight budget. Also, there are risks associated with using a PEO.

These risks, however, may inspire you to choose an HRO, especially if your budget will appreciate some flexibility. Just do so knowing that HROs have their risks as well. But what’s without risk?

One thing is known for sure: building an in-house HR team is outrageously expensive and time-consuming. Therefore, it’s important for you to choose one of these HR service providers to lift that burden from you while you focus on building a sustainable company.

If you’re not sure what to choose, you can consider using a provider that offers both PEO and HRO services. Their consultants can review your business needs as well as budget, and recommend the most appropriate service for you.

From our experience, we recommend that small businesses reach out to the following HR service providers that offer both PEO and HRO services:

  • ADP
  • Insperity
  • Paychex