Key points
- PEOs are “Professional Employer Organizations”. HROs are “Human Resource Outsourcers”.
- Both PEOs and HROs provide Human Resources administrative services such as payroll processing, employee benefits management, and employee tax reporting.
- PEOs are able to shoulder some liabilities and provide special rates on benefits packages, while HROs are not. This can have both advantages and disadvantages.
- HROs generally offer more flexibility and lower costs, while PEOs often provide greater services.
- A PEO is a “co-employment” partner with the client business. An HRO is a subscription-based supplier of services.
Small companies usually have no choice but to focus on growing quickly. Team members are often required to wear many hats and make do with limited available resources. In this situation, many companies choose to hire a third party to provide the capabilities that they do not have, such as Human Resources (HR). Two popular choices for this function are PEOs and HROs; they differ in cost and services provided so it is essential for businesses looking for an HR solution to know which service will align best with their own goals and present needs.
How are PEO and HRO defined?
PEOs and HROs are generally able to handle payroll processing, onboarding new employees, benefits administration, and employee tax reporting. A PEO is also able to provide benefits packages and assume liability for regulatory compliance and payment of employee taxes.
A PEO is a “Professional Employer Organization”. PEOs work with their partners as “co-employers”, meaning that for tax and benefits administration purposes the PEO is listed as the “employer of record” and the client business is listed as the “worksite employer”.
An HRO is a “Human Resources Outsourcer” or “Human Resources Outsourcing” company. As the name suggests, they take over HR functions that would otherwise be handled by the company’s internal HR team. They generally assume no liability, do not offer unique benefits packages, and generally charge less than PEOs.
Both PEOs and HROs specialize in different regions and industries, and offer different varieties of HR services. Some may not provide all of the services listed above, while others may offer more options.
What are the advantages of a PEO?
A PEO is the employer of record for often thousands of employees working at many different companies. Because of this, they are able to take advantage of a large “risk pool” in dealing with insurance companies and other benefits providers. A risk pool refers to the number of employees signing up for insurance from a single provider; generally, the larger the risk pool, the lower the premiums for each individual employee will be. PEOs can allow small companies to access pricing and packages usually only available to large employers.
Many PEOs are certified by the IRS. Because of their status as co-employers, they assume liability for workforce related regulatory compliance, and for employee tax reporting. This can also be advantageous to new companies; having a co-employer partner shoulder these liabilities means there is one less potential pitfall they have to worry about as they concentrate on growing their business.
What are the disadvantages of a PEO?
In order to tap the benefits of a large risk pool, PEOs work with only one, or a few, insurers. If the packages and premiums offered by that insurer do not fulfill the needs of the client, this will be a disadvantage. Additionally, the PEO can switch insurance or benefits providers at their own discretion.
PEOs hold all employee data. If co-employees or management wish to review payroll, benefits, or tax payments, they must request this information from the PEO. This could cause discomfort or difficulty with employees and management who are used to being able to access and review this information whenever they wish.
If a company wishes to stop working with a PEO, they will have to migrate all employee data to their own system, and correctly fill out additional paperwork in order to ensure they are not double taxed as the staff moves from being employed by the PEO to by the original business. Additionally, the business will most likely not be able to access the same premiums on benefits packages that they did through the PEO. Rates may raise or they may have to choose new benefits providers.
What are the advantages of an HRO?
As an outsourcer, an HRO takes care of HR functions that a company may not have the time, resources, or desire to build internally. The relationship between the client and the HRO is simple and they will only be involved in their limited scope, as regards the client’s business. If the company wishes to choose its own employee benefits packages from an array of options offered by insurance brokers, an HRO will have an advantage over a PEO.
An HRO may be advantageous If a company’s needs are simple. For instance, if the business wishes to onboard new employees on its own, has a benefits package it is happy with, is already handling regulatory compliance issues, and simply wants an HRO to help process payroll and W2 forms, the HRO solution will be less costly and require less commitment than an HRO.
What are the disadvantages of an HRO?
HROs are not large co-employers and are unable to provide discounted or upgraded benefits packages like a PEO can.
HROs assume no liability. This could be disadvantageous for a business that is unfamiliar with the regulations in a new geographic area or labor market.
An HRO may be limited in scope; the business may still have to employ HR personnel for tasks not covered by the HRO.
ADP’s Take on Human Resources Outsourcing (HRO)
PEO vs HRO: Full Comparison
Both PEOs and HROs can manage payroll and provide benefits administration, W2 reporting, and other HR functions.
PEOs assume tax and regulatory compliance liability, while HROs do not.
HROs will handle administration of benefits and insurance packages chosen by the client. PEOs can provide their own benefits and insurance packages, which are often discounted or offer higher coverage than those typically offered to small businesses. These packages are provided to the PEO, and are thus contingent upon the PEO contract.
HRO services are generally more flexible, less costly, and may require an internal HR team whom they assist. PEO services include shouldering liability and providing benefits packages, they are often more costly, but they may be able to take over all HR functions for a client. When a company stops working with a PEO, it will affect workers’ benefits packages and employment status.
PEO vs HRO — Your Choice
The choice between and HRO and a PEO requires a look at the business’s current needs and future goals.
Does the business already have some internal HR capabilities and wish to keep them? Is it only interested in outsourcing its HR for a short period until it grows a more robust department in-house? Is it happy with their employee benefits programs and does not wish to switch? Is it confident that it can comply with regulations and tax reporting requirements on its own? If the answer to these questions is yes, an HRO will likely be a good solution. When choosing an HRO company it may be worth checking whether employees there have relevant HR certifications and credentials.
Is the business moving into a new territory with unfamiliar regulations and reporting issues? Does it wish to provide less costly or more competitive benefits packages than those that are currently available? Is it uninterested in building an HR department and would rather focus on other goals? If the answer to these questions is yes, then a PEO may be the most desirable solution.
For more information on PEO companies, check out our Top 10 PEO Guide for 2023.
