PEO vs. HRO: Which Is Better for Your Business?

Many small businesses decide that human resources outsourcing is a winning choice.

An estimated 37% of small businesses outsource a business product.¹ It helps them scale, is cost-efficient, and gives many of them a compliant way to manage a vital HR function.

Landing on the type of HR outsourcing that best fits your business can be challenging. After all, there are several options. If you’re wondering which would serve your organization better, a PEO vs. HRO, read on for our in-depth comparison.

What is a PEO?

PEO is short for a professional employer organization. It’s a company that offers various HR outsourcing options to small and midsize businesses. Working with a PEO means entering into an employer partnership in which the PEO becomes the employer of record.

Depending on the agreement, a PEO partner will be responsible for several HR services. These may include payroll services, tax filing, health insurance benefits, workers’ compensation insurance, and avoiding or mitigating compliance issues.

In this co-employment relationship, the employer reports its wages under the PEO’s FEIN. This process puts the liability on the PEO.

What is an HRO?

Human resources outsourcing (HRO) companies also provide organizations with a host of essential HR functions. Companies can select the HR processes they want to hire the HRO to handle.

An HRO provider is considered a third-party provider instead of a co-employer, keeping responsibilities and liabilities with the client company.

Differences between PEOs and HROs

To make the best decision, organizations wanting to outsource human resources functions need to understand what both PEOs and HROs offer. It’s helpful to consider and weigh these 5 components.

Scope of services

Both options can cover a few HR tasks or almost every HR function, depending on business needs. Typically, however, a PEO provides a larger breadth of services, whereas an HRO provides companies with more targeted, pick-and-choose options.

Legal responsibilities

A big difference between PEOs and HROs is where legal responsibilities lie. PEOs’ co-employer arrangements make them legally liable for all business risks. An arrangement with an HRO, however, is a basic third-party relationship. The employer retains control and the risks associated with that responsibility.

Costs

PEOs tend to be more expensive upfront than HROs.

PEO costs usually involve a setup fee, which can be steep, and either a per-employee fee or a percentage of the total payroll every month. An HRO doesn’t usually charge a setup fee, and their cost-per-employee fee is usually lower than a PEO. However, HROs usually charge higher insurance premiums. Those can eat up the upfront cost savings an HRO provides.

Flexibility

An HRO company typically offers greater flexibility than a PEO. It’s easier for employers to choose as few or as many services as they want the HRO to handle. In addition, an HRO usually offers a wider array of benefits options.

Regarding insurance, companies can compare HRO vs. PEO vs. insurance brokers. Typically they find that PEOs only offer insurance options under their plan umbrella, which can seem limiting.

Risk management

An arrangement with HRO companies doesn’t include risk management. While an HRO may offer advice, the employer is ultimately on their own. With the co-employer designation, the PEO shoulders the risk.

Deciding which option suits your business best

Every business owner considering an HR outsourcing solution should weigh the pros and cons of PEOs and HROs before choosing. These questions can help make the decision.

How big is your business?

Your business’s size packs a lot of weight into your choice. If you run a startup or small business, a PEO may be the best option to secure the assistance you need.

However, larger organizations may not need as much help. They might be better with an HRO to cover the skills gaps and specific administrative tasks that would otherwise fall through the cracks.

What do you need help doing?

Small business owners who would benefit from a turnkey solution for every HR function should choose a PEO. Conversely, for those who only need help with a few strategic services, an HRO is probably the better choice.

Do you already have an in-house HR team?

If your organization doesn’t have an HR department or employs a single HR professional, a PEO is a smart choice to build and manage these responsibilities. Companies with existing HR departments can hire an HRO simply to fill gaps in knowledge or cover HR overflow.

How much risk do you feel comfortable assuming?

If you want to mitigate your company’s risk, the co-employer relationship PEOs offer may look good to you. If this isn’t an issue, or you want to maintain complete control, consider an HRO provider.

PEO vs. HRO: The decision depends on your business goals

Growing businesses must implement processes to help them scale and thrive. By understanding the key differences between PEOs and HROs, you can make a decision that drives your business’s long-term success.

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1 Small Business Outsourcing Statistics in 2019.