If your small or medium-sized business (SMB) needs a more efficient payroll process, better benefits, or an expert who can handle it all, a professional employer organization (PEO) or human resources outsourcing (HRO) provider can help. Both reduce administrative burdens. Yet, differences between HRO vs. PEO services impact your return on investment.
Generally, PEOs, as co-employers, work better for companies with limited or no HR staff, whereas HROs support existing HR departments. This PEO vs. HRO comparison explains the distinctions, including the pros and cons, and provides examples to help you decide.
PEO vs. HRO company comparison
HRO and PEO HR outsourcing services have different business models, even though they occasionally assist with similar processes.
Here’s how an HRO and PEO differ:
- Setup: HRO clients sign a vendor contract with an independent HRO provider. Conversely, a PEO service agreement establishes a co-employment relationship.
- Cost: PEOs are more expensive than HROs but replace your payroll department or HR employee, whereas you’ll still clock HR hours with an HRO.
- HR services: While PEOs provide a full suite of essential HR solutions, HROs offer an a la carte selection or bundle services like payroll and benefits administration.
- Risk and liability: PEOs share employment-related liabilities as co-employers, whereas HROs are external vendors who don’t take on additional risks.
- Insurance benefits: PEO health insurance benefits are top-notch, with lower premiums than open-market solutions. Still, HRO providers may offer more plan flexibility and customization.
What is a PEO?
A PEO or professional employer organization is a full-service HR outsourcing company. It operates under a co-employment business model to provide PEO HR, meaning the PEO assumes the employer of record (EOR) role for administrative purposes. This arrangement allows them to negotiate and sponsor employee benefits for your business, lowering small business premiums.
As co-employers, PEOs file payroll taxes under their employer identification number (EIN). Most provide a human resource information system (HRIS) software platform and may handle additional administrative tasks or offer advisory services. You run day-to-day operations while the PEO firm oversees human resources. PEO examples include Insperity, TriNet, and ADP Totalsource.
[Read more: 5 Facts About Using PEOs for Your Business]
What is an HRO company?
An HRO or human resources outsourcing company is a third-party HR service provider. It offers bundled plans or a la carte solutions to businesses wanting to offload specific HR functions, such as payroll, tax, or benefits administration.
As an independent firm, HROs act on your behalf according to your contract terms, which specify the outsourced HR processes. Although an HRO company may guarantee accuracy for certain services, your business is responsible for payroll tax liabilities and compliance. Unlike a PEO, the HRO doesn’t co-employ your staff.
Many external providers furnish human capital management (HCM) or process-specific software and offer new hire onboarding, strategic advisory services, or professional development assistance. HR outsourcing examples include CPEhr and G&A Partners.
What is the difference between a PEO and an HRO company?
The main distinction between PEOs and HROs lies in their relationship with clients. A PEO becomes a co-employer, whereas an HRO company is an independent contractor. However, the differences don’t end there. See below to compare PEO vs. HRO costs, insurance benefits, and HR services.
Comparing costs
HROs cost less than PEOs. Pricing varies for HR outsourcing services, with some providers charging a flat monthly rate plus a per-employee fee, while others offer project-based pricing. PEOs assess a flat per-employee fee or a percentage of your monthly payroll, ranging from 2% to 12%. Pricing usually includes administrative and insurance costs.
The payroll and HR platform Gusto costs $40 to $180 monthly plus $6 to $16.50 per employee for full-service payroll, hiring and onboarding tools, health insurance administration, and performance management. In comparison, Justworks PEO charges $59 to $109 monthly per employee for payroll, HR consulting, benefits administration, and state unemployment insurance.
Understanding HRO vs. PEO value
The value for the money depends on your company’s priorities and requirements regarding compliance, flexibility, and HR services. Businesses looking for comprehensive risk management and support could achieve a greater return from PEOs, whereas those needing targeted solutions find an HRO delivers more value.
Although PEOs cost more, the value comes from reduced insurance premiums and shared risk. The breadth of bundled services and integrated approach saves time on back-office tasks and vendor management.
On the other hand, HROs provide more flexibility and scalability. You have more control over your budget when choosing which tasks to outsource.
[Read more: How to Leverage a PEO to Help Grow Your Small Business]
Assessing HR services
When comparing HRO vs. PEO services, decide whether your business needs specialized, a la carte options or fully managed services. Both handle payroll and benefits management. However, a PEO integrates more deeply into your business and, on average, decreases administrative burdens more than an HRO.
Alternatively, an HRO tailors its program to your needs and doesn’t have co-employment responsibilities. Some PEO HRIS platforms provide training and development tools. In contrast, HRO companies offer specialized recruitment, training, development, and performance assistance. The services might include software, resources, and professional guidance, depending on your contract.
When comparing HRO vs. PEO services, decide whether your business needs specialized, a la carte options or fully managed services.
Examining insurance benefits
Generous insurance coverage and lower premiums are significant advantages of choosing PEOs. The PEO HR outsourcing structure gives small businesses access to major medical plans, retirement programs, and workers' compensation.
Meanwhile, an HRO service may offer benefits administration a la carte or include it in a subscription. While PEOs co-employ many people, giving them bargaining power, HROs can't access volume discounts. However, HROs allow clients more flexibility to customize their insurance plan types or insurance carriers to fit their business needs or demographics.
[Read more: PEO vs. Insurance Broker]
Should you choose a PEO or an HRO?
PEOs are an excellent fit for businesses without dedicated HR employees, whereas HROs work better if you have one or more. But this isn't a hard rule. Your HR capabilities, challenges, and goals should guide your decision.
Consider a small company with 50 or fewer employees and one person who could be the business owner managing payroll and HR tasks. In addition to needing time for revenue-generating goals, the owner wants to add affordable yet comprehensive benefits to attract and retain talent. Outsourcing HR to a PEO is worth it because the services add value, solve problems, and reduce liabilities.
Suppose another organization is nearing $2 million in annual payroll, moving beyond 100 employees, and has two or more HR team members. Talent recruitment and retention are top goals, as is refining internal workflows to improve efficiency. In this case, an HRO provides strategic advisory services, including a cost-benefit analysis to determine which tasks to outsource.
Weigh HRO vs. PEO pros and cons
Outsourcing business tasks always comes with risks yet offers the potential for enormous benefits. While this guide provides general HRO and PEO pros and cons, industry experts recommend evaluating your situation against various outsourcing solutions before deciding.
Consider these benefits and drawbacks of PEO and HRO companies:
- Pros: The biggest advantages of PEOs include reduced insurance premium costs and better coverage levels over open-market plans. They also provide hassle-free HR and risk mitigation. Conversely, HROs offer more control over your data and budget while allowing your company to outsource the most resource-intensive tasks.
- Cons: Some business owners find the co-employment model a drawback of PEOs. It affects your corporate culture, institutional knowledge, and taxes. Transitioning off a PEO can also be challenging. In comparison, HROs can’t fully replace your HR team or assume liabilities on behalf of your company.
[Read more: How to Delegate Tasks to an Outside Vendor]
Review alternative PEO HR outsourcing options
HR outsourcing takes many forms, and you’ll encounter plenty of terms, occasionally overlapping with PEOs and HROs. For instance, an administrative services organization (ASO) is a subset of an HRO. Many corporations considering an HRO also compare a PEO to an ASO.
In contrast, a company with a handful of employees might prefer an insurance broker and low-priced payroll software. A business going global faces complex employment law issues, where an EOR might be the answer.
However, PEOs and some HROs provide employer-of-record services. Therefore, you might want to evaluate PEOs and EORs.
Explore the best PEOs and HROs
The following examples round out this comparison of HRO vs. PEO services. Although each vendor is only listed once, some may offer multiple outsourcing models. When researching providers, review all solutions, including HRO, PEO, or ASO options.
Top PEO providers
Small and large PEO companies furnish regional, national, and global services. Although their technology platforms and support options differ, all PEOs have a similar co-employment model and manage payroll and benefits.
PEO HR outsourcing companies include:
- Insperity: This PEO HR service allows medium-sized businesses to customize and configure solutions to align with their goals. It designates a compliance specialist, provides a plug-and-play platform, and has cost-effective insurance plans.
- Rippling: With certified HR experts, big company insurance plans, and other employee perks, Rippling appeals to companies wanting direct access to employee data with the option to transition on or off the PEO to Rippling’s other services by clicking a button.
- ADP TotalSource: This IRS-certified all-in-one HR solution supports five to 250 employees. ADP PEO helps with hiring and staff retention and offers major medical coverage from national and regional carriers. It provides mobile apps and reporting tools.
- TriNet: With HR and payroll technology, on-demand experts, and TriNet-sponsored benefits, small businesses can offer employees plans from leading carriers and visualize HR information while concentrating on growth-generating activities.
[Read more: Everything Your Small Business Needs to Know About Choosing a PEO]
Well-known HRO companies
HR outsourcing covers consultancy offerings, software-as-a-service platforms, or a combination. Some vendors specialize in recruitment or employee development, whereas others have an all-in-one system.
HR outsourcing companies for a small business include the following:
- Bambee: For companies seeking an outsourced compliance solution, Bambee provides a dedicated HR manager, software, and automation features. It assists with onboarding, policy creation, terminations, and conflict resolution.
- Paychex: Customize plans offering advisory and administrative services for every aspect of HR and the employee lifecycle. Paychex assesses your needs to recommend solutions, from benefits administration to training and development programs.
- G&A Partners: This customizable, full-service HR solution features an integrated HR software platform with tailored options for specialized training programs, employee recruitment tools, and competitive benefits.
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