PEO vs HRO: A Guide to Understanding the Essentials

If your business is looking for assistance executing human resources functions, you have several options. A professional employer organization (PEO) and a human resources outsourcing (HRO) provider are two different ways to get the help you may need.

In general, PEOs are designed for small and medium-sized businesses. HRO customers are usually larger companies with existing HR departments or personnel. Recent statistics highlight approximately 487 PEOs in the United States serving 173,000 clients with a total of nearly 4 million worksite employees and the industry cornering some $254 billion in revenue. The market for HROs in the U.S. is approximately $10.9 billion.

Here we'll provide a comparative overview of PEO vs. HRO to help you determine which might best suit your company.

What Is a PEO?

A PEO works with businesses that want to outsource human resource functions. It provides full-service HR solution to businesses. Typically, a PEO will handle most of the routine HR functions and may also provide additional HR strategic services. TriNet is a professional employer organization.

Role of a PEO as a co-employer

When a business and a PEO decide to work together, the business enters into a contract with a PEO for services. The PEO operates under a co-employment model in which the PEO, as a co-employer, is the employer of record for tax purposes and is responsible for collecting and remitting payroll taxes for employees on its platform. The business owner maintains control of business decisions and daily operations, including the day-to-day supervision of employees.

PEO services

The exact services a PEO will provide to a client company depends on the particular PEO and contractual agreement. In general, PEOs offer a wide range of services, which may include:

• Payroll services such as payroll processing, direct depositing, and debiting.
• Calculating deductions and tax withholding; remitting and filing payroll taxes paid through the PEO platform.
• Access to and administering employee benefits
• Workers' compensation coverage and administering claims
• Tools to help with recruitment and onboarding process of new employees.
• Providing best practices and guidance on employment-related state, local and federal rules and requirements.
• Better insights to HR data with workforce analytics.

Benefits of a PEO

A PEO can provide substantial benefits to small and medium-sized businesses. PEOs help businesses when they outsource their HR functions, freeing up executives and staff to work on other matters. They also help relieve the businesses of the need to hire additional HR staff so their resources can be better used elsewhere.

A PEO has greater purchasing power than a typical small or midsize organization, thanks to economies of scale. This enables the PEO to provide clients access to health benefits and other employee benefits at cost effective prices. PEOs can often offer a more cost effective workers’ compensation program as well.

PEOs can also help businesses to stay up to date with employment-related rules and requirements so they can comply, which helps to reduce the likelihood of penalties and fines due to noncompliance.

Understanding HROs

An HRO is a third-party consulting company that provides HR outsourcing services. Unlike a PEO, an HRO is not a co-employer, does not become the employer of record for certain responsibilities. An HRO offers a business a range of outsourcing services. The business selects what it wants which can be on an a-la-carte basis.

How an HRO streamlines essential HR functions

When a business contracts with an HRO, it can outsource as many or as few of its HR tasks as it chooses. This enables the business to provide some HR services in-house, when that makes sense, while outsourcing services that could be better handled by others.

The choice will depend on the strengths and weaknesses of their HR department or personnel. For example, a business might choose to outsource payroll processing and benefits administration to an HRO while managing recruitment and training in-house. Using an HRO allows a business to fine-tune which HR functions it keeps and executes.

Advantages of HROs

HROs may be a good option for larger organizations that already have HR departments and want to outsource specific HR functions. Advantages of working with an HRO include:

• Potentially lower costs. Because of the a la carte services, HROs may charge less than PEOs.
• Security considerations. When contracting with an HRO, businesses can choose to keep sensitive HR functions in-house.
• Flexibility. HROs let businesses pick and choose which services they need and change their selections if their needs change.

PEO vs. HRO: A Comparison

Let's review some of the key differences between PEOs and HROs.

Co-employment

A PEO, as a co-employer and the employer of record for tax purposes and assumes certain responsibilities and HR functions. An HRO, as a third-party service provider and does not take on as an employer of record for these functions.

Access to benefits

A PEO can provide a business with access to premium employee benefits and can be cost effective. This is a valuable service for both the employees and the company. Employees get access to premium benefit plans, and employers enjoy higher employee satisfaction and potentially lower turnover. An HRO might offer a great number of plans but does not have the same purchasing power as a PEO and therefore may not be as cost effective.

Costs

You may pay less for an HRO service than for the equivalent service from a PEO. However, a business will usually need an in-house HR department or staff to effectively work with an HRO. That expense is a factor into the total-cost comparison.

Services

Both HROs and PEOs offer a wide range of services. Employers typically opt in or out of HRO services, while PEOs tend to take on more of the HR responsibilities and provide a full-service comprehensive HR solution.

Effect on culture

Entering into co-employment with a PEO may affect a business’s culture base on the strategic guidance provided to businesses. HROs, as outside consultants, are less likely to impact company culture.

Security concerns

For security reasons, employers may have concerns about letting PEOs and HROs handle their sensitive HR data. With the greater flexibility that HROs provide, it might be easier to handle sensitive information in-house while outsourcing only those tasks warranting less security concern. In any case, employers who are considering working with either PEOs or HROs should vet prospective companies carefully surrounding data privacy and security.

Draw Your Own Conclusion

Small and medium-sized businesses don’t always have sufficient internal HR resources to handle all the required administrative tasks. When that's the case, time-consuming routine tasks may be better and more efficiently handled by outsourcing.

PEOs and HROs are good options for businesses seeking the HR help they may need. HROs provide a flexible option for companies that have grown enough to have an internal HR department. PEOs are an especially good choice for small businesses, or those of any size, that would prefer to outsource most of their HR functions. PEOs also help businesses with certain HR risks and compliance issues.

You can begin your own discovery process here. You can also contact us any time to learn more about whether a PEO is right for your company. As a Certified PEO, TriNet provides payroll services, access to comprehensive employee benefits and more, as well as guidance on best practices and easy-to-access platform and assistance by phone or online.

To learn more about TriNet and for more on the news and trends impacting HR today, visit TriNet's growing Trends & Insights resource center.

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