HRO vs PEO: Comparing HR Outsourcing Options

HRO vs PEO: Comparing HR Outsourcing Options

January 23, 2024

With limited resources yet complex HR needs, small and mid-size businesses face critical decisions when weighing HROs vs PEOs for HR outsourcing. Aligning services to true pain points and priorities allows companies to derive maximum value whether opting for targeted HRO solutions or full-service PEOs as a co-employer.

As small and mid-size companies grow amid talent competition and regulation, they reach an inflection point for HR outsourcing. While handling payroll, compliance, benefits, and technology internally worked initially, expansion demands specialized support. HROs and PEOs both enable access to scalable capabilities but take vastly different approaches. Understanding how these models compare empowers leadership in pursuing the optimal mix of services to drive operational and financial performance.

Understanding PEOs and HROs

PEOs, or professional employer organizations, and HROs, or human resources outsourcing companies, are two options businesses have when looking to outsource HR functions. PEOs act as co-employers, taking on many employer responsibilities and liabilities for their clients’ workforces. HROs, on the other hand, serve strictly as third-party providers of select HR services without any co-employment.

Specifically, PEOs assume critical employer obligations like payroll, benefits, workers’ compensation, and compliance. They become a co-employer of their clients’ employees and manage HR responsibilities through a contract. PEOs consolidate many key tasks for small and mid-sized businesses with HR and benefit administration.

In contrast, HROs simply act as external suppliers that are contracted to handle individual HR processes for their clients. HROs allow companies to outsource specific HR functions like recruiting, payroll, or training on an a la carte basis. They provide clients with economies of scale and expertise in HR areas without taking on co-employment.

While PEOs offer a full-service, co-employment HR solution, HROs provide flexible, specialized HR services without the employer’s liabilities. Both models allow businesses to focus on core operations while leveraging outside HR capabilities and technology.

What is PEO in HR
What is PEO in HR

Key Differences: PEO vs HRO Comparison

When weighing PEOs vs HROs, there are critical differences in their co-employment status, risk and tax handling, HR services, benefits flexibility, costs, and overall value.

Co-employment vs Third-Party Service Models

The main differentiation between PEOs and HROs lies in the co-employment versus third-party supplier dynamic. PEOs become co-employers through HR service contracts, assuming substantial employer responsibilities and risks. HROs strictly remain third-party vendors providing select, non-bundled HR services.

Specifically, PEOs share employer liabilities like safety, compliance, employee misconduct, and negligent hiring and retention. HROs avoid these risks by maintaining an external vendor relationship without any co-employment status.

Similarly, PEOs manage their clients’ tax and labor law compliance as a co-employer including payroll processing, withholding, and filings. HRO clients retain control and liability for their own tax and compliance handling, only outsourcing individual HR processes.

So while PEOs deliver a full-service, co-employment HR solution, HROs offer customizable HR capabilities without the enlarged risks or compliance involvement.

HR Services Comparison

When it comes to services, PEOs provide a wide range of bundled HR functions like payroll, benefits, workers’ comp, training, compliance, HR technology, and labor law guidance. They offer robust capabilities across essential HR areas typically lacking for small businesses.

Conversely, HROs allow their clients to hand-pick the specific HR processes they want to outsource such as:

  • Recruiting – Advertising, screening, assessments
  • Payroll – Payroll processing, direct deposit, tax filings
  • Benefits – Plan development, enrollment, administration
  • L&D – Training programs, eLearning content, LMS technology
  • Compliance – Labor law guidance, workplace policy setting

So PEOs consolidate a full suite of essential HR services while HROs enable specialized, targeted capabilities without bundling.

In terms of quality and breadth of plans, PEOs often provide benefits and technology access beyond what small companies could attain independently. Their large shared employee pool and aggregated bargaining power secure elite plans. HROs typically leverage strong vendor partnerships and economies of scale as well to offer quality plans to clients.

However, PEOs uniformly deliver their standard bundle of HR services to all clients. HROs conversely allow each client to customize their precise mix of HR outsourcing. So HROs offer superior flexibility and personalization of HR services purchased.

What is the difference between PEO and HRO
What is the difference between PEO and HRO

Benefits flexibility

PEOs provide exceptional health insurance plans, retirement programs, leave policies, and other benefits far beyond typical small business offerings. However, their benefits packages tend to be standardized across clients with minimal customization opportunities. HRO-managed plans afford more flexibility to tailor benefits to organizational needs.

For example, PEOs uniformly deliver a defined set of health insurance options for all client companies. HROs would allow each client to select from various providers and plan designs to best meet their budgets and preferences.

So while PEOs supply outstanding, HROs facilitate more customizable and flexible benefits aligned to individual organizations. Of course, independent brokers also remain an option for fully tailored plans.

Cost and value analysis

When evaluating true HR outsourcing costs, PEOs often appear more expensive on the surface than specialized HRO services. 

However, when factoring in the full value derived from PEOs, their ROI exceeds the higher gross fees for most small to mid-sized businesses. The question becomes, is the extra cost worth the added value?

True PEO value emerges from consolidated HR functions, elite benefits and technology, reduced liability, enhanced compliance, leveraged expertise, economies of scale, and the focus shift to core operations. Only a thorough cost-benefit analysis reveals their ultimate ROI.

Meanwhile, HROs deliver targeted capabilities at lower price points but with less risk relief and business impact. HROs provide real HR solutions but primarily tackle administrative tasks rather than higher-level strategic and technology needs.

So PEOs drive higher business performance to often warrant their larger fees. HROs simply deliver cost-effective, tactical HR assistance.

AspectPEOsHROs
DefinitionCo-employer that bundles multiple HR servicesThird-party supplier of specific HR functions
Services OfferedPayroll, benefits, workers’ comp, compliance, etc. – full suiteA la carte selection – recruiting, payroll, benefits, L&D, etc.
SetupCo-employment contractVendor service contract
FlexibilityLittle customization – standardized bundlesHighly customizable mix of selected services
Cost Implications3-15% of payroll – higher gross fees but more value*2-5% of payroll for chosen services only*
*For reference only, please contact your HR outsourcing services providers for detailed costs

Decision-making criteria for businesses

When evaluating PEOs versus HROs, it primarily comes down to the company’s size, budget, risk tolerance, and specific HR vulnerabilities. There are benefits to both models based on the organization.

For most small businesses, PEOs make the most economic and operational sense. The consolidated HR services, advanced technology, reduced liability, and focus shift to core business provide immense value that outweighs the larger fees. Limited HR knowledge and infrastructure also make outsourcing through a PEO strategically prudent early on.

As businesses scale, the a la carte HRO model allows great flexibility to hand-select priority HR functions needing support. Companies can leverage external expertise for tasks like recruiting, L&D, or payroll based on internal gaps without overpaying for unneeded areas. HROs provide targeted solutions more cost-effectively for mature companies.

In closing, while HROs and PEOs meet distinct HR outsourcing needs, small and mid-size businesses must fully grasp the implications of each to strategically select their best option. HROs allow targeted task support like recruiting or L&D without the enlarged risks or fees of full-service PEOs. Yet for most SMBs, PEOs provide immense value consolidated HR capabilities with advanced technology and reduced liability. When aligned with true organizational requirements, outsourcing through HRO, PEO or other services paves the way for HR excellence and ultimately, business success.

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