Human resources is responsible for various employee management-related business functions. For example, HR can handle the hiring process, track employee time and attendance, run payroll, file employer payroll taxes, administer employee benefits, manage employee performance, and create and enforce policies and procedures.
Many small businesses manage these responsibilities in-house; in fact, an OnPay survey revealed that 41% of small business owners choose to handle HR themselves. However, it can be tricky to master myriad HR tasks while maintaining legal compliance with labor and employment laws. This is why many businesses choose to outsource their core HR functions to an experienced third party.
There are two primary ways to outsource HR: You can partner with a professional employer organization (PEO) or a human resources outsourcing (HRO) service. Although these two options offer many of the same advantages and limitations, they have a few key differences. Understanding these differences will help you determine which option is best for your business.
Tip: When weighing the pros and cons of an internal HR department, consider your budget and your need for access to reliable onsite assistance.
What is a PEO?
A professional employer organization, also known as a PEO, is a third-party company that provides HR services to small and midsize businesses through a co-employment model. A co-employment model means the PEO is legally and financially responsible for your employees, but you maintain management oversight.
The best PEO services offer comprehensive features such as HR administrative tasks, employee benefits administration, payroll, training and development, and risk and compliance. These features are often bundled into one preset package.
What is an HRO service?
A human resources outsourcing service, also known as an HRO service, is a third-party company that provides HR services such as pre-employment screening, HR administrative tasks, employee recruitment and onboarding, HR policy development, payroll, employee benefits administration, time and attendance, workplace safety and training, performance management, legal compliance, and HR consulting.
When you partner with an HRO service, you get help managing one or more of these HR functions while maintaining all ownership and legal responsibility for your employees. The best HRO services are flexible and allow you to scale your HR functions as needed.
PEOs vs. HRO services: What’s the difference?
PEOs and HRO services offer many of the same features and services. The best PEOs and HRO services are comprehensive and can take care of virtually any HR function you require, making it difficult to decide which type of HR partner to choose.
While PEOs and HRO services are similar, they have fundamental differences, including employee ownership, service flexibility and HR compliance functions.
1. Employee ownership
The most significant difference between PEOs and HRO services is their employment models. A PEO uses a co-employment model, while an HRO service does not.
When you partner with a PEO, it takes on legal and financial responsibility for your employees; for example, it will administer employee benefits, process employee payroll and file payroll taxes – all under its own name and employer identification number (EIN). A co-employment model also means that the PEO owns your employee data.
Because an HRO service doesn’t use a co-employment model, your relationship will be similar to any other type of outsourcing partner. The HRO can offer you HR services, but you retain ownership and legal and financial responsibility for your employees.
If an HRO service helps you with a task such as payroll processing, it will do so under your business name and EIN. You retain ownership of your employee data, which can be especially important if you intend to change how you manage HR in the future.
2. Service flexibility
Another key difference between PEOs and HRO services is their service flexibility. Although this can vary based on your company choice, a PEO’s services typically come as a bundled package. This means you must pay for all features, even if you only need a few.
On the other hand, an HRO service tends to offer a la carte services, allowing you to pick and choose which specific functions you want to utilize. Service flexibility is essential if you need to outsource only a few HR functions.
3. HR compliance consulting
HR consulting is another area where PEOs and HRO services can differ. When you partner with a PEO, it typically takes care of your HR functions, whereas an HRO service acts more like a consulting company by providing HR compliance guidance.
Although HRO services tend to be more service-oriented, the best PEOs can offer some form of HR compliance consulting as well.
FYI: If you don’t want a PEO to take care of HR compliance for you, the HR consulting assistance that an HRO service provides can help you avoid common HR compliance challenges.
How much do PEOs and HRO services cost?
PEOs and HRO services operate with a similar pricing structure. They can charge a percentage of your business’s total monthly payroll (between 3% and 12%), or they can charge per employee per month (between $40 and $160).
Per-employee per-month pricing is most common, and your rates will depend on which features you need. PEO and HRO service plans may also have additional costs, such as setup fees and cancellation fees.
Which type of businesses should work with a PEO versus an HRO service?
One of these outsourcing arrangements will likely benefit your organization more than the other depending on a few factors, such as how big your business is, which type of employee ownership you’re seeking and which features you need.
Which businesses should work with a PEO?
Most PEOs are geared toward small and midsize businesses with at least five employees. As your business starts to grow, so will your HR needs. If you don’t want to hire an HR manager or HR department, you can hire a PEO to take over your HR functions. This will relieve you and your employees of handling HR duties, allowing more time to work on other vital tasks.
PEOs are also ideal for businesses with limited labor and employment law knowledge. Keeping up with federal, state, local and industry-specific laws and regulations can be difficult, so many small and midsize businesses tend to find it helpful to turn over legal and financial employment responsibilities to an experienced third party like a PEO.
In addition to relinquishing some financial and legal obligations, small businesses can benefit from a PEO because of its access to affordable healthcare and the great retirement savings plans. PEOs work with many businesses, so they gain access to comprehensive benefits and group insurance rates that might not otherwise be available to a small business owner. If you’re a small business owner looking to offer competitive and affordable employee benefits, a PEO might be right for you.
Did you know? In 2020, according to NAPEO, there were 487 PEOs in the United States providing services to 173,000 small and midsize businesses.
Which businesses should work with an HRO service?
HRO services serve businesses of any size, but they tend to partner with larger organizations that need only a few services outsourced. If your business already has an HR manager or department to take care of most of your HR functions and you need assistance with just a few specific HR services, an HRO service is a great choice.
An HRO service’s flexibility allows you to add or remove HR services as needed, so you can customize them to meet your exact HR needs.
HRO services are also for businesses that want to retain ownership and responsibility for their employees. Since an HRO service doesn’t operate under a co-employment model, it allows you to be your staff’s sole employer while also receiving HR assistance.
What are the best PEOs and HROs?
There are many PEOs and HRO services, making it tough to identify the best one for your business. To help you with your search, we researched and analyzed PEOs and HRO services to identify the market’s top vendors.
Top PEOs to consider
If you’re looking for a PEO, here are a few excellent options.
- Justworks: Justworks’ PEO comes with a top-notch technology platform that’s hosted in the cloud and easy to navigate. It’s one of the few PEOs we reviewed that lists its pricing online. Read our Justworks PEO review to learn more.
- Oasis Advantage: Oasis Advantage, a Paychex company, is a great PEO choice for startups. It offers annual plans that require only that you have a minimum of five employees. Read our review of Oasis to learn more.
- Rippling: Rippling is a scalable platform that’s easy to implement. You can use Rippling with or without the PEO model; if you toggle it on or off, Rippling will transfer employee data from one mode to the next. Read our Rippling PEO review to learn more.
- TriNet: TriNet is a great PEO for those looking for a PEO tailored to their industry. TriNet offers flexible pricing, industry-specific plans and specialized support. Read our review of TriNet to learn more.
Top HRO services to consider
If you’re looking for an HRO service, here are a few excellent options.
- G&A Partners: G&A Partners offers services ideal for employee development. It specializes in skilled trades, healthcare, manufacturing and professional services. Read our G&A Partners review to learn more.
- Paychex: Paychex is a great HRO service for small and midsize businesses. Its comprehensive services can help you stay compliant with laws and regulations. Read our Paychex review to learn more.
- Zenefits: Although HRO services are geared more toward larger businesses, Zenefits is a solid option for startups. It has transparent online pricing and add-on services. Read our review of Zenefits to learn more.
Top hybrid PEO/HRO services to consider
If you’re looking for a company that offers both PEO and HRO service models, here are two top options.
- ADP: Some companies offer both PEO and HRO service options, and ADP is a company that does it well. Whichever model you choose, ADP has great benefits administration and customer service. Read our ADP outsourcing review to learn more.