HRO vs. PEO: What's the Difference?

Updated: April 30, 2009

Introduction

When exploring HR-outsourcing solutions, many companies encounter two unclear and unexplained acronyms: HROs (Human Resources Outsourcers) and PEOs (Professional Employer Organizations). Since these three-letter terms often appear hand-in-hand, it's easy to assume that they refer to the same thing. But that's not necessarily the case.

Most people use HRO when they're talking about either breed of service provider, so it's easy to get confused and assume that HRO is the blanket term for HR outsourcing. While HROs and PEOs do offer similar services, however, fundamental differences exist between the two approaches. And every company — whether it's a startup just breaking into the market or an enterprise with years of experience — needs to understand these differences before choosing an outsourcing solution for their HR needs.

Analysis

HROs

An HRO is a third-party provider of common HR services. Depending on its range and scope, an HRO can address all or only a few of businesses' various HR needs, including payroll , benefits administration, training, risk management and recruitment . Most HRO companies offer services à la carte so that clients can pick and choose which HR responsibilities they want to outsource. For instance, ADP Inc . offers payroll, retirement administration and several other HR-related services. E-Chx Inc ., on the other hand, provides only outsourced payroll solutions .

The clearest advantage of HROs as compared to PEOs is flexibility. Companies can choose which services to outsource and which to manage in-house. Many SMBs (small- to medium-size businesses) turn to HRO companies so they can focus on business objectives, save time and cut costs.

PEOs

PEOs, on the other hand, take care of all HR responsibilities for their customers. A PEO handles every HR task — from workers' compensation to creating an employee handbook . A PEO also assumes all associated liabilities and legal responsibilities for its clients.

In order for this relationship to work, both logistically and legally, a hired PEO becomes a co-employer with a client company. Also known as an "employer-of-record," a PEO essentially hires a company's employees directly and then "leases" them back to the company for work. Put another way, the PEO serves as the administrative employer, while the client business acts as the on-site employer.

This might sound fishy, but it actually has a number of benefits for companies. Since the PEO is the employer-of-record, it is responsible for federal and state taxes , as well as workers' compensation. PEOs can also pool employees from their client companies in order to get reduced rates for health benefits and retirement packages. And PEOs are responsible for tangling with legal regulations, tax laws and insurance.

The drawback of PEOs is, of course, that you surrender all control of your HR department to another company. Many small enterprises, however, view this as a benefit in itself; allocating all HR responsibilities to a PEO allows growing businesses to devote their attention to issues that will make or break them.

Which One's Right for You

Determining whether an HRO or PEO is right for your company requires a significant amount of consideration and planning. But a few key facts may help direct your decision process.

If your company is fresh on the market, you may be wise to consider a PEO. Startups have a host of issues on their plates — from determining the right number employees to creating an effective marketing strategy — and may not have the budget to hire a dedicated HR professional . A PEO can save you a tremendous amount of time and effort.

In addition, if you have a small company, it's worth hiring a PEO to be able to offer your employees competitive rates on health insurance or 401(k) plans . If your SMB is going to compete with larger companies for talent , you need to provide benefits that are up to snuff.

If your company has more experience under its belt, however, an HRO might be the better choice. Switching any HR system can be a difficult task for an already established company and has the potential to cause major problems. For instance, integrating an HRO's system with a company's legacy payroll system may be cause for consternation. And you might have already hired an HR professional that you trust and value. Outsourcing one of your time-consuming tasks — but not all — may be the best bet.

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