PEO vs HR Outsourcing: Understanding The Differences
By If you’re navigating human resources, you may have heard of PEOs and HR outsourcing. These solutions are meant to make HR easier for your team, and can be especially great for small businesses. But what’s the difference?
PEOs, or professional employer organizations, offer a co-employment model where they share responsibilities with your company. On the other hand, HR outsourcing involves delegating your entire HR functions to a third-party provider. Each has its unique advantages and potential drawbacks, depending on your company’s needs and objectives.
That being said, these two solutions can have a lot of overlap, and sometimes the distinction gets fuzzy. In this article, we’ll take a closer look at these two models, so you can decide which option is the best fit for your business.
Key Takeaways
- PEOs (professional employer organizations) offer a co-employment model, sharing both legal and HR responsibilities with your business. This can include payroll processing, benefits administration, and compliance with employment laws.
- HR outsourcing involves businesses delegating their entire HR functions to a third-party provider.
- HR outsourcing does not necessarily involve co-employment. Companies retain sole employer responsibilities. The main role of HR outsourcing is to manage HR tasks allowing the in-house HR team to focus on more strategic, growth-centric projects.
- There are distinct differences between PEOs and HR outsourcing in terms of legal implications, services offered, and cost structures. While PEOs share legal responsibilities and offer comprehensive HR solution packages, HR outsourcing only manages HR tasks with the company retaining all legal responsibility.
- Costs for PEO services typically depend on employee numbers while HR outsourcing charges are based on the specific HR solutions required.
- While simple HR outsourcing can be cost-effective for smaller businesses, PEOs might be a more strategic choice for businesses looking for more comprehensive HR solutions.
Understanding PEOs and HR Outsourcing
Let’s take a moment to review each of these solutions in greater depth.
What Is a PEO?
As we’ve mentioned, a PEO is an entity that lends a hand to businesses, particularly small-scale ones, in streamlining HR tasks. It creates a co-employment scenario, sharing legal responsibilities with the client company. Much more than an HR service provider, a PEO becomes a joint employer with your business. This means it can undertake tasks such as payroll processing, benefits administration, and compliance with employment laws. As a shared employer, a PEO also becomes liable for work-related risks and managing workers’ compensation claims.
PEOs can offer a number of employee benefits, including affordable health insurance, retirement plans, and other perks. On the employer side, they also help onboard new hires.
What Is HR Outsourcing?
HR outsourcing, commonly referred to as HRO, describes the process in which businesses entrust their entire HR functions to a third-party service provider. Unlike PEOs, these HR outsourcing firms don’t necessarily engage in co-employment. That means they won’t be able to help with things like workers’ compensation coverage and employment taxes. Instead, HR outsourcing covers common HR tasks, including payroll, benefits administration, and performance management.
It’s worth noting that these services can overlap. Fourth PEO, for instance, also offers HR outsourcing services. In other words, it helps with both employer responsibilities and HR tasks such as payroll processing and benefits management.
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Key Differences Between PEOs and HR Outsourcing
Although PEOs and HRO can overlap, there are key distinctions involving legal implications, the variety of services offered, and cost structures.
Legal Implications
PEOs operate under a co-employment model, establishing themselves as the ’employer of record’ for tax and insurance purposes. This model involves a PEO sharing legal responsibilities with the client company, according to the National Association of Professional Employer Organizations (NAPEO). This means PEOs are well versed in employment laws and risk management, providing valuable protection and compliance support for your business.
In contrast, HR outsourcing manages your HR tasks without entering into a co-employment agreement. An HR outsourcing company typically handles tedious HR responsibilities like payroll processing and administering employment taxes, freeing up your HR team for strategic project management. However, as a business owner, you maintain ultimate responsibility for all HR legal implications at the end of the day.
Services Offered
PEOs usually offer a comprehensive HR solution package that includes employee benefits like health insurance and retirement plans. They own the tools for streamlined onboarding processes and effective performance management, providing everything in-house for your company’s HR needs. PEOs essentially become an extension of your in-house HR department, ensuring consistency in your company culture and helping support retention.
On the other hand, HR outsourcing only focuses on direct HR tasks such as payroll services and benefits administration. The services offered are generally not as broad as those provided by PEOs. An HR outsourcing solution serves as a standalone provider, integrating with your existing HR functions and supporting your team without the comprehensive takeover that PEOs usually offer.
Cost Structures
Generally speaking, the cost of a PEO will depend on the number of employees in your business. PEOs work under a pricing model that charges per employee, making it a scalable solution suitable for businesses of various sizes. PEOs also have other financial advantages, like helping you manage workers’ compensation coverage and providing employee benefits at a more affordable rate.
In contrast, HR outsourcing charges are typically based on the specific HR solutions you require. This means you might end up paying for individual services like payroll management or benefits administration separately. This can be a cost-effective strategy for businesses that only need help in specific HR areas, without requiring a full-service PEO.
What’s Best For Your Business: HR Outsourcing or PEO?
PEOs and HR outsourcing both offer unique solutions that can help manage your human resources. Both of these solutions can significantly streamline your business operations and free up your team to focus on different tasks. Which option is best for you will depend on a number of factors: the size of your organization, your business needs, and your existing internal HR team.
HR outsourcing can be a very customizable spot-solution for employers that just need assistance with certain administrative tasks. PEOs, on the other hand, offer comprehensive HR services and shared liability as a co-employer. If you just need assistance running payroll, HRO may be enough—but if you also want greater legal security, more affordable benefits, and help setting your organizational culture, a PEO is the way to go.
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What is the key difference between PEOs and HR outsourcing?
PEOs (professional employer organizations) provide comprehensive HR solutions and share employment responsibilities, while HR outsourcing offers specific task-oriented services. The choice between the two depends on a business’s specific needs.
How is the cost structure of PEOs and HR outsourcing different?
PEOs typically charge per employee, meaning they can scale easily as your business changes. On the other hand, HR outsourcing pricing is typically based on the specific services required, which can help save costs depending on your business size.
What are some benefits of HR outsourcing?
HR outsourcing can offer an array of benefits including improving efficiency, providing professional expertise, managing risks and ensuring compliance, offering specific cost savings, and improving overall employee services.
What advantages does a PEO offer to businesses?
PEOs offer businesses streamlined compliance, risk management, and benefits administration. They act as the de facto employer for tax purposes, allowing businesses to maintain control while decreasing liability.