PEO vs. Employee Leasing: Key Differences & When to Use

In 2024, there were 1.5 million fewer unemployed workers than job openings. Over the next decade, this worker shortage is only expected to worsen. In answer to this labor shortage, employers are being smarter about how they hire, train, and retain their existing workforce.

Key employment providers, like a Professional Employment Organization (PEO) and employee leasing companies, can help your business save on administrative costs and deal with HR issues more effectively. While there are many similarities between these two options, there is a fundamental difference in how the employee-employer relationship is set up. Because of this, it’s important to learn as much as possible about PEO vs. employee leasing to determine which option will work best for your company.

If you want to cut HR costs, employee leasing may be able to help. In essence, employee leasing is where an organization leases a worker from a staffing firm. The staffing agency handles all of the payroll, HR, and compliance tasks. In trade, your company pays the staffing agency for the employee’s labor and the added administration costs.

Years ago, employee leasing and PEO were used as interchangeable terms. Today, there are distinct differences between PEO and employee leasing organizations. 

The Advantages of Employee Leasing

As a business owner, there are a few key benefits to employee leasing. First, using employee leasing enables you to fill your company’s positions quickly. The staffing agency already has employees on staff, so you don’t have to interview or train the right worker. In some cases, the agency will even hire specialized experts in different fields, making it much easier to hire for hard-to-fill positions.

More importantly, using employee leasing means you can avoid the administrative burden of finding, interviewing, hiring, and training new employees. You don’t have to waste your time filling out a Form W-2 or Form I-9.

While there might be added costs involved, you can still hire the leased employee if you decide that you need them as a permanent part of the team. However, each staffing agency has different rules about the process and costs involved in doing this.

 

The Disadvantages of Employee Leasing

Although there are many benefits involved, there are also important drawbacks to employee leasing. The biggest problem is that the leasing company retains all control of the employee. This means that they get the tax breaks for employing them. 

Additionally, the leasing company is in charge of the worker after they leave your company. The employee can end up at a competitor using the same information and training, potentially harming your business.

Finally, this decision can affect your employee morale in a few ways. Your existing employees may not enjoy working with a revolving door of leased workers. Because your existing employee base is smaller, it may be more challenging for you to offer competitive, affordable benefits to your current employees.

Instead of using employee leasing, you can opt for a PEO. While PEOs remove some of your administrative burden, you get more control over the employee. Unlike employee leasing agencies, PEOs form a co-employer relationship. They handle your administrative duties, like completing HR forms, filling out W-2s, processing payroll, and administrating benefits. 

Then, you get to handle the day-to-day employer activities. For example, you’ll be in charge of hiring, firing, and promoting your workers.

The Advantages of PEOs

Using a PEO offers a few distinct benefits. Because a Professional Employment Organization is in charge of the HR and payroll compliance, it reduces your company’s risks and liability.

By letting someone else handle HR, payroll, and benefits administration, you save on administrative costs. Because you’re not devoting company hours to administration, you can focus on your core business.

PEOs are especially useful for small businesses that can’t afford a world-class HR team. When you work with a PEO, you can gain the best HR and payroll services without having to outfit an entire department.

 

The Disadvantages of PEOs

Although there are many benefits to using a PEO, there are also some PEO disadvantages you should be aware of. The largest drawback is that you lose control over your payroll and HR activities. If an employee has an issue with their paycheck, they have to go through a third party to get help.

Similarly, you have to rely on the PEO and its vendors to provide top-quality services. Because of this, the cost and quality of your benefits can vary significantly. By hiring a PEO, you lose control of your HR functions and benefits. 

Because of all of these reasons, a PEO can negatively impact your employee morale, culture, and satisfaction in the long run. However, you can mitigate these risks by carefully comparing PEOs to find the best one.

For a long time, people often used the terms PEO and employee leasing interchangeably. In reality, there are a few similarities and differences between employee leasing and PEOs. 

When To Use Employee Leasing

Employee leasing is a good option if you want to temporarily increase your workforce. For example, you may need to hire seasonal workers for just a few months. In this type of instance, handling all of the administrative paperwork and hiring process is more costly and inconvenient than turning to a staffing agency.

If you have a major project coming up, employee leasing may also be useful. This option allows you to quickly staff your company with specialized skills. Then, you won’t be responsible for the worker’s unemployment benefits or ongoing administrative costs once the project is complete.

 

When To Use a PEO

PEOs are ideal for small and medium businesses that don’t have the budget for an entire HR department. You are still the employer, but you share some of the responsibilities with the PEO. If you are looking for a medium- to long-term relationship with a worker, this is a good option. 

It’s also wise to use PEOs when you plan on expanding rapidly. Fast growth makes it difficult to adequately scale your payroll and HR departments. By using a PEO, you can instantly scale your workforce without hassling with all of the administrative and compliance obligations.

Finally, PEOs are great for organizations that want to boost employee retention. PEOs have a range of employee benefits available, which can help improve your retention rates and hiring processes.

While PEOs and employee leasing providers have different structures, there are as many differences within each provider type as there are between PEOs vs. employee leasing companies. Before you hire an employee leasing provider or PEO, there are a few questions you should ask to see if the organization will be the right fit for your company’s needs.

Questions To Ask Your PEO Provider

1. How many hours a week of HR services is the PEO willing to commit to your company?
2. Do they share your company’s core values?
3. Do they have your employees’ best interests at heart? 
4. Is the PEO able to help with training, onboarding, and performance management? 
5. What type of benefits does the PEO offer? How much do they cost? 
6. Is there a set contact for your company? Will you have to work with multiple points of contact? 
7. What technology and software integrations are available?
8. Do they offer retirement plans?
9. Are there any former clients you can use as a reference? 
10. What type of fee structure will you be charged? Are there any early cancellation fees if you decide the PEO isn’t right for you?

 

Questions To Ask an Employee Leasing Provider 

1. If everything goes well, how much would it cost to buy out the employee’s contract? 
2. Do they have testimonials or references from past employers? 
3. Does the employee leasing company have experience staffing businesses in your specific industry? 
4. What is the cost structure for their services? 
5. Are there add-on costs or hidden fees? 
6. How do they handle confidentiality, especially if the worker goes on to work at another company in your industry? 
7. What is their client retention rate? 
8. How do they handle onboarding new clients?
9. What are your specific obligations to the employee? What liabilities are you taking on?
10. How do they source and screen all of their candidates?

When it comes to employee leasing vs. PEOs, there are many similarities and differences to understand. The right choice depends on your business type, budget, and overall goals. Once you decide whether to hire a PEO or employee leasing provider, the next step is finding a specific organization that matches your unique needs.