In the United States, there are around 32.6 million businesses. Only 6.1 million of these businesses reported having employees, and 99.7% have fewer than 500 employees.
For the vast majority of small businesses, running a full HR and payroll department is simply not an option. If you’re in the 89% of businesses that have less than 20 employees, you’re operating on a shoestring budget and don’t have the high-level skills necessary to manage all of your HR tasks.
As a result, you may need the convenience of a Professional Employer Organization (PEO) or a human resources outsourcing (HRO) company. While PEOs are often used by small and medium businesses, HROs are popular among large corporations that need extra HR help. To find out which option is right for you, read on to learn more about PEOs vs. HROs.
What Is a PEO in HR?
A PEO serves as a co-employer and the Employer of Record, so they handle all of your payroll and employer tax responsibilities. In trade, you manage the day-to-day operational details of being the employer.
In practice, this means the PEO reports employment taxes under its own employer identification number (EIN). They run payroll each payday, calculate wage garnishments, remove FICA taxes, offer health insurance benefits, and provide low-cost workers’ compensation insurance.
While the PEO might take on many of your legal responsibilities, you’re still in charge of the workers each day. You can assign them to different teams, terminate their position, or train them for new roles.
Today, around 4.5 million workers are managed under the auspices of a PEO. Altogether, PEOs manage worksite wages valued at $305 billion.
Benefits & Drawbacks of PEO
Each state has different regulations about taxes, employment law, and HR issues. Working with a PEO means you can let the PEO handle all of the state-by-state compliance differences.
PEOs often have advanced recruitment and onboarding tools. Considering 68% of workers are more likely to stay with a company for at least three years if they have a good onboarding experience, it’s important to get this part of the hiring process right.
Although workers’ compensation isn’t required by every state, it’s a good idea to get it to protect your business from unexpected accidents.
When you work with a PEO, you can access more affordable benefits, such as health insurance and dental insurance. Besides ensuring your compliance with the Affordable Care Act (ACA) and other laws, these benefits can also help you attract and retain workers.
If you want to grow your business quickly, a PEO allows you to instantly scale your HR and payroll services without having to hire entirely new staff members.
The PEO is responsible for fielding many of your payroll and HR questions, which could lead to employee dissatisfaction if you have a major cultural mismatch.
Ultimately, using a PEO is going to decrease your control over your workers. As a co-employer, you’ll only be handling the day-to-day operations.
Depending on the PEO, you may be charged a flat rate or a percentage of your payroll. If you were previously using a bookkeeping app or having one of your workers handle payroll and HR, this may increase your costs.
What Is an HRO?
An HRO provider might offer similar services, but it is distinctly different from a PEO. With an HRO company, you are the employer of record and still retain all of your compliance obligations. The HRO’s job is simply to help you perform important HR functions.
HRO providers are popular among large corporations that want to outsource specific services. For example, an HRO company can be hired to handle your insurance benefits, workplace safety oversight, or tax compliance. HRO companies often handle the following services.
- Policy creation
- Professional development and training
- Tax administration
- HR compliance
- Risk management
- Benefits administration
- Payroll
- Health insurance
Most importantly, an HRO company will not be the employer of record or a co-employer. If you use an HRO for specific services, you still retain all of your legal obligations and requirements as the employer.
Because of their convenience and à la carte offerings, HRO companies are part of a growing industry. Today, the market for HROs is about $21.55 billion. By 2030, it’s expected to grow to $31.16 billion.
Benefits & Drawbacks of Using an HRO
Unlike a PEO, an HRO allows you to retain your control of workers. You remain the employer of record.
An HRO’s entire purpose is understanding important payroll, tax, and HR rules. By using an HRO, you can leverage their expertise.
Working with HROs can reduce your legal risks and ensure your company’s legal compliance.
An HRO’s entire job is handling HR and payroll tasks, so they can achieve a better level of efficiency. By outsourcing HR tasks, your organization can focus on its core business objectives.
In many cases, using an HRO can decrease your overall costs. Many companies are too small to justify a dedicated payroll or HR employee. If you aren’t large enough to have an entire payroll and HR department, you can use an HRO instead of prematurely devoting your budget to building an entire department.
Because you are still the employer of record, you are still liable for any compliance mistakes.
Depending on the provider you work with, there may be hidden costs involved. If you add any services in the future, the amount you spend will increase. Service creep can become a costly problem.
Sometimes, HRO companies have employees located overseas or in different states. This can lead to issues communicating with them during business hours.
When you work with an HRO provider, you’re relying on their company’s data security, which can vary significantly.
What Is the Difference Between an HRO and PEO?
If you’re trying to decide between a PEO vs. HRO, there are a few key differences to keep in mind.
| PEO | HRO | |
| Employer Setup | The PEO is a co-employer, so they share the responsibilities and liabilities of being the employer. | The HRO provides services and is not an employer. |
| Cost | Often, PEOs have a higher upfront cost. Between lower liability costs and the number of services automatically included, they may end up being the more affordable option as time goes on. | HROs often have the lowest upfront cost, but they can become more expensive as your company grows and you add services. |
| HR and Payroll Services | The PEO provides standard services, but you can always add more. | HROs allow you to choose as many or as few services as you want. |
| Risks | Your PEO shares in the risks of employment. | The HRO does not share in the risks of employment. |
| Benefits Flexibility | You generally have to offer the benefits the PEO chooses. | You have more flexibility over the benefits you offer workers. |
| Best for | Small and medium companies that need someone else to handle payroll and HR while they grow. | Large corporations that want to outsource specific services. |
Frequently Asked Questions on PEO vs. HRO
There are a few frequently asked questions about PEOs vs. HROs that can help you make your decision. For more information about how these employment models and services work, reach out to our PEO and HRO experts for help.
No, a PEO is not the same as a staffing agency. At a staffing agency, the employee is fully in the agency’s control. You have no control over whether the worker is terminated or not. Even if you choose not to work with the employee, the staffing agency can still keep them on payroll and hire them out to a different company.
In a PEO, the PEO and the company both share the burdens of employment. The PEO is a co-employer, so they become the employer of record while you handle the day-to-day operations.
With an HRO, your company remains the employer. The HRO is only used as an outsourced provider of specific services and benefits.
Written by
Courtney Pocock is a Copywriter & EOR/PEO Researcher at Employsome with 15+ years of experience writing for the HR, corporate, and financial sectors. She has a strong interest in global business expansion and Employer of Record / PEO topics, focusing on news that matters to business owners and decision-makers. Courtney covers industry updates, regulatory changes, and practical guides to help leaders navigate international hiring with confidence.
Our content is created for informational purposes only and is not intended to provide any legal, tax, accounting, or financial advice. Please obtain separate advice from industry-specific professionals who may better understand your business’s needs. Read our Editorial Guidelines for further information on how our content is created.
