According to a survey in 2021, more than half of HR departments used an outsourcing firm for their health benefits and payroll processing.
More and more companies are turning to professional employer organizations (PEOs) or human resources outsourcing (HRO) firms to manage their HR tasks. But how do you choose the right one for your business? The key is not only understanding the differences between the two but also evaluating your business needs.
Keep reading to learn about the differences between HROs vs. PEOs so you can make the best decision possible for your business!
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What Is Human Resources Outsourcing?
A human resource outsourcing company is a business that offers a suite of HR services that you can pick and choose from. The role of an HRO is to help your business manage human resource responsibilities so you don’t have to hire and maintain as many HR staff.
These independent companies provide anything from essential HR services to more detailed services like administrative support. Typical services an HRO offers include:
- Benefits administration
- Employee recruitment and onboarding
- Risk management and compliance
- Payroll and tax administration
- Create workplace policies
- Oversee workplace safety
- Software solutions for employees
You’ll find some HR companies bundle their services together in a specific way to meet your business needs. While other HROs only offer separate services that you’ll have to purchase individually.
You’ll sign a contract service agreement with an HRO, and fees can range from $50 to over $2,000 monthly, depending on the services you need. You also might have startup fees and administrative fees.
Benefits of Using an HRO
There are specific advantages of outsourcing your HR functions you’ll need to consider before making your decision. The first main advantage is using an HRO will ensure that your business is in compliance.
Remember, there is numerous local, state, and federal regulations you have to consider. There is a lot to keep track of, from the Fair Labor Standards Act to the Retirement Income Security Act. This is also the main reason many businesses turn to these companies.
HR outsourcing also improves your employee experience overall. This is because HRO companies provide many different software solutions that provide easy access to payroll and benefits.
HRO companies also reduce your costs by saving you significant money in the long run. In the US, an HR manager can earn between $99,000 and $126,000 a year, depending on their experience. You’ll also have to pay for benefits, vacation time, and continuing education to keep current on new laws and regulations.
HRO companies allow you to keep fewer HR employees on staff overall.
What Are Professional Employer Organizations?
A professional employer organizer or PEO is a firm you can outsource your HR needs to. However, a PEO also acts as your co-employer. A PEO partnership essentially means they become a statutory employer or co-employer.
This means the PEO you use will file your payroll taxes under their own EIN (federal employer identification number). This partnership doesn’t change your day-to-day business operations because you’ll be able to keep any responsibilities you want.
Instead, it shifts the responsibility of payroll taxes and tax withholdings onto the PEO. It also puts any tax risks and liability onto the PEO, not your business.
PEOs provide many services, which include:
- Payroll processing
- Workers’ comp administration
- Helping with labor and employment laws
- Filing taxes
- Assisting with employee onboarding and training
PEOs also provide health insurance plan options. With PEO health insurance options, your employees can access the same health plans the PEO offers to all the businesses they work with. Since they work with larger companies, they can access a broader range of health benefits.
As a result, employees will often have access to plans that are usually too expensive for most small or medium-sized businesses to be able to offer. On the other hand, when you choose a PEO with a particular health insurance plan, you’re stuck with that plan and won’t be able to change any options.
You’ll sign a client service agreement with a PEO which outlines their responsibilities. Typically, a PEO either charges a fixed monthly fee for each employee or a percentage of all employee wages.
To learn more about PEOs, you can click here for further information.
Benefits of a PEO
PEOs offer your employees a range of high-quality and affordable benefits that you wouldn’t have access to otherwise. These benefits include:
- Worksite benefits
- Healthcare plans
- Mental health support
- Retirement plans
- Life insurance
- Disability insurance
PEO companies also help you to save money on benefits long-term because they can negotiate better rates for benefits across the board.
They’ll also help you with payroll, labor, and benefits compliance. Finally, a PEO will save your business a lot of time and money. They also take the burden of taxes and compliance issues off your table. This frees you up to focus on other aspects of your business.
PEO vs. HRO
The main difference in a PEO and HRO is that a PEO is your co-employer. In contrast, an HRO company is a third-party employer you hire, like any other type of firm you might outsource business too.
Remember, since a PEO is your co-employer, they handle all your tax affairs under their own EIN and sponsor all your insurance needs. An HRO only handles the services you ask them to provide, and you’ll also be responsible for managing your own tax affairs.
Both PEOs and HROs typically offer as many services as you desire, but HRO is more of an “a la carte” type of company because you can pick and choose what you want.
PEOs usually work best for small to midsize businesses that don’t employ regular HR staff or have the time to deal with administrative tasks.
Larger companies typically use HROs since they likely have an HR team on staff that can handle some of the work on their own. This way, larger companies can save money by only outsourcing what they need to and have their current staff do the rest.
Knowing the Difference Between PEO vs. HRO
Now that you know the difference between professional employer organizations and human resources outsourcing, you’ll be better able to make a choice that meets your business needs.
Make sure you sit down and write a list of your company goals, needs, and budget to help make your decision.
If you’re ready to learn more business tips, check out the rest of our blog today!