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PEO vs. HRO: What’s the Difference?

Max Freedman
Max Freedman
Business News Daily Contributing Writer
Updated Dec 08, 2021

A PEO's co-employer agreement may seem more risky, but for some businesses, it's better than a standard HRO arrangement.

  • A PEO lowers your insurance plans through a co-employment agreement; an HRO company’s “a la carte” arrangement involves no plan discounts.
  • PEOs may appear more expensive, but since they lower your insurance premiums, they can cost less than HRO companies.
  • A PEO is better for most small businesses, though you may prefer an HRO company if you want to pay less for fewer HR services.
  • This article is for small business owners considering whether to choose a PEO or an HRO company for their HR outsourcing needs.

Although not all employees are required to provide health insurance, you may be wondering whether the increased employee satisfaction accompanying employer-sponsored healthcare is worth your premiums’ costs. This question becomes far less pressing if you choose a PEO over an HRO company for third-party HR services. While both options cost money, PEOs can lower many of your health insurance costs – and that’s not their only benefit over HRO companies. Learn more below.

What is a PEO?

A professional employer organization (PEO) is an HR outsourcing firm that acts as your co-employer. In this arrangement, your PEO shares all your business risk and obtains lower-premium health and workers’ compensation insurance plans. It also remits your business taxes under its own employer identification number (EIN) instead of yours. If your PEO’s state unemployment tax rate is lower than yours, you’ll be taxed less.

PEOs specialize in connecting small businesses like yours with health and business insurance plans you might otherwise struggle to afford. Your PEO should also handle payroll on your behalf, and you can add even more HR services to your contract if you so desire. Either way, since your PEO acts as your co-employer, it will handle all the time-consuming administrative tasks often associated with HR. For an example of a PEO, read our Oasis PEO review.

Although your PEO is your co-employer, it won’t have any power over how you run your business. Yes, it can step in for whatever HR needs you desire, but it can’t execute your actual work tasks for you. Even with your co-employer arrangement, you can continue to run your business exactly as you have been.

That said, it’s understandable to worry that a co-employer could overtake your business affairs. This outcome is highly unlikely, and it’s guaranteed not to happen if your PEO is certified by the IRS or Employer Services Assurance Corporation. PEOs with these certifications must adhere to rigid standards that make for trustworthy company affairs.

What is an HRO company?

A human resource outsourcing (HRO) company is a business that offers your company a suite of HR services from which you can pick and choose. For example, if you need someone to handle your payroll and health insurance but nothing else, you can contract an HRO company for just these needs. You’ll remain responsible for any HR concerns not specified in your contract, and this division of responsibility can prove advantageous for certain companies. For an example of an HRO service, read our Paychex HRO review.

What is the difference between a PEO and an HRO company?

While a PEO is your co-employer, an HRO company is just a third-party provider that you hire like any other firm. As your co-employer, a PEO sponsors your health insurance, workers’ comp and other types of business insurance. With an HRO company, you’ll just pay for whichever services you ask it to provide. Additionally, unlike an HRO service, a PEO will handle your company’s tax affairs under its own EIN instead of yours.

Key TakeawayFYI: A PEO offers and sponsors HR products and services through a co-employment agreement, whereas you’ll pay out of pocket for the services of whichever HRO company you choose.

PEO vs. HRO company comparison and table

To better understand how the PEO co-employment model compares with the standard third-party service arrangement of an HRO company, consider the below factors:

Setup

As your co-employer, a PEO enters an arrangement with you in which it takes on all the risks of your business. For example, in the event of a tax audit, you and your PEO are equally liable. With an HRO, it’s solely your responsibility to handle all IRS affairs during a tax audit, though you’ll need to obtain relevant documents from your HRO company.

Additionally, the standard third-party contract you sign with an HRO company allows you to add as few or as many HR services as you desire. HRO companies can advise you on legal compliance and organizational strategy without becoming your co-employer. PEO contracts focus more on shared risk and employment responsibilities rather than a consulting agreement.

HR services

Theoretically, PEOs and HRO companies can both offer as few or as many HR services as you desire. However, HRO companies are more widely associated with an “a la carte” model in which you can pick and choose what you want. That said, you can technically designate which HR services you want in your PEO contract.

A more obvious distinction is that PEOs are often higher quality. Since a PEO will sponsor your health insurance, workers’ comp and sometimes other business insurance, you may find yourself with more comprehensive plans that you couldn’t afford on your own. However, PEOs offer a narrow breadth of plans compared to HRO companies. Sure, you’ll pay more to obtain insurance plans through HRO companies, but you’ll have far more options.

Costs

PEOs often charge $150 to $200 per employee per month, whereas HRO companies usually cost less. Additionally, a PEO setup fee can cost thousands of dollars. However, with an HRO company, you’ll have more expensive insurance premiums, so the higher upfront costs of a PEO can sometimes mask lower overall costs.

Both PEOs and HRO companies may charge a flat fee per employee per month for their services. Some PEOs might go another route and charge a percentage of the total amount you pay your employees each pay cycle. In this model, you may also pay administrative fees that vary by employee.

Benefits flexibility

A PEO will offer your company its exclusive, rigid set of insurance plans only. Although these plans are often among the best around, you cannot customize them. You also won’t have a wide variety of plans to choose from, as you would with an HRO company. That said, the plan diversity of HRO companies doesn’t include the substantial premium savings found with PEOs.

So that you can more easily understand all of the considerations above, we’ve organized the key distinctions into a table for quick side-by-side comparison:

 PEOHRO
SetupCo-employment arrangement and attendant joint-risk burdenStandard third-party services agreement and no risk management
HR services offeredFundamental services, though you can add moreFlexibility to choose as few or as many as you want
CostMay be higher upfront but occasionally less expensive overallMay be lower upfront but occasionally more expensive overall
Benefits flexibilityInflexibleFlexible

Which should you choose?

PEOs often work with small and midsize businesses (SMBs), since their co-employment models entirely remove the time-consuming burden of HR from these thinly spread companies. SMBs may also benefit from the higher-quality benefits administration and plans they can access for less money through a PEO. 

Large companies often hire HRO companies instead of PEOs, since these companies are more likely to have a full-time HR staff. HRO companies can handle certain tasks these in-house staffers don’t cover, or they can help build strategies around appropriate organizational structures.

That said, some small business owners may use HRO companies to keep their costs low and to set up payroll and benefits only. However, HRO companies assume no risk and can leave you with plenty of tedious administrative work. A PEO may be the better choice overall for most small businesses. Find the right one for your needs with our best picks for PEO services. Whether excellent customer service or tailored industry HR is your primary concern, you’ll find the right PEO in no time.

Image Credit:

Paul_Bradbury / Getty Images

Max Freedman
Max Freedman
Business News Daily Contributing Writer
Max Freedman is a content writer who has written hundreds of articles about small business strategy and operations, with a focus on finance and HR topics. He's also published articles on payroll, small business funding, and content marketing. In addition to covering these business fundamentals, Max also writes about improving company culture, optimizing business social media pages, and choosing appropriate organizational structures for small businesses.