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Updated Mar 25, 2024

PEO vs. HRO: What’s the Difference?

Both HR outsourcing options can help small businesses, but your needs will determine the best fit.

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Max Freedman, Business Operations Insider and Senior Analyst
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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Although not all employers are required to provide health insurance, you may wonder whether the increased employee satisfaction accompanying employer-sponsored healthcare is worth the cost of premiums. 

This question becomes far less pressing if you choose a professional employer organization (PEO) rather than a human resources outsourcing (HRO) company for third-party HR services. Although both options cost money, PEOs can lower many of your health insurance costs, and that’s not their only benefit. 

However, HRO has advantages as well. Your business’s specific needs will determine which option is better for you. Learn more below.

What is a PEO?

A PEO is an HR outsourcing firm that acts as your co-employer. In this arrangement, your PEO shares all of your business risks 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 with health and business insurance plans that you might otherwise struggle to afford. Your PEO can also handle payroll on your behalf, and you can add even more HR services to your contract if you so desire. Because your PEO acts as your co-employer, it will handle the time-consuming administrative tasks often associated with HR. For an example of a PEO, read our Paychex PEO review.

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

That said, it’s understandable to worry that a co-employer could take over 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 Corp. PEOs with these certifications must adhere to rigid standards that ensure trustworthy company affairs.

What is an HRO company?

An HRO company is a business that offers companies a selection of HR services. For example, if you only need someone to handle your payroll and health insurance, you can use an HR outsourcing company for those specific needs. You’ll remain responsible for any HR concerns that are not specified in your contract. This division of responsibility can prove advantageous for some companies. For an example of an HRO service, read our Paychex HRO review.

Beyond payroll and health insurance, HRO companies typically offer services such as tax and benefits administration, workplace safety oversight and policy creation. Risk and HR compliance management, employee hiring and onboarding, and professional development and training are also standard HRO services. Basically, if you’d typically hire an HR employee for something but you’d rather outsource it, an HRO can cover it.

Notably, because an HRO won’t act as your co-employer, your relationship with it has no bearing on your perceived company size among benefits providers. As such, unlike with a PEO, the less-expensive health insurance plans that are typically available for larger companies might not be accessible through an HRO. 

Of course, you can still get excellent health insurance (plus other benefits) through an HRO provider, but the plans may be more expensive than those offered through a PEO.

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

A PEO is your co-employer, while an HRO company is a third-party provider that you hire to outsource HR functions. As your co-employer, a PEO sponsors your health insurance, workers’ comp and other types of business insurance. With an HRO company, you’ll 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.

FYIDid you know
A PEO offers and sponsors HR products and services through a co-employment agreement, whereas you pay out of pocket to outsource HR functions to an HRO company.

PEO vs. HRO company comparison 

 

PEO

HRO

Setup

Co-employment arrangement and attendant joint-risk burden

Standard third-party services agreement and no risk management

HR services offered

Fundamental services, though you can add more

Flexibility to choose as few or as many as you want

Cost

May be higher upfront but occasionally less expensive overall

May be lower upfront but occasionally more expensive overall

Benefits flexibility

Inflexible

Flexible

To get a better understanding of how the PEO co-employment model compares with the standard third-party service arrangement of an HRO company, consider the following factors.

Setup

As your co-employer, a PEO takes on all of your business risks. For example, in the event of a tax audit, you and your PEO are equally liable. With an HRO provider, 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. An HRO company can advise you on legal compliance and organizational strategy without becoming your co-employer. PEO contracts focus more on risk management and shared employment responsibilities than on consulting agreements.

HR services

Theoretically, both PEOs and HRO companies can 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 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. Because a PEO will sponsor your health insurance, workers’ comp and sometimes other business insurance, you may have access to comprehensive plans that you couldn’t afford on your own. However, PEOs offer a narrower breadth of plans than HRO companies do. Sure, you’ll pay more to obtain insurance plans through HRO companies, but you’ll have far more options.

Costs

PEOs often charge $40 to $160 per employee per month or between 3 percent and 12 percent of your monthly payroll. 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. Some PEOs may instead charge a percentage of the total amount you pay your employees each pay cycle. In this model, you also may pay administrative fees that vary by employee.

Benefits flexibility

A PEO will limit you to its exclusive, rigid set of insurance plans. Although these plans are often among the best around, you cannot customize them. You also won’t have as many 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.

Did You Know?Did you know
When you use a PEO to offer health insurance, you'll likely receive better benefits and rates. The PEO negotiates on behalf of its entire client base to access rates that are typically reserved for very large companies.

Should you choose a PEO or an HRO?

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

Large businesses often hire HRO companies instead of PEOs because they’re more likely to have a full-time human resources employee or HR staff. HRO companies can handle certain tasks that 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 set up payroll and benefits only. However, HRO companies assume no risk and can leave you with plenty of tedious administrative work. Overall, a PEO may be the better choice for most small businesses.

The best PEOs and HROs

Ready to find the best HR partner for your needs? Consider the following PEOs and HRO companies.

The best PEO providers

The best PEO services can provide flexible and robust HR offerings. We recommend the following vendors for PEO services:

  • Insperity: Through Insperity’s PEO services, you can arrange for specialists to conduct on-site safety audits. You can also schedule anti-harassment training sessions for your employees and work with Insperity to create your company’s policies. We especially like that Insperity will contact you when there are crucial employment law changes. Explore what you get with this co-employer in our Insperity PEO review.
  • TriNet: It’s surprisingly rare for PEO providers to offer services tailored to specific industries, but TriNet does precisely that. The company serves both low-regulation industries and highly regulated industries such as healthcare and finance. It also knows how to navigate compliance for manufacturing and supply chain concerns. Learn more in our TriNet PEO review.
  • Rippling: Signing up for HR support through Rippling doesn’t permanently commit you to a PEO. Instead, Rippling makes it especially easy to transition from PEO services to your own in-house HR team because the company also offers high-quality HR software. Discover what else you get with Rippling in our Rippling PEO review.

The best HRO providers

For lower monthly costs than a PEO, go with one of the best HR outsourcing companies, such as these providers:

  • BambooHR: The provider of this popular HR software also offers HRO services for document management, hiring and onboarding. You can also hire BambooHR to oversee your time tracking and performance management. Learn more about this provider’s offerings in our BambooHR HRO review.
  • Bambee HR: Not to be confused with the very similarly named BambooHR, Bambee HR offers HRO services that are designed to support new and small businesses. You can work with Bambee to write your first-ever employment policies and HR procedures. It’s also easy to sign up for and administer employee benefits with Bambee’s HRO services. Explore what else Bambee offers in our Bambee HRO review.
  • Gusto: This brand is well known for combining state-of-the-art payroll software with built-in HR services. In fact, Gusto’s HRO team can cover your entire recruitment process, from posting jobs to delivering job offer letters. You’ll also have quick access to Gusto’s in-house HR experts for help with anything else you need. Check out our Gusto HR software review to learn all about this vendor.
TipTip
If you prefer an in-house HR solution, the best HR software can help ensure HR compliance and best practices for human capital management.

HROs and PEOs are the way to go

Many small business owners find that using an HRO or a PEO is easier than having an in-house HR team. Which option is the better substitute, however, depends on your needs and budget. At the same time, many providers offer both PEO and HRO services. If you try one service but wind up thinking you’d prefer the other, you can always make a change. 

author image
Max Freedman, Business Operations Insider and Senior Analyst
Max Freedman has spent nearly a decade providing entrepreneurs and business operators with actionable advice they can use to launch and grow their businesses. Max has direct experience helping run a small business, performs hands-on reviews and has real-world experience with the categories he covers, such as accounting software and digital payroll solutions, as well as leading small business lenders and employee retirement providers. Max has written hundreds of articles for Business News Daily on a range of valuable topics, including small business funding, time and attendance, marketing and human resources.
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