If you’re considering looking for outside help with human resources management and payroll for your SMB, chances are you’ll have come across both PEOs and HR outsourcing.
It can be difficult to tell exactly what’s included in each, and which best fits your needs.
If that sounds familiar, don’t worry. This guide will go through the differences between a PEO and human resources outsourcing — giving you all the information you need to make the best decision for your company.
Table of Contents
What is a PEO?
A PEO is a Professional Employer Organization. PEOs become your HR partners, taking responsibility for almost all of your HR, payroll, tax, and compliance needs while also providing a competitive workers’ compensation solution. They can have the ability to manage benefits packages and business insurance as well.
When PEOs talk about being partners, they’re not being hyperbolic. A PEO is considered a co-employer, meaning that they are jointly liable for employment-related activities of your company.
In broad terms, a PEO acts as an outsourced HR department for SMBs. They offer access to support, services, benefits, and resources that would otherwise be beyond the reach of most smaller employers.
What is human resources outsourcing?
Human resources outsourcing (HRO) is a less comprehensive, but often more bespoke, arrangement. An SMB contracts an HRO to fulfill specific HR tasks that are proving onerous.
Historically, HROs have been aimed primarily at larger organizations, but many providers are now working with SMBs to offer additional HR support. HROs offer targeted support for business owners or fledgling HR departments and can be a cost-effective way to free up time and simplify your HR management.
What are the key differences?
There are several key factors to consider when deciding whether to choose a PEO or HRO (or indeed to go it alone). Here are some of the most important ones.
Co-employment: How does it work?
Co-employment is one of the biggest differences between a PEO and an HRO. PEOs become a co-employer for your staff and HROs don’t. But what does that mean in practical terms for your business?
A co-employer is jointly liable with you for ensuring that your business is fully compliant with all aspects of employment law. This means that a PEO is fully accountable for their work. If you have any concerns or worries about compliance, this can be a strong reassurance.
Co-employment isn’t just about liability, though. It also affects financial issues such as your state unemployment tax rate (SUTR) and workers’ compensation policies. With co-employment, you are evaluated under your PEO’s (almost invariably much lower) SUTR rate. Your employees are included under your PEO’s master workers’ compensation policy. And, in many cases, this can lead to substantially lower overheads.
As part of assuming joint liability, PEOs will typically expect you to follow some of their policies and procedures. Although some SMBs may find this restrictive, others appreciate the time and cost-saving through not having to develop their own policies.
Cost: How do PEOs and HROs compare?
For the majority of companies, both PEOs and HROs offer great value for money. For smaller businesses in particular, outsourcing your human resources management can more than pay for itself. Freeing up your leadership team allows them to improve your offerings and find more clients, making outsourcing a valuable investment.
With an HRO, you can be very selective and outsource as much, or as little, as you want. This allows you to focus your resources where they will make the most difference. As your business grows, you may decide to hand over more responsibilities to your HRO as cost becomes less of an issue.
PEOs provide you with benefits packages and insurances. As larger organizations supporting a much greater workforce, they are able to pass on competitive pricing and generous packages. It’s important to factor these savings into your analysis of the cost of the different options.
What’s more, you can bundle up PEO services to suit your needs. Drop us a line at MartinoWest to find out more.
Flexibility: Will I have it and does it matter?
Outsourcing aspects of your human resources management may come with some loss of flexibility. It’s important to understand exactly where you might lose flexibility and to think honestly about whether that matters to you.
HROs are inherently more flexible than PEOs. You choose which aspects of HR management you hand over and which you remain solely responsible for. This kind of agreement is easy to change and an HRO will typically have little interest in how you run your business.
As mentioned previously, PEOs become jointly liable for compliance with employment law, meaning that they have a vested interest in ensuring that you are fully compliant. This will often mean that they require you to follow their policies on specific issues such as grievance procedures and risk management.
For some employers, this loss of flexibility appears unappealing at first glance. Others welcome the reassurance that they’re following approved policies that they can be sure are fully compliant. Remember that not all PEOs will operate in the same way, which is why it’s essential that you choose the right partner for you.
Make sure that you fully understand and are happy with any policies or procedures you are expected to follow. If requirements seem unnecessarily restrictive to you, consider an HRO or finding an alternative PEO.
How can I choose between a PEO and Human Resources Outsourcing?
Even once you understand the differences between a PEO and HRO, the choice isn’t always easy. Here are a series of questions that can help you decide which is right for you.
- Do I have staff ready to handle day-to-day HR tasks?
If you already have a small team ready to take over HR duties and they simply need a little support, you probably don’t need a full PEO. An HRO will be able to provide additional assistance, allowing your existing team to manage their workloads more effectively.
A word of warning though: if you’re considering adding HR duties onto existing staff, be aware that it may be more time-consuming than you expect. Ensure that you consider their time well-spent or what may feel like a cost-saving initiative will be, in fact, a costly mistake.
- Do I want to create a dedicated HR team soon?
Think about how you are expecting your business to grow over the next 12 months. How about the next 3 years? Do you envisage creating a dedicated HR team within that time frame?
If you’re thinking of building your own HR department imminently, you may benefit from a flexible arrangement where you can reclaim HR tasks as your budding team develops the capability to manage them. An HRO is ideal for this situation.
If creating your own HR team feels several years off, you may benefit more from working with a PEO. The policies and procedures your PEO partner will put in place can provide a model for your own procedures later — when you are ready to go it alone. It also allows your entire company to develop good habits and expectations with regard to HR management, setting your future HR team up for success.
Not thinking about an in-house HR team at any point in the future? Then consider how much of your time you are willing to devote to HR management in the long term. If you’re happy handling HR issues for the foreseeable future, an HRO will probably be an appealing option. If you’d prefer to forget about HR tasks, building a trusting relationship with a PEO partner can take this completely off your plate.
- Do I have the expertise to keep up with compliance?
SMB compliance is a serious matter — and requirements change regularly. If you’re sure that you have the time and expertise to keep abreast of changing state and federal regulations, then an HRO might be the right choice for you. It does help to have experience in reading legal documents and regulations to ensure that you are correctly interpreting the rules.
If you’re not sure you have the time (or, if we’re honest, the inclination) to scour the rules and regulations, a PEO is probably a better option. Your PEO partner will be responsible for keeping you updated and they’ll make sure your policies tick all the boxes too.
- Am I sure which HR tasks are best to outsource?
If you have previous experience with HR, you probably know which tasks you find time-consuming or frustrating. If this is the case, an HRO will allow you to focus your attention on areas of HR that interest you — and you can outsource the rest.
For those with less experience, it can be tricky to know which aspects of HR outsourcing offer the best value for money and which you could keep within your control. You probably know that payroll is something you’d be happy to hand over, but what about the rest? If you don’t have a strong interest in HR management, you might be better off with a PEO.
- How much can I afford?
This is a key question for any form of outsourcing — and it’s important to consider both the costs and what you get for your money.
If your priority is to find the lowest cost option in the short term, you will probably want an HRO. A good HRO will allow you to select only the options that make a significant difference to your business at the lowest possible outlay.
If your priority is growing your company and recruiting top-quality talent, you may find that a PEO is a more cost-effective option. A good PEO can often substantially lower the cost of your benefits packages, even while increasing the benefits included. It will also free up more of your time to focus on growing your business.
Most SMBs will probably find themselves somewhere in between these two extremes. If that’s you, then it might be time to break out the spreadsheets! Track the time you spend on HR tasks in a typical month and incorporate this into your calculations. Rather than assigning an hourly rate to your time, consider how much value you could bring to your business if you had that many additional hours available. For most SMBs doing this exercise, a PEO is a more cost-effective choice.
- Can I find a partner I can trust?
So far, we’ve been discussing the best options for your SMB as if all PEOs and HROs were equal. But this is absolutely not the case. Often, finding the right partner for you is at least as important as choosing which kind of partner you want.
If you are struggling to find a partner you can trust, it’s important to look at certifications and industry body memberships. Some PEOs are certified by the IRS and are accredited by ESAC. This can offer you a greater level of reassurance in your PEO partner. Others come with the backing of other trusted partners, like the team here at MartinoWest.
At MartinoWest, we’re experts in finding the perfect PEO partner for you. As a PEO-focused brokerage, we understand the PEO market better than anyone else. We take the time to understand your business and can set you up with a PEO bundle that offers everything you need — and nothing that you don’t. We focus on your priorities to ensure that you get the support you need at a price that’s right for you.
If you’re ready to let go of payroll-related headaches, have more time to focus on your business, and offer your staff a great benefits package, contact us today for a consultation.