The Differences Between a PEO and HRO

Managing human resources is a necessary function for any company that has employees, regardless of the size. However, hiring an HR manager or designing an HR department does not make sense for some companies. When looking to outsource human resources functions, companies have two main options-to go with a PEO or a HRO form.

What is a PEO?

A PEO is a Professional Employer Organizer, basically a firm that has bundled services that are performed for an organization. Services include benefits, payroll, workers’ compensation, recruiting, and risk management. When a company works with a PEO, the PEO hires the employees and becomes the employer that is on record for tax purposes, forming a co-employment situation.

What is HRO?

HRO stands for Human Resources Outsourcing and is an independent company that provides some or all of a business’s HR needs. A HRO firm may provide basic HR services or may offer detailed and strategic HR services, so it is important for a company to research several HRO companies thoroughly before making a selection. Some HRO firms allow companies to bundle services or select services to scale with the company’s needs and pay for services accordingly.

HRO versus PEO

A HRO firm offers the advantage of being more flexible, allowing companies to pick and choose which services will be outsourced and which will be managed in-house. A PEO, on the other hand, takes care of all HR functions, which may be an advantage or a disadvantage depending on the organizational needs. Smaller or growing businesses may find it a relief to have all HR functions taken care of so that greater attention can be focused on revenue-bearing tasks.

A PEO is often less service oriented than a HRO, with as many as 30 clients assigned to each employee. A HRO organization generally acts as a partner with the company, providing advice and guidance on compliance issues and organizational strategy. Companies often find that having a knowledgeable HRO representative assisting with these issues is helpful.

Brand and Nature of Business

When a company enters into an agreement with a PEO, the company’s brand name and employee are henceforth facets of the PEO and not the original company. This can make it difficult for a growing company to establish brand recognition and earn the loyalty of employees. It can also be very difficult to leave a PEO, as all employee data is owned by the PEO after an agreement has been entered into.

A HRO firm remains a separate entity from a business, so the business can continue to grow and develop without any issue. HRO firms will generally accommodate growth by offering the option to change the service agreement to accommodate new needs. HRO firms also do not interfere or in any way affect the brand loyalty or recognition of a business.

Which One is Right for Your Company?

Companies that are very new or very small may benefit from working with a PEO, as the PEO can save the company time and effort while making sure that all essential HR functions are handled. PEOs may also be able to offer company employees more affordable health insurance and 401K plans than would otherwise be possible.

Companies that have been around longer or are larger may benefit from working with a HRO firm. Working with a HRO firm will allow the company to completely retain its identity and all decided upon HR functions, while receiving assistance with the desired tasks.

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