If you’re considering outsourcing aspects of your HR functions, it’s most likely that you’ve come across the acronyms PEO and HRO.
PEO stands for professional employer organisation and HRO, human resource outsourcer. In many ways, they are similar, but not entirely. Both service providers provide HR support and administrative relief, allowing business leaders more time to focus on revenue-generating initiatives.
They’re structured to either work in conjunction with your company’s internal human resources department if you have one or support your human resource needs if you don’t have an HR department in-house.
However, as stated already, PEOs and HROs are not the same. Both service providers have fundamental differences that must be thoroughly understood to enable you to choose which of them will best serve your organisation.
This guide explains the essential differences between both types of service. We hope that it helps you choose what you need to help your business thrive.
Let’s get started.
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What is a Professional Employer Organisation (PEO)?
As defined by the National Association of Professional Employer Organisations (NAPEO),
“A professional employer organisation (PEO) provides comprehensive HR solutions for small and mid-size businesses. Payroll, benefits, HR, tax administration, and regulatory compliance assistance are some of the many services PEO companies provide to growing businesses…”
Partnering with PEO companies allows businesses of all sizes to outsource a significant part of their human resource functions, share employment liability, and gain economies of scale to bring big business benefits package to employees.
In this arrangement, the PEO becomes an extension of your business and works with your management team to resolve complex employee-related matters.
Workforce Africa is a PEO. Under our mother company Workforce Group, we’ve been a PEO since 2004. In addition to being certified by the primary governing bodies in the African countries we work in, Workforce Africa is also a member of NAPEO.
Businesses that engage the services of a good PEO enter a profoundly supportive and healthy partnership in every sense of the word.
A PEO is a business partner that provides specialised HR support and shares some liability with you for your company’s employment decisions and actions. This is why a partnership with a PEO is also known as a co-employment arrangement. The PEO becomes a co-employer of your employees.
According to the National Association of PEOs, co-employment is “a contractual allocation and sharing of certain employer responsibilities between the PEO and the client.”
For more information on how co-employment works, read our article on all you need to know about co-employment.
Common Misconceptions About PEOs Resolved
At this point, it’s essential to address a significant worry that business leaders frequently express, the concern of control.
Many business leaders and owners assume that turning over their human resources administration to a PEO means they’ll lose control of their company.
Though a PEO becomes a co-employer with your organisation, it DOES NOT contend with your role as the primary employer. Instead, you maintain control of your core business, and the PEO provides you with the human resource services your business requests.
For example, if you need to terminate an employee, a PEO can help you ensure the process is handled professionally and correctly to avoid legal problems. It does not get in the way of your business in any way whatsoever.
It is also essential to state that hiring a PEO doesn’t eliminate the need for your existing HR staff. On the contrary, many companies find that a PEO helps their existing staff get more done, supported by much-needed expertise so that the business can grow without hiring additional HR employees.
PEOs perform the following HR tasks:
- Recruitment and Onboarding
- Payroll processing and tax compliance
- Benefit plans and administration
- Regulatory compliance
- HR management
- Insurance plans
- Workers’ compensation
- Training and development
- Risk management and workplace safety
Depending on the contract or service agreement, a PEO may also provide individual coaching for managers and employee relations support, salary surveys, succession planning and other strategic HR functions.
What is Human Resources Outsourcing?
As defined by the Society for Human Resources Management (SHRM),
Human Resources Outsourcing (HRO) is a contractual agreement between an employer and a third-party provider whereby the employer transfers the management of and responsibility for certain HR functions to the external provider.
Depending on their unique needs, businesses can pick and choose the responsibilities of an HRO. These responsibilities can include payroll, benefits management, recruitment, and administrative functions such as creating employee handbooks.
In addition, if needed, HROs provide on-call support and help with insurance services, coaching and training, and onboarding.
However, unlike a PEO, an HRO doesn’t become the co-employer of a business’s employees. Instead, an HRO fulfils specific roles for businesses as a third-party provider.
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PEO vs HRO: How to Choose
To help you decide as objectively as possible how to outsource your HR administration, here’s a guide to help you make the right decision:
1. HRO vs PEO = Vendor vs Trusted partner
As explained, although both types of companies perform human resources functions on-demand, HROs are outsourced and completely independent from your business. In contrast, PEOs function with your company in a co-employment arrangement.
While a PEO works with your organisation as a co-employer, it bears repeating that the HRO works with you as a vendor.
One of the core differences between a PEO vs HRO is that although an HRO offers on-demand, specific HR services like a PEO, HROs do not assume any employer-related liabilities or obligations. Thus, the HRO can provide a full scope of functions for your company, but it does it as a third party.
So, choosing between PEO vs HRO is essentially a question of choosing a vendor or a trusted advisor.
It boils down to what your business needs.
2. What does your business need?
What HR functions weigh you down the most that you would like to transfer to a skilled partner?
Here is what we advise: if you have an in-house HR team, call your team together, and get everyone to thoroughly highlight what they do that improves the business’s revenue.
Every time-consuming HR function (payroll inclusive) that does not directly contribute to the bottom line should be outsourced immediately to free up time for more money-making activities.
After you identify and list the activities you would like to offload, use that list to see how the solutions you’re considering line up with your needs.
For example, if you need someone to handle one aspect of HR because your team can take care of other areas without much stress, you might prefer to have an HRO.
However, if you don’t have a dedicated HR team and want help with the burdens of HR management, payroll, compliance, and benefits, a PEO like Workforce Africa would be your best bet.
3. Carefully assess the credentials of the PEO or HRO of your interest
Have you decided on a PEO? If yes, great. Next question: what are their credentials? Is the PEO duly certified?
If you have decided on an HRO, check to see if they are part of governing bodies in charge of certifying HROs.
In the long run, whether you choose an HRO vs PEO, you’re paying to have a partner, so find out how qualified they are before you invest.
4. Do you have the time and resources to handle the HR work yourself?
Are you taking time away from your core business competencies to deal with HR, payroll, benefits selection and administration, regulation and compliance issues, onboarding, and training?
If your answer is yes, a PEO is the best choice for you. They’ll handle all these tasks on your behalf so you can get back to running your business.
But if you have the time and do not mind handling your HR work yourself, except for selected functions you’d wish to outsource, then perhaps an HRO is a good choice for your company.
5. Are you competent and confident with handling compliance-related issues?
If yes, an HRO is perfect for your business. When you work with an HRO, all your compliance issues rest squarely on you.
Conversely, if you’re sure that you can’t handle compliance on your own, a PEO is a better bet. Remember that in a co-employment situation, the risk is shared between the PEO and your company. Similarly, a PEO and the client share specific responsibilities, especially around employer compliance.
6. Does your business need strategic HR support?
In addition to tactical HR expertise, the best PEOs can equally provide strategic HR support.
In other words, they can provide support and guidance to help you make decisions more strategically. Good strategy execution always translates to improved customer service, increased revenue, and achievement of other business goals.
In comparison, most HROs may only offer assistance in the tactical aspects of your HR administration (e.g., payroll processing, time and attendance, et cetera).
To sum it up,
Investing time to find the right HR outsourcing company earns the right to be categorised as an activity that can potentially improve your business’s bottom line.
This is because when your business finds the right HR outsourcing partner, the benefit that can arise from that relationship will improve your company’s profitability.