PEO vs. HRO Explained: Key Benefits, Costs, and Use Cases

People are a company’s most valuable asset, and supporting them in their roles, benefits, and payroll affects employee retention.

However, the challenges of managing your teams multiply once different countries, tax regulations, labor laws, and compliance risks are introduced.

There are two main services you can turn to for help—professional employer organizations (PEOs) and human resource outsourcing (HROs). Both services support businesses by managing HR administration, payroll and taxes, benefits, and compliance risk management, but they offer distinct advantages depending on your business size and goals.

In this blog, we’ll break down the main differences, service offerings, benefits, use cases, and costs for PEOs vs. HROs so that you can choose the best one for your business.

PEO vs. HRO: What are the main differences?

The main differences between PEOs and HROs are in regards to setup, liability, service model, health insurance benefits, and cost.

PEOs partner with businesses through a co-employment arrangement while HROs act as an external vendor that doesn’t take on any liability for businesses.

The breadth and flexibility of the services PEOs and HROs provide also affect how expensive each option is and the perks that businesses can expect.

In the table below, we’ve summarized key differences at a high level. Keep reading to dive deeper into the nuances of PEOs and HROs.

What is a PEO?

A professional employer organization (PEO) is a company that helps businesses manage HR, payroll, benefits, and compliance in the US through a co-employment arrangement. This means that businesses can offload administrative tasks to PEOs while maintaining control over their core operations and people. The PEO becomes the employer of record for tax and benefits purposes, allowing businesses to limit their liability and focus more on strategy and scalability.

What services do PEOs provide?

PEOs offer expertise and assistance with HR and payroll tasks, taking on many of the administrative and compliance responsibilities that can overwhelm growing businesses. PEOs typically offer bundled services, which provides businesses with a strong, all-in-one option. Their core services typically include:

• Payroll and tax administration: PEOs manage payroll end-to-end, ensuring employees are paid accurately and on time. They also handle tax withholdings, filings, and year-end reporting on a state, federal, and local level

• Access to high-quality benefits: Through a PEO, businesses can offer employees competitive health insurance, retirement plans, and other perks that are usually only available to larger companies, all at a more affordable price

• HR support: From creating employee handbooks to managing onboarding, benefits enrollment, performance reviews, and terminations, PEOs provide essential HR expertise and support

• Compliance and risk management: PEOs ensure your business stays updated and compliant with regulations across the US, reducing employment liability as a result

• Workers’ compensation programs: PEOs provide access to workers’ compensation coverage and assist with claims management

• Recruitment services: Many PEOs offer guidance on hiring practices, job postings, and thorough background checks to help businesses attract and retain top talent

Key benefits of partnering with a PEO

One of the biggest advantages of working with a PEO is the reduction of liability and risk. With a PEO acting as the employer of record for tax and benefits purposes, businesses can rest easier knowing they’re less likely to incur fines, penalties, or costly legal issues.

PEOs also make it easier for companies to scale with confidence. Whether you’re a small business or a larger enterprise, a PEO provides the infrastructure to manage compliance, payroll, and hiring without overwhelming internal teams.

Another key benefit is lower costs and greater efficiency. By streamlining HR processes and centralizing administrative tasks, PEOs free up valuable time and resources. This allows business leaders to focus more on strategy and innovation rather than time-consuming, manual work.

Finally, PEOs help improve employee retention and satisfaction. Small and mid-sized businesses gain access to health insurance, retirement plans, and other benefits typically reserved for larger employers. Offering these competitive perks not only helps attract top talent but also ensures current employees feel supported, leading to stronger long-term retention.

When should you use a PEO?

PEO services are typically best for SMBs who don’t have extensive HR and payroll departments to support rapidly growing teams and operations. Through the co-employment arrangement, SMBs also benefit from decreased liability and access to big-company benefit plans at more affordable prices.

International businesses who need support with managing teams in the US or need help with expanding into the US market also benefit from PEO services. Regulations vary across the 50 states, and they’re constantly changing. Partnering with a PEO ensures that your business growth isn’t compromised by non-compliance risks.

What is an HRO?

A human resource outsourcing (HRO) company is an external vendor that provides businesses with HR, payroll, and benefits administration services. In contrast to PEOs, HROs don’t partner with businesses through co-employment arrangements, meaning the client company retains full liability for maintaining compliance with payroll, taxes, and HR administration.

What services do HROs provide?

HROs offer a selection of HR and payroll services that companies can pick and choose from. This offers more flexibility if you already have HR resources in place and just need support in specific areas. Key services that HROs provide include:

• Payroll and tax administration: HROs help businesses set up payroll for new hires, manage payroll calculations and deductions, and ensure tax compliance with federal, state, and local laws

• Healthcare and benefits: HROs offer access to competitive benefits packages, manage open enrollment processes, and determine employee eligibility for various insurance programs

• Talent acquisition: Get help with creating job descriptions, sourcing and interviewing candidates, managing application tracking systems, and streamlining onboarding

• Policy and workforce management: Offload tasks like creating and updating policies, managing your HRIS, answering employee questions, and securing sensitive payroll data

• Employee development: Implement or update employee training programs, performance review processes, and reward systems in partnership with an HRO

• Data-driven HR insights: HROs help businesses monitor HR data to make informed decisions in recruiting, hiring, and managing employee workload

Key benefits of partnering with an HRO

Partnering with an HRO offers similar benefits as PEOs. By outsourcing HR tasks to external experts, you can improve your payroll operations and HR processes without overwhelming your current teams or distracting from core business initiatives. This leads to increased efficiency, better scalability, compliance assurance, and a more positive employee experience.

The main difference between an HRO’s and PEO’s benefits relates to flexibility. While PEOs offer more comprehensive, bundled services, HROs offer their services a la carte, allowing businesses to choose specific services and the extent at which they’re needed.

For example, a business that already has an extensive HR team and workflows may just need extra help with managing workplace conflict. An HRO could help the business manage the conflict while the business’ core HR team focuses on other tasks like hiring, onboarding, and employee training. In this case, an HRO could be especially helpful since they would have reduced bias when resolving issues as an external vendor.

When should you use an HRO?

The flexibility of HRO services makes it a good resource for businesses ranging from startups to larger enterprises. The decision you make comes down to your business goals.

For startups and SMBs who have specific HR tasks that are time-consuming or need extra expertise, partnering with an HRO would help save time and establish more efficient processes. Since smaller businesses typically experience rapid growth and change while building their business foundations, the flexibility of HRO services is especially beneficial.

For larger businesses and enterprises who already have comprehensive HR and payroll teams, onboarding an HRO to fill in gaps can help businesses stay compliant and save time without causing disruption to existing workflows and teams.

Key considerations for deciding between a PEO and HRO

When deciding between a PEO and HRO for your business, some key factors to consider include the level of liability, the scope of your HR needs, your existing staff, pricing, and benefits and healthcare options.

Level of liability and control

Consider what level of liability and control you are comfortable with as you evaluate PEOs and HROs. PEOs take on liability for tax and insurance purposes through co-employment. While businesses are not fully offloading all liability through a PEO, the overall compliance risk does decrease.

HROs partner with businesses as an external vendor without any shared liability, which gives businesses full control and responsibility. The right choice for your business depends on your needs and goals.

Scope of your HR needs

PEOs and HROs offer similar services but in different packages. If you’re in need of a full, all-in-one suite of HR and payroll services along with access to Fortune 500-level benefits, a PEO may be the best choice for you.

However, if you only have specific HR needs that you need support for, the flexibility to pick and choose services from HROs is a strategic choice that could keep costs low while still increasing efficiency.

Taking time to evaluate the scope of your HR needs will help you gain clarity on which type of service will benefit your business the most.

Pricing and budget

PEOs typically have a higher upfront cost, but the value from reduced insurance premiums and shared liability makes it a worthwhile long-term solution. Pricing for PEOs is usually calculated as a percentage of payroll or on a per employee per month basis.

The cost of HROs depends on the amount of services you choose, which can result in more affordable prices if you only need a few services. But if you’re in need of a large scope of services, the costs can be on par with a PEO.

Benefits and healthcare options

If offering employees high-quality benefits is a priority for your business, PEOs are your best bet. By pooling employees from all their clients, PEOs gain significant buying power to negotiate for more affordable healthcare and retirement plans. This means even small businesses can reap the benefits that larger corporations typically access.

HROs can still help businesses access competitive benefits plans, but they don’t have the same buying power as PEOs. However, if you prefer to keep your existing plans, then partnering with an HRO may be the better choice.

Compliantly manage HR, payroll, and benefits in the US with Deel PEO

Every business has their own unique needs, and PEOs and HROs both have specific strengths that you can leverage for your advantage.

If partnering with a PEO is best for your business, Deel PEO allows you to offload compliance risks and HR admin, so you can focus on scaling your business across the US and beyond. We’ll handle your payroll, HR, and benefits administration as well as state tax compliance, worker claims, and terminations.

Whether your business is already based in the US or you’re looking to expand to the states, we’re redefining the PEO experience to best support you. Request a free, 30-minute demo today to speak to one of our experts about your needs and goals.