PEO Vs. Unbundled: Which Employment Model Is Best for Your Business?

PEO Vs. Unbundled

Your whole business — your mission and goals, your employee talent — is greater than the sum of its parts. But what if you’re paying too much for the parts? 

Take that PEO contract you signed to take care of your HR needs. It’s saving you time, but is it also draining your budget? Or consider that HRO you’ve been researching instead. How will you make full use of each service it provides?

If you’re looking to outsource your HR or administrative tasks, your choice depends on the services you want covered and the ownership you want to retain. Here we’ll compare the pros and cons of bundled (PEO) vs. unbundled (HRO) services. 

What Is a PEO?

Also called the Employee Leasing Company, a PEO is a co-employment relationship between your business and a licensed, third-party Professional Employer Organization. As a bundled service, the PEO manages employer-related responsibilities that include …

  • Employee benefits — health insurance, workers’ compensation, 401(k) plans
  • Tax compliance, payroll processing, and unemployment and workers’ compensation claims
  • HR consulting and strategic services — employee handbook and policies, safety training and risk management, leadership training, recruiting, career transitions
  • Other HR services you agree to contract

Since the PEO provider becomes the “employer of record,” it takes on a company’s employer-related financial and legal responsibility. Also as a co-employer, the PEO files payroll taxes under its Federal Employer Identification Number (FEIN), rather than your business’ FEIN. 

Benefits of a PEO: 

  • You have access to lower rates for health and business insurance plans.
  • You have support from professional experts to manage vendors and HR tasks.
  • You save time and people power by outsourcing administrative tasks.

Drawbacks of a PEO: 

  • A PEO prioritizes compliance and risk over employee engagement and company goals.
  • A PEO provider, not your company, gains control over employee data and decisions to hire and fire company employees.
  • A PEO offers few to no options for employee benefits, workers’ compensation, and 401(k) plans.
  • A PEO may include more expensive costs for set up, health benefits, etc. 
  • A PEO provider bills for the group, not for each employee, so fees are more easily hidden under its bundled services.
  • Filing under the PEO FEIN can cause issues with transparency. For example, the PEO provider may charge different thresholds for Unemployment Insurance (UI) and federal payroll (FICA) taxes, or they could charge owners unnecessarily for workers’ compensation premiums. 

What Is an HRO?

An HRO is a third-party service provider that you pay “a la carte” for the suite of HR services you need. An HRO provides …

  • Organizational strategy
  • HR consulting and policy development
  • Payroll services
  • Employee benefits administration
  • Workplace safety and training
  • Legal compliance
  • Management of employee-related laws and regulations

In contrast to the PEO, the HRO is not a co-employer. It does not assume employer-related financial and legal responsibility, and you continue to file payroll taxes under your business’ FEIN. 

Benefits of an HRO:

  • You choose how many HR services you want.
  • You have access to a wider range of insurance plan options.
  • You have lower upfront and overall costs than a PEO.
  • You have greater autonomy over business decisions. 

Drawbacks of an HRO:

  • You assume all business risk, including full liability of tax compliance.
  • Unless you pay extra for HR services, your employees manage all administrative tasks.
  • Your insurance options may be more expensive than those offered by a PEO. 

PEO Vs. Unbundled — Which Model Should You Choose?

A PEO and HRO are two types of outsourcing providers that manage some or all of your business’ HR functions. Their key distinctions are their employment models, bundling approach, and overall cost. 

Employment Models

When you partner with a PEO, the PEO provider becomes the employer on record. While your business would maintain day-to-day management of your employees, the PEO provider owns your employee data and controls the handbook, policies, and hiring and firing of employees. The PEO also files payroll taxes under their name and FEIN. If you decide to take on a PEO, review the contract with an attorney!

On the other hand, with an HRO, you remain the employer on record. You maintain autonomy of your business’ day-to-day management, as well as the data, policies, and hiring and firing of employees. You also file taxes under your business name and FEIN.

Bundling Approach

Because a PEO offers bundled services, a PEO provider limits flexibility. You have fewer options for employee benefits, workers’ compensation, and 401(k) plans — and you are subject to hidden fees that are baked into their bundled services. Meanwhile, an HRO offers unbundled services. You choose which services to contract with the HRO provider, and you have greater choice regarding insurance plans.

Overall Cost

PEOs typically work with smaller to mid-size businesses because they promise access to lower benefit costs — and they take care of HR tasks that a small company may not have the time or people power to do. On the other hand, an HRO service works for larger companies who already have a full-time HR staff and are looking to pay for specific tasks not covered by in-house employees. 

To figure out the best options for your business, talk to an agent at Regency West. We’ll help you choose health insurance, payroll, and other services that meet your budget and company needs. Call us today!