Businesses looking to outsource their human resources functions to reduce overhead and increase efficiencies typically turn to a professional employer organization (PEO) or a human resources outsourcing firm (HRO). The terms are sometimes used interchangeably, but there is an essential difference in the eyes of the law and the IRS.
The Co-employment Model
Both HROs and PEOs can provide various HR services to clients, such as handling and processing payroll. The key difference is a PEO enters into a "co-employment" agreement with clients, allowing the PEO to serve as the official employer of record for tax and insurance purposes. The PEO assumes certain administrative responsibilities, including filing and depositing payroll taxes and providing employee benefits and workers' compensation insurance. In a co-employment arrangement, the client company is relieved of burdensome administrative tasks but retains full control over its employees and operations. The client continues to manage employees and makes all hiring/firing decisions.
An HRO does not use the co-employer model, which means employees of HRO clients remain on the client's books for all financial and employer tax-related matters. HRO services can also vary in scope and typically are less comprehensive than a PEO's solutions offering.
ASOs, CPEOs, and ESAC
The HR services industry is a veritable alphabet soup of acronyms, which can confuse potential clients of HROs and PEOs. Here are three common acronyms you are likely to come across in your search for a human resources partner:
- ASO - Administrative Services Organization. Similar to an HRO, ASOs do not operate as a co-employer or sponsor employee benefit programs or workers' compensation coverage. ASOs typically offer a more limited list of a-la-carte HR support services than either HROs or PEOs.
Companies shopping for a benefit plan may also come across the term "Administrative Services Only," or ASO plans. These are benefit plans in which an insurance company is hired to evaluate and process benefit claims from employees while the employer handles payment of the claims themselves.
- CPEOs - Certified Professional Employer Organizations. These are PEOs that complete a rigorous, voluntary IRS certification program. Clients of CPEOs receive additional protections and tax advantages compared to clients of non-certified PEOs. For example, a CPEO must maintain a bond of up to $1 million each year in favor of its clients. CPEOs also do not have to restart the FICA and FUTA wage bases when a client joins or leaves a CPEO mid-year.
- ESAC - Employer Services Assurance Corporation. Like the FDIC for banks, ESAC is an independent nonprofit corporation and official accreditation and financial assurance organization for the PEO industry. Clients of ESAC-accredited PEOs each receive a bond to protect them for up to $16 million.
A lesser-known and less extensive certification program is available for HROs through the HRO Today Provider Certification Program.
HROs vs. PEOs
|
HRO |
PEO |
|
No co-employment relationship, client is responsible for all employer liabilities |
Serves as co-employer and assumes employer liabilities |
|
Provides comprehensive HR services |
Provides turn-key HR services offering |
|
Typically supports a client's HR department |
Typically serves as a client's HR and employer compliance department |
|
Can provide access to HR technology applications and HR service staff |
Provides HR technology solutions and access to experienced HR and compliance professionals |
|
Can administer client's employee benefits |
Can provide/sponsor Fortune 500-caliber employee benefits and insurance plans |
|
Can administer client's risk management program |
Can sponsor client's workers' compensation insurance, and manage risk and safety program |
|
Typically handles payroll and other employee administration and compliance responsibilities |
Typically handles payroll and other employee administration and compliance responsibilities |
|
Can provide HR training and education |
Can provide HR training, manager, and supervisor education support |
For companies that want to keep some HR functions in-house, partnering with an HRO to handle a few specific services such as payroll administration may make sense. A company looking for one provider to assume all HR-related responsibilities across the board and provide turn-key workforce solutions will typically partner with a PEO.
*The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to IRS.gov.