PEO vs. Human Resources: Which One Is the Best Option?

Understanding the Basics of a PEO

A Professional Employer Organization (PEO) is a third-party company for outsourcing comprehensive human resource functions by entering into a co-employment relationship with a client company. 

A co-employment relationship involves both parties signing a contractual agreement called a Client Service Agreement (CSA) contractual agreement, where employer responsibilities and liability are shared. 

By outsourcing Human Resource Management (HRM) responsibilities to a PEO, you can focus on other essential parts of your business that lie more within your expertise, such as enhancing your product offerings, maximizing daily operations, or increasing revenue. 

The role and services of a PEO

PEOs provide an array of essential services to their clients. They act as the employer of record for worksite employees, handling payroll taxes and HR administrative tasks. PEOs also grant businesses access to comprehensive employee benefits packages and assist with risk management, automated payroll services, regulatory compliance, and other scalable human resource functions. Still, the exact services provided depend on the PEO and the contractual agreement.  This flexibility caters to businesses of all sizes, making PEOs a versatile option for managing HR functions.

The benefits of partnering with a PEO

When businesses partner with a PEO, they can experience various benefits. These include:

• Cost savings: These providers help businesses save money by handling several employer responsibilities considered costly. Additionally, the ROI of a PEO allows businesses to save money with every penny they invest in the PEO
• Access to quality benefits: A PEO’s economies of scale gives clients access to various health benefits such as health insurance, dependent care, and more at a lower price. This leads to higher employee satisfaction, lower turnover, and the ability to attract top talent
• Compliance assistance: PEOs guide businesses through the compliance process. They know about the changing labor laws in different states and help reduce compliance issues and the likelihood of penalties or fines
• Enhanced HR resources: PEOs offer valuable HR expertise on payroll processing, employee relations, legal compliance, and more to improve a company's operations further

Insights Into Traditional HR Operations

Your HR department is the cornerstone of your business as they are responsible for all HR functions. Traditional human resources involves having a department that operates internally, and their primary responsibility is managing worksite employees.  A high-functioning department is essential for the growth and development of any business. 

Traditionally, Human Resource Management (HRM) involves having a department that operates internally, and their primary responsibility is managing worksite employees. However, with technological advancements, HR today has become more than just a department managing employees and performing administrative tasks.

The core functions of HR

Key roles and responsibilities of a human resource department typically include:

• Recruitment and staffing: Every company needs qualified employees to get the job done, and to get them, your human resource department takes responsibility for identifying staffing needs, posting job openings, conducting candidate interviews, and managing the recruitment process
• Employee onboarding and offboarding: These departments oversee the employment lifecycle, from welcoming new employees and providing orientation to managing the paperwork and the processes involved with departing employees
• Training and development: New employees require proper training to familiarize themselves with the company and the role they would be performing. These departments organize training programs and workshops to enhance an employee’s skills and knowledge
• Compensation and benefits: Timely and rewarding compensation and benefits packages are pillars of guaranteeing higher employee satisfaction and retaining top talent, which the department performs
• Performance management: They manage performance appraisals, feedback sessions, goal setting, and improvement plans. They also address employee concerns and conflicts to ensure a positive work culture
• Employee relations: These professionals foster positive employee relations, handle disputes, and promote a healthy workplace culture
• Legal compliance: Your business should comply with labor laws and employment regulations and uphold ethical standards, where HR help plays a role. They also handle legal matters related to employment within the organization
• Records keeping: A human resource department maintains and secures employee records, including personal information, performance data, and other related documents. They also address data privacy and security concerns
• Employee engagement: In-house HR focuses on strategies to enhance employee satisfaction, engagement, and retention to maintain lower turnover
• Policy development and implementation: They create and enforce workplace policies and procedures, ensuring employees adhere to company guidelines

The advantages of traditional HR

Utilizing a traditional HR department can be advantageous in different ways. Firstly, they offer businesses safety and complete control over human resource functions. Secondly, flexibility is provided as a conventional HR department possesses in-depth knowledge of the company and its values, tailoring HR solutions accordingly. Sensitive personnel data require less security, and a traditional department can provide that.

Furthermore, immediate and personalized responses are offered concerning employee-related issues and cannot be found elsewhere due to their proximity and knowledge of employees. Overall, having a traditional and internal HR department is a good option for businesses looking for a highly customized and interactive approach. 

What Is the Difference Between Traditional HR and PEO?

When deciding between a PEO and an internal human resource department, it's important to note the key differences. Understanding these differences will make your selection process much more straightforward. The way they operate, the services they provide, and the associated costs are all crucial factors to consider.

The co-employment relationship

A prominent difference is the concept of co-employment. As established, the PEO shares legal and technical responsibilities that allow them to provide specific HR functions that otherwise could not be possible. 

Usually, this relationship is an especially good choice as it makes it easier to pay employee salaries and handle all tax and compliance-related functions, relieving businesses of the need to perform these HR tasks themselves. 

A common myth about PEOs is a loss of control of business decisions; however, this is not the case. Business owners and managers control worker duties and daily operations and retain final decisions over human resources functions. On the other hand, a traditional department is internal, meaning that HR services are provided within the business and, if efficient, offer greater flexibility.

The administration of employee benefits

A PEO’s economies of scale give businesses competitive rates on employee benefits, which is beneficial for a small or midsize organization. 

Alternatively, with a traditional department, employee benefits administration is provided differently. Generally, a business will have to pay for these benefits out-of-pocket, and typically, a small business will have the capability to offer essential benefits. In contrast, larger companies offer more comprehensive benefits. 

Evaluating the costs and services

The costs and services offered by PEOs and traditional HR providers can vary. Payroll management, healthcare benefits, legal compliance, and additional HR support are the primary PEO services, which can be more cost-effective than investing in a thoroughly efficient internal department. Additionally, using a PEO’s services can lower HR risks due to their vast experience performing these functions. 

A traditional department can be advantageous for larger organizations with the finances to hire proficient employees because a higher cost for an equivalent service from a PEO is a possibility. 

Making the Right Decision for Your Business

The size of your organization is essential because, in some cases, large businesses prefer the independence of an internal department. In contrast, smaller businesses might like a PEO because of their ability to help a business grow. However, both options work for businesses of all sizes, goals, and needs. 

Cost considerations are also important. Traditional departments require a high fee to hire proficient employees, while a PEO has fixed pricing structures with a flexible option of customizable services. PEOs offer multiple plans to fit any budget.

When considering HR services, the level of professional guidance and reliability needed is essential. While a traditional in-house HR department may offer the same level of guidance as a PEO, it can be costly. On the other hand, a conventional department may provide reliability, but that doesn't mean a PEO won't offer the same level of dependability. Therefore, IRS & ESAC-certified PEOs give customers an idea of their reliability, financial stability, and commitment to ethical practices. 

Conclusion

In conclusion, PEOs and traditional human resources offer valuable services to businesses, and the choice between them depends on various factors such as the company's size, the industry, and the specific HR needs of the business. While traditional HR departments offer internal management, PEOs provide a cost-effective approach to outsourcing comprehensive HR functions. PEOs offer a wide range of services, including regulatory compliance and employee benefits, which can help businesses save money and improve employee satisfaction. Ultimately, the decision of which option to choose falls upon the business owner or manager. We understand that this can be a difficult choice to make, so we hope that this article can be a helpful resource in making an informed decision that best suits your specific needs. To continue your research we recommend you visit our PEO company reviews page and blog to help you make an informed decision.

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