Do You Need a Human Resource Outsourcer or a Professional Employer Organization?

Amid the many acronyms business owners encounter – FMLA, FICA, HIPAA and COBRA to name a few – two are designed to ease the burden of HR responsibilities for employers.

PEO (professional employer organization) and HRO (human resource outsourcer) companies remove the need for internal human resources, allowing business owners more time to focus on growing their business.

Employees can be the cornerstone of an enterprise. They can also be an enormous liability for employers grappling to adhere to the myriad of laws and regulations.

If uncertainty about how the Family and Medical Leave Act (FMLA) would apply to your newly-hired administrative assistant who has decided to adopt a child from Russia is keeping you awake at night, or if you simply prefer not to spend a portion of your week interpreting health care insurance plans, outsourcing to a professional employer organization or a human resource outsourcer may be the answer.

Though the two perform similar functions as a human resources department, human resource outsourcers are outsourced and completely independent from a client’s business and professional employer organizations function as a partnership agreement.“The choice is basically a function of what the customer is most comfortable with,” says Jeff Stinson, president of California-based Global Human Resources Outsourcing.

Under a professional employer organization contract, a “co-employer relationship” is created where the PEO and client company both employ the workers, allowing them to share liabilities and responsibilities. Clients outsource their human resources to the professional employer organization and maintain control of their companies, while the human resource outsourcer provides basic human resources services such as employee benefits, payroll administration and workers’ compensation.

The average professional employer organization client has 19 worksite employees according to data compiled by the National Association of Professional Employer Organizations (NAPEO).

A human resource outsourcing company also handles HR-related issues for a client but does not share employment-related liabilities with the employer. The HRO can provide a full scope of functions for the company, everything from employee acquisition to payroll, but does so as a third party.

Companies opting for a human resource outsourcing company vary in size from one to thousands of employees and, like professional employer organizations, service a wide range of industries, Stinson says.

As employee-related issues such as health care insurance become more complex, statistics indicate that more small business owners are opting to co-employ. NAPEO estimates the professional employer industry increased $5 billion in 2008, claiming $68 billion in gross revenues.

One potential concern for business owners in a co-employment arrangement is loss of the ability to make unilateral decisions in certain employee-related matters such as employee terminations, Stinson says. But typically a professional employer organization is only involved in employee terminations to ensure that the process is handled in a professional manner that won’t cause repercussions.

“Terminating employees is your greatest liability,” Stinson says. “The idea behind hiring a professional employer organization or human resource outsourcing company is that you can let someone else worry about HR responsibilities and spend your time running the business.”