Types of HR Outsourcing: HRIS vs PEO

Note: This column was originally published in HR Technologist in March 2019. Minor formatting changes and link updates have been made to the following blog.

HR tasks like hiring, onboarding, and benefits administration are extremely burdensome and time-consuming. For that reason, most small and mid-sized businesses are looking for a solution to HR administration. There are a number of options available, including adopting an HRIS or working with a Professional Employment Organization (PEO).

Each of these options has different pros and cons. Below, we’ll look at some points of differentiation that may help business owners or solo HR professionals determine the best way to optimize their work, as well as some options in each category.

HRIS vs. PEO: Cost

Both HR software and PEOs are typically paid for on a per-employee-per-month basis, though an HRIS is significantly less expensive. PEOs may range anywhere from $75 to $125 per employee, per month, while HR software typically ranges from $10 to $25.

The cost difference is reflective of services provided—an HRIS generally offers a suite of services to manage the employee life-cycle online, such as applicant tracking, onboarding, benefits enrollment, time tracking, and PTO. A PEO may also provide employers with software to manage these items but typically provides other services outside of technology, which we’ll cover below.

When it comes to a PEO, business owners and HR leaders should be careful to review the fine print of pricing. Bundled pricing may contain hidden fees, and employers should also be careful to ensure that a PEO recognizes any tax caps, exclusions, or reductions that the employer may be eligible for.

Another cost item to consider is how the small business accesses an HRIS. Many small businesses are looking for benefits advisors that can also solve HR challenges. As a result, some brokers provide HR technology solutions as part of their value proposition, resulting in an even lower cost to the employer.

HRIS vs. PEO: Other Business Services Provided

Again, PEOs provide other services outside of technology, and for some organizations, that can make a PEO strategy the better choice.

For example, PEOs can pool together small groups for benefits in areas such as workers’ compensation or retirement plans. While an HRIS with robust benefits administration functionality can make it easier for small businesses to offer more lines of coverage and build more competitive benefits packages, it won’t necessarily help groups take advantage of economies of scale.

Another example is compliance liability. Because a PEO can be the employer of record and maybe leasing employees back to the business owner, this strategy can represent less HR liability to the employer. Similar to benefits, an HRIS can provide compliance solutions, but it doesn’t always impact the level of liability associated with compliance to the same degree that a PEO might.

HRIS vs. PEO: Transition

Adopting an HRIS gives employers a set of tools to manage HR, but the rest of the organization largely stays the same. Staffing up the HR department or outsourcing this work similarly represents a low level of change to an organization. Moving to a PEO represents a larger business decision, however, and would be part of a more significant change in strategy for a small business.

When considering an HR solution, small business owners can ask whether their challenges are mainly administrative. If so, using an HRIS will likely be more than enough to streamline the organization’s processes without the higher cost associated with expanding the HR team, and still allowing HR leaders to focus on business-building. If the challenges are bigger than that, a PEO might be a more attractive option.