A PEO co-employs your workforce. An HRO runs your HR while your company stays the only employer. This page explains exactly what changes between the two, what it takes to unwind a PEO if you are already in one, and how to tell which model your business needs today.
If you only read one section, read this one. Everything below is the reasoning behind it.
Choose a PEO
when benefits access is the blocker
You have a small headcount, nobody inside the company runs HR, and the medical plans you can buy on your own are the thing holding you back.
Choose an HRO
when you want the expertise and the control
You want a full HR operation run by senior people, and you want your company to stay the only employer of your team.
Choose an ASO
when you already have HR and need relief
Someone inside your company already owns HR. What they need is the administrative load lifted, not a new employer relationship.
Most companies that call us sit somewhere between the first two cards, and the honest answer turns on four things: how many people you employ, whether anyone inside already owns HR, what your own benefits would actually cost, and how much control you are willing to trade for access.
The three letters matter less than the employment relationship underneath them. Here is what each model does with it.
A PEO enters a co-employment relationship with your company. It becomes an employer of your people for payroll tax and benefits purposes, and it delivers HR through its own systems, its own master plans and its own policies.
An HRO runs some or all of your HR functions under contract. There is no co-employment. Your company stays the sole employer, keeps its own tax accounts and carriers, and buys the functions it wants outsourced.
An ASO handles HR administration without co-employment and usually without strategy. It is the processing half of an HRO, sold on its own, and it works best when someone in the building already owns the HR decisions.
Co-employment is the whole difference between the two models, and it is usually described in one sentence and left there. Here is what it means in practice.
Your company keeps its EIN as a legal entity. What moves is whose account your employment taxes are reported under: in most arrangements the PEO files under its own, with your employees included in its aggregate return. Your EIN stops building an employment tax history for the length of the relationship.
Nothing moves. Payroll, filings and employment records stay under your EIN, because your company never stopped being the only employer.
Most states allow the PEO to report your employees under its own state unemployment account, so your own experience rating stops accruing. When you leave, you generally come back as a new employer at the state new-employer rate rather than the rate your own claims history would have earned.
You keep your own state accounts, and your experience rating keeps building in your name, whether that helps you or costs you.
Your people join the PEO master plans. The PEO negotiates the renewal, decides which carriers are in the arrangement, and sets the plan designs on offer. You choose from the menu. You do not choose the menu.
They stay your plans, with your broker and your carriers. We administer enrollment, changes, billing and compliance against the plans you chose.
Most PEOs place clients into a multiple employer or pooled employer plan that the PEO sponsors. That genuinely removes administrative and audit burden. It also means the plan document, the investment lineup, the recordkeeper and the advisor relationship are not yours.
You sponsor your own plan with your own advisor. We handle the payroll integration, the contributions and the administration around it.
Coverage usually runs through the PEO master policy. Like unemployment, your own loss history stops accruing in your name, which matters the day you go back to the open market and get underwritten on your own.
You hold your own policy and your own loss runs, and your safety record stays attached to your company.
A PEO has a legitimate interest in the policies governing people it co-employs, so in practice you adopt the PEO handbook template and policy positions written to the PEO risk tolerance. In most agreements those documents remain the PEO property.
Your handbook is written for your company, in your voice, and it belongs to you. We draft it, maintain it and keep it current as the law changes.
You still hire, direct, manage and separate your own people. That does not change. What the PEO gains is a voice in how those things are done, because it now shares the liability for them.
The decisions are yours, and so is the liability. Our job is to make sure you make them with good advice and clean documentation.
None of that is a scandal. It is the deal. A PEO takes on real employer liability, and in exchange it needs real control over the things that create it. The only question worth asking is whether that trade is a good one for your company right now.
Ask any provider what their pricing is indexed to. The answer tells you how the number behaves in three years, which is the part that decides this.
The two common shapes are a percentage of gross payroll and a per-employee-per-month administrative fee, with benefit premiums and statutory costs sitting alongside. The percentage shape is the one worth understanding, because it ties your HR administration cost to a number that has nothing to do with how much HR work you generate. Give the team a raise and the bill goes up. Have a strong bonus year and the bill goes up.
You agree what is being outsourced, and that is what you pay for. Adding a state, a benefit line or a new function is a scope conversation you decide to have, rather than an increase that arrives on its own.
At a small headcount, a percentage of a modest payroll is a small number, and pooled benefit rates can more than pay for it. As payroll grows the percentage keeps compounding on a bigger base, while the underlying HR work grows far more slowly. Most companies feel that crossover somewhere past fifty employees, and it is usually what starts the conversation about leaving.
PEO invoices commonly blend administration, benefit premiums, workers compensation and statutory taxes together. Until you can see the administrative component by itself, you cannot compare it to anything, including a quote from us. Any provider worth hiring will break it out when you ask.
Answer them honestly and the model usually picks itself. Where two answers pull in different directions, the benefits question is the one carrying the most weight.
Fewer than 25
Pooled benefits are often the strongest argument in the room, and a PEO is a serious option. Price your own plans anyway, so the comparison is real.
More than 50
A percentage of payroll is now compounding on a large base. This is the headcount where the model usually stops paying for itself.
Nobody does
You need capability, not just administration. A PEO and an HRO both supply that. An ASO does not.
Somebody does
They usually need depth and relief rather than replacement, which points at an HRO or an ASO.
Never, or years ago
This is the single assumption most likely to be out of date, and it is the one carrying the most weight in your decision. Test it before you renew anything.
Recently, and the rates were workable
The largest argument for co-employment has just gone away. Decide the rest on expertise and control.
They are a genuine differentiator
A templated handbook written to somebody else risk tolerance costs more than it looks like on paper.
We need them correct more than distinctive
Either model will get you compliant. Weight the decision toward cost and service instead.
Yes, and it is accelerating
Multi-state expertise is worth paying for either way. What multi-state growth does not require is co-employment.
No, we are concentrated
Compliance is more contained than you fear. Buy for the HR work you actually have.
You have not asked
Ask before you sign rather than after. The exit is the part of a PEO agreement nobody reads and everybody eventually needs.
You have read the termination clause
Good. Now check whether the notice period lands you mid plan year, because that is what sets your realistic exit date.
Facts about the two models rather than a scorecard. Several rows are identical on purpose, because the models are not different everywhere people assume they are.
| Dimension | PEO | HRO (Humareso) |
|---|---|---|
| Employment relationship | Co-employment with the PEO | Your company stays the sole employer |
| Employer of record for payroll tax | Generally the PEO | Your company |
| Employment tax filings | Filed by the PEO, often in aggregate | Filed under your own EIN |
| State unemployment account | Usually the PEO account and rate | Yours, and your rating keeps building |
| Workers compensation | PEO master policy | Your policy and your loss history |
| Medical, dental and vision | PEO master plans | Your plans, your broker, your carriers |
| Retirement plan | Usually a PEO-sponsored pooled plan | Your own plan and advisor |
| Handbook and policy | PEO template and risk posture | Written for your company, owned by you |
| Who directs the work | You | You |
| Day-to-day HR support | Pooled service teams | Named senior HR professionals |
| Compensation and org strategy | Usually an upsell or out of scope | In scope |
| Pricing shape | Percentage of payroll or per employee, bundled | Scoped to the functions you outsource |
| Buying it in pieces | The bundle is the product | Payroll only, leave only, or any combination |
| Implementation | Longer: benefits and tax accounts move | Shorter: nothing has to migrate |
| Leaving | Benefits, retirement and tax accounts all unwind | End the scope; your accounts never moved |
We sell HRO, so read this section with that in mind. We also turn away companies a PEO would serve better, because a bad fit ends the same way every time.
Master medical plans can give a very small employer rates and plan designs the open market will not quote. That is a genuine advantage, and for some companies it is the largest single line in the whole decision.
A PEO gives you compliance infrastructure, payroll, benefits and a workers compensation policy in one relationship, quickly. If you are starting from nothing, that matters more than elegance.
Co-employment is not only a constraint. The PEO takes on real employer obligations alongside you, and for a leadership team with low risk tolerance that is worth something.
If HR, payroll and benefits fused into a single relationship is the outcome you actually want, a PEO is built for exactly that, and a good one delivers it well.
The mistake is almost never choosing a PEO in the first place. The mistake is staying in one for years after you stopped being the company it was right for.
Nine steps, in the order they bite. None of this is a reason to stay somewhere that stopped fitting. It is a reason to start about six months before you want to be out, rather than six weeks.
Most PEO agreements carry a notice period, and many are written around the plan year. The notice period, not the moving work, is usually what sets your earliest realistic exit date.
A January 1 exit is by far the cleanest, because it lines up the benefit plan year, the retirement plan year and the payroll tax year at once. That means one W-2, one set of wage bases and one open enrollment. A mid-year exit is possible, and every one of those becomes two.
You will need state unemployment and withholding accounts in every state where you employ people. Expect the new-employer unemployment rate in most of them until your own experience rebuilds.
You are leaving a master policy, so you get underwritten on your own. Ask the PEO for your loss runs before you give notice, while you are still a client and the request is routine.
Underwriting, plan selection and open enrollment take months, and carriers want census data and often prior claims experience. Start this before you set an exit date rather than after.
If your people are in the PEO pooled or multiple employer plan, you are generally choosing between spinning your portion into a plan you sponsor or moving it to a new plan you establish. A plan document, a recordkeeper, an advisor and an audit question come with it. This is the step companies discover late.
Whether your employees Social Security and federal unemployment wage bases carry over or restart depends on whether the change qualifies under the successor employer rules. Getting it wrong mid-year produces overwithholding, an amended filing or an employer tax bill nobody budgeted. Put the question to your accountant and keep the answer.
Payroll history, I-9s, personnel files, leave and accommodation records, ACA reporting data and open COBRA elections. Ask for all of it in writing, and confirm who files the ACA forms for the year you split.
Your handbook, your offer letter templates and your policies came out of the PEO library, and under most agreements they stay there. Plan on writing your own, and plan the time for it.
Details vary by state, by agreement and by plan document. Treat this as the map and confirm the turns with your own counsel and accountant. If you want a second set of eyes on an agreement you already signed, we read them all the time.
If you have a name in front of you rather than a category, start there. Each page covers the same ground against that specific provider.
Already decided on the model and want to know what we actually do? See the full HR outsourcing service, covering payroll, benefits, leave, compliance and recruiting.
Straight answers, including the ones that point away from us.
Twenty minutes with a senior HR lead. We read PEO agreements all the time, and if a PEO is the better answer for where you are, we will say so and tell you what to look for.
No co-employment. No multi-year contract. You keep your EIN.
