PEO vs. HR Tools: How Both Can Help Your Business as It Grows

March 12, 2022・6 mins read
PEO vs. HR Tools: How Both Can Help Your Business as It Grows

If you're a small to mid-sized business owner, you should have control over how quickly and efficiently you grow. However, without the right tools and a proper HR department, your company may experience unnecessary growing pains. When customers don't get the customer service they expect, you can face:

  • Extra labor costs
  • Fewer hours for employees to work productively
  • Lost revenue

Some businesses use PEOs (professional employer organizations). In contrast, others opt for HR tools like HRM or HRIS software to balance exponential growth with quickly changing business needs. Learn about both with this guide.

Professional Employer Organization (PEO)

A PEO is a third-party company that provides:

  • Payroll
  • Personnel
  • Other administrative tasks for companies

Rather than investing in human resources (HR) management, some companies may use PEOs for personnel and other organizational resources. With a PEO, businesses no longer need to hire and manage their own HR teams. Organizations often outsource HR, benefits, and workers' compensation to a variety of other vendors of platforms, whereas a PEO acts as a single, comprehensive solution for employers. With this solution comes increasing costs. As your company grows, your PEO might take a bigger bite out of your earnings. If you're not careful, it can also eat up more time on your part. In addition, you'll have less control over expenditures or what services your PEO provides. Understand all aspects of the relationship before signing any contracts with an outside vendor.

With a PEO, businesses no longer need to hire and manage their own HR teams.

What are the pros and cons of using a PEO?

A successful PEO may deliver significant advantages to smaller businesses that don’t have HR abilities or resources to manage broader programs like payroll and HRIS. Weighing the pros and cons is crucial to finding the right fit. PEOs typically offer administrative support such as:

  • Payroll
  • Benefits
  • Hiring services

These can be a huge relief to small business owners. Some of the pains that can be removed via a PEO include:

  • Benefits administration
  • Compliance assistance
  • Drug testing programs
  • Family and Medical Leave Act administration
  • Hiring and recruitment
  • Payroll, unemployment, and workers' comp administration

The main downside of joining a PEO is that employees may have less flexibility with their schedules and more individual responsibility for keeping track of company expenditures. Some of the other disadvantages might include the following:

  • A loss of institutional knowledge
  • An outside company's influence on your culture
  • Diminished value of internal HR department
  • Employee resistance
  • Impersonal/automated customer service
  • Increasing prices
  • Lack of flexibility, loss of control of essential processes and people
  • No employer-employee relationship
  • Security issues within the vendor's system
  • Tech limits

Human Resources Information Systems (HRIS)

HR can view and manage various workflows within a platform while automating specific manual tasks, thus allowing greater oversight over employee data and functions.

HRIS helps businesses manage HR tasks as an internal tool instead of an outsourced service. HR can view and manage various workflows within a platform while automating specific manual tasks, thus allowing greater oversight over employee data and functions. While using HRIS simplifies managing HR from a non-HR position, none of the liability is removed from you. It's still your responsibility to know, understand, and comply with all laws. However, with that responsibility comes control. You're free to organize and carry out your HR processes as you wish. You'll also have access to more information about employees than ever before, allowing for more informed decisions when it comes to hiring or firing.

What are the pros and cons of an HRIS?

A sturdy HRIS can streamline the processes of:

  • Managing human resources
  • Help businesses save time and money
  • Generate new business opportunities.

However, getting the ball rolling can be costly and complicated. Although the benefits outweigh the negatives, it's still important to understand all your options before making a decision.

HRIS positives:

  • Automated reminders: events, performance appraisals, benefit deadlines
  • Benefits administration: enrollment, notices, changes, and reporting
  • Employees can enter the system to change or retrieve data without bothering HR
  • Improved data accuracy
  • Integrated data: different parts of the system can “"talk to each other”
  • Most HR-related employee tasks only need to be entered once
  • Recruiting management: applicant tracking, management, and reporting
  • Self-hosted company documents: employee handbooks, procedures, safety guidelines
  • Updates occur in one place when employee information changes

HRIS disadvantages:

  • Systems must be designed to prevent unauthorized access to sensitive and confidential data and unintended publication
  • With any system, there are acquisition costs and maintenance costs. SaaS (software as a service) systems are less expensive since they are cloud-based
  • With larger systems, you'll have to cover the cost of hiring a specialist to manage the HRIS

HRIS can be a useful tool for an organization to assist in hiring, training, and tracking employees. It can be used as a cost-cutting measure or as a way to maintain the health of the workforce. The best HRIS software tools are those that are:

  • Most customizable
  • Built with accurate reporting systems that are compatible with native company software.

Other nice-to-haves are strong support teams offering customer service via phone or webchat.

Weigh your options

PEOs and HRIS offer different services, but they both benefit businesses. The main difference between the two is that HRIS is just an online software tool, whereas a PEO is a more holistic solution. With a PEO, you can get the technology of an HRIS and the support of a team to guide businesses along the way as they develop processes and strategies that fit best. While the decision to use a PEO might make sense for a smaller company, it can become burdensome and more expensive as your business grows. This is particularly the case when a dedicated internal HR team is required. If you're still not sure whether to run with a PEO or want to choose an alternative HR system, we've already done the math for you. If you've run the numbers and are considering switching from a PEO to an internally managed payroll and benefits solution, download our free chart to ensure you make the right decision.

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