Why PEO/EOR Software is the Future of HR Management, and How it Differs from Staffing/Outsourcing Companies

In today’s fast-paced business environment, companies are actively looking for more effective ways to streamline their business operations, mitigate risks and expand their horizons throughout the world. As they strive for more innovative ways, many companies still depend on various traditional recruitment/payroll/outsourcing channels such as staffing companies, headhunters, general recruiters, ASOs and HROs. Whereas, various new age growth-oriented companies are opting for PEO/EOR platforms where they can access much better benefit plans at reduced costs, avoiding all sorts of employment risks, freeing themselves from payroll processing and compliance management.

This article intends to outline the various recruiting and HR outsourcing options available in the market and how those staffing and outsourcing agencies lack the merits of a PEO/EOR platform like Global Squirrels.

Five recruitment/outsourcing options available in current market

1. Headhunters

Headhunters are recruitment professionals who specialize in filling specific job roles. They work on a commission basis, but their real worth lies in the strong relationships they build within their industry. While they are technically capable of recruiting for any position, most headhunters have a specific area of expertise. The companies that hire headhunters pay a fee, usually a percentage of the salary, if the headhunter successfully places a candidate. In some cases, executive or highly specialized headhunters work on a retainer basis. This means that they are compensated for sourcing candidates, regardless of whether or not the candidate is ultimately hired.

2. Human resource outsourcing (HRO)

When larger organizations with established HR departments want to offload routine and monotonous tasks like payroll processing, they often turn to HROs. In Human Resources Outsourcing (HRO), the employer contracts with a third-party provider to transfer the management and responsibility of specific HR functions to the external provider.

3. General recruitment

Companies can choose to outsource their recruiting needs to a recruiter or recruiting firm, regardless of the level of specialization required. It is important to note that the recruiters are paid by the company, and not the candidates.

4. Administrative services only (ASO)

Businesses can outsource administrative functions such as payroll, HR management, employee benefits, workers compensation, and safety programs through an administrative service offering (ASO). By using an ASO, small businesses can partner with a single provider who manages the vendors that the business has selected to work with.

5. Staffing Companies

Staffing companies offer more than just finding and recruiting employees; they also manage the hiring process and handle employee payroll. This model is widely adopted in industries with high staff turnover and low-skilled labor.

While staffing companies offer some benefits to businesses, there are also several disadvantages to consider when hiring through a staffing company. While staffing companies offer some benefits to businesses, there are also several disadvantages to consider when hiring through a staffing company.

Here are some of the most common disadvantages of hiring through staffing companies

Increased costs

Staffing companies often charge a premium for their services. Businesses may have to pay a percentage of the employee’s salary to the staffing company, which can be a significant expense.

Limited control over the employees

When hiring through a staffing company, businesses may have limited control over the employees’ work. Staffing companies are responsible for managing the employees, and the business may have limited input into the hiring process or how the employees are trained and managed.

Poor quality of employees

Staffing companies may not always provide the highest quality employees. Since staffing companies are often focused on filling positions quickly, they may not have the same level of scrutiny or standards for their employees as the hiring company.

Not a good fit for culture of the company

Staffing companies may not always provide employees who fit well with the company culture or values. Since staffing companies often focus on finding employees with specific skills, they may not consider other factors that are important for a successful hire.

Higher turnover rates

Staffing companies often provide temporary or contract employees, which can lead to high turnover rates. This can create additional costs for the business as they have to constantly replace employees and may not be able to build a stable, long-term team.

Early termination fee and the risk of hidden costs

Staffing companies levy a penalty fee if clients opt to end the agreement before the mutually agreed end date. This fee is typically outlined in the contract between the client company and the staffing company and is meant to compensate the staffing company for the time and resources they invested in recruiting, hiring, and training employees for the client company. It is important for client companies to carefully review the terms of the contract and understand the potential financial implications of terminating the agreement early.

Legal liability will still be there

If a staffing company is responsible for managing employees, the hiring company may still be liable for any legal issues that arise. This can create additional legal risk for the business, even if they are not directly managing the employees.

As we understand the drawbacks of hiring through staffing companies, let us also discuss how PEO/EOR platforms differ from outsourcing companies and other hiring methods.

What is a PEO/EOR Software?

A PEO/EOR (Professional Employer Organization/Employer of Record) software is a cloud-based platform that helps businesses manage their sourcing, HR, and administrative tasks. PEO/EOR software typically provides services such as candidate sourcing, payroll management, benefits administration, compliance management, and employee onboarding/offboarding. Unlike staffing companies, PEO/EOR software acts as the employer of record for the employees they hire on behalf of the client company. This means that the PEO/EOR platform is responsible for payroll taxes, insurance, and other employment-related liabilities, freeing up the client company to focus on their core business activities.

How a PEO/EOR is different from staffing and outsourcing companies?

	Staffing companies	PEO/EOR Platforms
Employment relationship	Employee belongs to staffing/outsourcing companies, they work as per their instructions	Employee works 100% for you, PEO/EOR software takes care of payroll and compliance
Cost structure	Commission/percentage on employee salary	Flat monthly license fee irrespective of the salary paid to employees
Termination fee and hidden costs	Staffing companies charge a hefty termination fee if client opts to end the agreement before date	No such hidden charges or penalties
Range of services	Limited to recruitment, onboarding, and other specialized services	Sourcing, onboarding, payroll, benefits, attendance, and compliance – all bundled under one roof
Liability	Limited to the issues arising out of hiring/onboarding a new employee	Majority of the risks associated with being an employer

Related read: Employer of Record vs Staffing Agency

Employment relationship, employee works 100% for you

One of the primary differences between PEO/EOR software and staffing companies is the employment relationship. With staffing companies, the employees are typically employees of the staffing company, not the client company. This means that the staffing company is responsible for all employment-related matters, including payroll taxes, insurance, and other employment-related liabilities. With PEO/EOR software, the employees are employees of the client company, but the PEO/EOR software acts as the employer of record. This means that the PEO/EOR software is responsible for all employment-related matters, allowing the client company to focus on their core business activities.

Range of services, from sourcing to compliance

Another difference between PEO/EOR software and staffing companies is the services provided. Staffing companies typically provide services such as recruitment, screening, and placement of employees. PEO/EOR software provides a more comprehensive suite of services, including payroll management, benefits administration, compliance management, and employee onboarding/offboarding.

Cost structure, percentage vs monthly license fee

The cost structure is another difference between PEO/EOR software and staffing companies. Staffing companies typically charge a fee for their services, which can be a fixed percentage of the employee’s salary or a flat fee. PEO/EOR software typically charges a monthly license fee, which includes all services provided.

Cost-effective alternative, no need of foreign entity

PEO/EOR platforms offer a more flexible and cost-effective alternative to these traditional hiring methods. By outsourcing their HR and administrative tasks to a PEO/EOR platform, businesses can quickly and easily hire international employees without having to set up a foreign entity or navigate complex legal and regulatory frameworks.

Control and shared liability

With staffing companies, the client company typically has more direct control over the work that the employees perform. With PEO/EOR software, the client company still has some control over the work performed, but the PEO/EOR software is responsible for all employment-related matters, including compliance with local labor laws.

While a staffing agency is mainly concerned with reducing the risks that arise during the hiring and onboarding process of new staff, a PEO takes on a majority of the risks and liabilities that are typically associated with being an employer.

Conclusion

As businesses of all sizes are looking for ways to expand their reach and grow their operations, hiring international employees can be a complex and time-consuming process, but PEO/EOR platforms offer a more flexible and cost-effective alternative to traditional hiring methods. By outsourcing their HR and administrative tasks to a PEO/EOR platform, businesses can focus on their core business activities while leaving the employment-related tasks to the experts.