For companies approaching or surpassing the 50-employee mark, HR quickly becomes more complex. You’re now facing requirements like the Affordable Care Act (ACA), the Family and Medical Leave Act (FMLA), and more detailed compliance reporting.
If you don’t have an in-house HR leader, you’re probably contemplating your next step. (Check out our article comparing internal, outsourced, and fractional HR options.)
Two options are a Professional Employer Organization (PEO) and Fractional HR services. In this guide, we’ll compare both approaches in common situations that your growing organization is likely facing.
Defining PEOs and Fractional HR
- Professional Employer Organization (PEO): A co-employment model where the PEO becomes the employer of record for tax and benefits purposes. They typically manage payroll, tax filings, benefits, and compliance administration.
- Fractional HR: Contracted HR professionals who act as your HR team or leader. They help build policies, systems, and strategies while you remain the employer of record.
Here’s the major difference: a PEO focuses on taking over HR administration through co-employment, while Fractional HR provides leadership and guidance to help you build and manage a sustainable HR function within your own organization.
Comparing PEOs and Fractional HR with Common HR Situations
Establishing or Formalizing an HR Function
How do you know you’re ready to establish an HR function? Some common signals include:
- Inconsistent (or non-existent) policies or practices
- Frequent employee relations issues are taking up too much leadership time
- Compliance is getting too complicated to manage internally
- High turnover or disengaged employees
- Onboarding employees is inconsistent (or not happening at all)
- You’re hiring rapidly and need to handle the administrative burden of recruiting, hiring, onboarding, benefits, compensation, etc.
- You’re considering a permanent HR hire, but you’re not sure what it should look like (and you need to get it right)
Fractional HR can serve as a partner to help you build an HR function that can keep up with your growth. This can include:
- Project-based foundation building: Helping you identify what’s missing and putting the basics in place, like onboarding, policies, and performance reviews.
- Day-to-day integration: Acting as part of your team, handling employee relations, compliance, engagement initiatives, and policy updates.
- Future-proofing: Getting things ready so your first HR hire can step in without starting from scratch.
This approach helps you solve today’s issues while putting policies and systems in place that won’t break as you scale.
A PEO operates differently, potentially reducing your need to build HR internally. The focus tends to be on HR administration and compliance, and a PEO may not provide strategic HR guidance.
Better fit: Fractional HR if you want to establish HR infrastructure and leadership capacity; PEO if you primarily need administrative processes covered.
HR Administration
Common HR administration tasks and requirements that organizations of this size often need support with include:
- Employee handbooks
- Policy updates
- Required postings
- Onboarding documentation
- Training compliance
- Recordkeeping
Fractional HR can create customized policies, practices, and systems that fit the way your company actually operates. With a fractional HR consultant, you’re getting an experienced HR professional who has hands-on experience administering HR policies and practices.
PEOs typically provide standard policies, handbooks, and required postings as part of a bundled package. With this approach, your team will need to adapt the provided templates to your organization’s policies and culture.
Better fit: Fractional HR if you want HR processes tailored to your organization; PEO for templated, one-size-fits-all policies and processes.
If you just want to meet the minimum legal requirements, cookie-cutter policies and processes will work. But customized policies and practices create a consistent experience across all teams and departments, and they’re built for your culture.
Planning for a Permanent HR Hire or Future HR Leadership
If you expect to hire a full-time HR leader in the future, a PEO may complicate the transition because systems and benefits are tied to the co-employment model.
When is the right time to make your first permanent HR hire? Most organizations make their first permanent HR hire between 50–100 employees, when compliance thresholds kick in, turnover becomes costly, and leadership needs dedicated support for people and culture.
Fractional HR can build the HR infrastructure and then transition responsibilities smoothly to a permanent hire. One of the major benefits of a fractional HR solution is its ability to help you set up systems and documentation so your first HR leader can hit the ground running. Specific actions a fractional HR provider can take include:
- Developing documentation and processes: Creating SOPs, policies, and compliance calendars that can be easily handed off to a new HR leader.
- Implementing systems: Setting up HRIS, payroll, and performance management systems so they’re established before a full-time hire takes over.
- Building reporting and metrics: Establishing dashboards and metrics that give future HR leaders clear visibility into workforce trends.
- Defining the HR role: Helping leadership clarify the responsibilities, scope, and priorities of the future HR position.
- Supporting recruitment: Assisting with drafting job descriptions, evaluating candidates, and even participating in the hiring process for the new HR leader.
- Knowledge transfer: Providing structured onboarding and transition support so the new HR leader can step in with minimal disruption.
Better fit: Fractional HR if your goal is to prepare for a smooth handoff with minimal disruption; PEO if you want to delay building HR internally until a later stage (or don’t want to bring HR in-house at all).
Having a Resource Available for Employee Relations
Employee relations challenges at this stage often include:
- Performance management conversations
- Employee complaints or grievances
- Workplace investigations
- Conflict resolution
A fractional HR consultant can give your employees access to an experienced HR leader who acts as a resource and sounding board for employee concerns or questions.
A PEO provides policy frameworks to address these issues, but managers are often still responsible for handling conversations and documentation. Some PEOs offer a help desk (either phone or online) for employees to submit questions or concerns.
Better fit: Fractional HR if you want an HR representative that your team can go to with questions or concerns; PEO if you are comfortable managing issues internally with policy frameworks or access to an employee help desk.
Staying Compliant
At 50 employees, organizations also have to consider several compliance requirements, including:
- Affordable Care Act (ACA): Employers with 50 or more full-time equivalent employees must offer affordable health coverage and file forms 1094-C/1095-C with the IRS.
- Family and Medical Leave Act (FMLA): Employers with 50 or more employees must provide up to 12 weeks of job-protected leave and maintain accurate leave documentation.
- EEO-1 Reporting: Employers with 100 or more employees, or federal contractors with 50 or more, must file annual demographic workforce data with the EEOC.
- OSHA Recordkeeping: Most employers with more than 10 employees must track workplace injuries and illnesses and report serious incidents to OSHA.
- State and Local Requirements: Employers must follow jurisdiction-specific mandates, such as paid sick leave, wage notices, or required training programs.
As your workforce grows, so do compliance risks like fines, audits, and lawsuits.
Fractional HR can help you establish internal processes, policies, and tracking to manage compliance or hand it off to a future hire.
With a PEO, most compliance filings are completed on your behalf, though your team is still responsible for providing accurate employee data and approving leave decisions.
Better fit: If you want hands-off compliance handling with less direct involvement, a PEO can be a good fit; Fractional HR works if you want customized policies and processes, and long-term ownership of compliance without the ongoing costs of a PEO.
Offering Health Insurance
If you’re introducing health benefits for the first time, a PEO may provide access to large-group health plans, which can lower costs and broaden options compared to a small-group plan.
With a PEO, you’re less involved in plan negotiation, but you give up some control over design and carriers.
Better fit: PEO.
Needing Payroll and Tax Administration
A PEO typically takes over payroll processing, tax filings, and year-end forms under their EIN, reducing your administrative load. For a growing organization, payroll and tax administration needs often include:
- Setting up and maintaining accurate employee records across multiple states or jurisdictions.
- Managing complex tax withholdings, including local taxes and multi-state compliance.
- Ensuring timely and accurate payroll cycles.
- Handling year-end W-2 and 1099 preparation and distribution.
- Coordinating deductions for benefits, retirement contributions, and garnishments.
- Supporting audits and reconciling payroll with financial systems.
With this option, you’ll mainly review reports and provide accurate employee data on time.
Better fit: PEO.
Workers’ Compensation Coverage
PEOs often bundle workers’ comp into their offerings, sometimes at better rates due to pooled buying power. With a PEO, claims management may be largely handled externally, though your team is still expected to report incidents accurately.
Fractional HR doesn’t provide coverage directly but can help you select policies, prepare for audits, and manage claims, while your team continues interfacing with carriers and handling day-to-day safety and reporting.
Better fit: PEO if getting coverage or lowering costs is the main concern; Fractional HR if you want guidance in choosing and managing coverage while keeping policies in your name and maintaining direct carrier relationships.
Strategic HR Guidance
HR strategy is important from day one, but it starts to become really important once organizations reach around 50 employees. Managers multiply, culture becomes harder to maintain, and turnover or engagement issues start surfacing. Early strategic guidance can help growing companies improve retention, develop leaders, and keep your culture intact.
PEOs focus on administration and provide standardized processes and compliance practices.
Fractional HR offers strategic support to strengthen retention, leadership development, and culture. This can include:
- Organization design: Structuring teams, roles, and reporting lines to support growth.
- Workforce planning: Figuring out who you’ll need to hire next and preparing people to step into bigger roles.
- Culture and engagement: Developing initiatives to improve employee experience, drive retention, and improve culture.
- Leadership development: Building leadership capacity and recommending training initiatives.
- Change management: Helping your team through big changes like growth or restructuring so work keeps moving.
Better fit: Fractional HR if you need tailored strategic leadership; PEO if you want standardized administrative consistency and less emphasis on customization.
What’s Next
As your organization grows, the question isn’t whether you need more HR support; it’s which approach fits your goals. A PEO can ease the burden of administration, while Fractional HR can help you build the structure to grow with confidence.
If you’re weighing your options and want to see how Fractional HR could work for your team, learn more about ERC’s Fractional HR services.
