What is Human Resource Outsourcing (HRO)?
Human Resource Outsourcing (HRO) providers come in two forms: Professional Employer Organizations (PEO, aka "employee leasing") and Administrative Service Organizations (ASO).
Beyond basic payroll support, businesses today need help managing increasingly complex employee-related matters such as human resources, health benefits, workers' compensation claims, payroll, payroll tax compliance, and unemployment insurance claims. PEOs/ASOs assume these responsibilities and provide the invaluable expertise of critical human resource responsibilities and employer risks for clients. This allows clients to concentrate on the operational and revenue-producing side of their operations—to grow their bottom line.
Some outsourcing companies only offer one model or the other, professing it to be the "right" solution. Certainly, both the PEO and ASO models come with possible pros and cons for your company's unique situation. The key is to figure out which option is "right" for you.
Both platforms enable clients to cost effectively manage liability and increase company value by providing:
• Relief from the burden of employment administration.
• A wide range of personnel management solutions through a team of professionals.
• Improved employment practices, compliance, and risk management to reduce liabilities.
• Access to a comprehensive employee benefits package, allowing clients to be competitive in the labor market.
• Assistance to improve productivity and profitability.
Who uses a HRO?
Any business can find value in HR Outsourcing. An average client of a NAPEO member company is a business with 17 worksite employees. Increasingly, larger businesses also are finding value in a HR Outsourcing, because of robust Web-based HR technologies and expertise in HR management. HR Outsourcing can offer tremendous value for companies that have 500 or more employees and work in conjunction with their existing human resources department.
Why would a business use a HRO?
Business owners want to focus their time and energy on the "business of their business" and not on the "business of employment." As businesses grow, most owners do not have the necessary human resource training, payroll and accounting skills, the knowledge of regulatory compliance, or the backgrounds in risk management, insurance, and employee benefit programs to meet the demands of being an employer.
The HRO's economy of scale enables each client company to lower employment costs and increase the business's bottom line. The client can maintain a simple in-house HR infrastructure or none at all by relying on the HRO. The professionals at the HRO can provide critical assistance with employer compliance, which helps protect against liability. In many cases, the client can pay a small upfront cost for a significant technology and service infrastructure or platform provided by the HRO. In addition, the HRO provides time savings by handling routine and redundant tasks for its clients. This enables the business owner to focus on the company's core competency and grow its bottom line.
How does an HRO arrangement work?
While functionally, there is little difference to the client company between a PEO arrangement and an ASO arrangement, there is a significant difference in the relationship between the HRO and the employee. Once a client company contracts with a PEO, worksite employee, and client company, there exists a “co-employment” relationship in which both the PEO and client company have an employment relationship with the worker. The ASO platform has no such “co- employment” relationship.
• Who is responsible for the employees' wages and employment taxes?
• Who is responsible for state unemployment taxes?
• Who is responsible for workers' compensation?
Under both arrangements, the HRO and client company share and allocate responsibilities and liabilities. The HRO assumes much of the responsibility and liability for the business of employment, such as risk management, human resource management, and payroll and employee tax compliance. The client company retains responsibility for and manages product development and production, business operations, marketing, sales, and service. The HRO and the client will share certain responsibilities for employment law compliance. An HRO will often provide a complete human resource and benefit package for worksite employees.
Do the business owners lose control of their businesses?
Bottom line: No!
The client retains ownership of the company and control over its operations. The HRO and client will contractually share or allocate employer responsibilities and liabilities. The HRO will generally only assume responsibilities and liabilities associated with a "general" employer for purposes of administration, payroll, taxes, and benefits. The client will continue to have responsibility for worksite safety and compliance. The HRO will be responsible for payroll and employment taxes, will maintain employee records, and reserves a right to hire and fire. Because the HRO also may be responsible for workers' compensation, many HROs also focus on and improve safety and compliance. In general terms, a quality HRO will focus on employment- related issues and the client will be responsible for the actual business operations.
PEO or ASO? Which platform is right for me?
PEO and ASO providers will each tell you that they have the best solution for every company. We are here to tell you that both services can be great and also horrible solutions.
There are many factors that need to be understood (federal and state laws, company structure and resources, etc.) when determining the best fit of possible solutions for your company needs. Most sales representatives are not versed on both platforms and are therefore unaware. Many others may not complete a full analysis of your situation or disclose critical elements that are critical in order to make a truly informed decision.
Here are some questions that will help you in determining which service is really right for you.
1. Are we really handling all areas of payroll, HR, benefits administration, and workers' compensation management?
2. Would I prefer to transfer some of the risk associated with being an employer?
3. What services can I effectively outsource?
4. How many employees do I have?
5. Can I better utilize my personnel resources in other functions?
6. How do I currently process my payroll and what is my current SUI rate?
7. Is my organization structured as a 501(c)(3)?
8. Do I (or might I) have employees in multiple states?
A comprehensive analysis and clear understanding of the answers to these questions and the details of your company and your needs are essential in selecting the best solution for you.