Human resources play a vital role in the daily operations and long-term success of your business. The people working for your business’s human resources are responsible for developing and changing your organisation’s culture.
They also are in charge of recruitment, performance management, and training. Your business won’t thrive if it doesn’t implement strong HR practices.
For your business to successfully carry out essential HR functions, outsourcing human resources is an excellent option. Transferring the responsibilities of specific HR tasks to another service provider allows your business to control cost, save time, minimise paperwork, and refocus energy on revenue-generating tasks.
What is HR outsourcing and how does it work?
In its simplest sense, HR outsourcing involves using the services of a professional consulting company to “take care” of your business’s specific HR requirements. Depending on your needs, you can outsource human resources on a short or long-term basis.
Different HR companies offer different services. While some only focus on recruitment, other HR companies can manage all HR responsibilities, such as employee inductions, performance coaching, and workplace culture programs.
Once you decide to outsource human resources, the HR company will identify your business needs, audit your existing HR practices, and develop an HR plan to mitigate or solve issues. HR companies employ individuals with in-depth experience in different HR functions, which means that they can execute any HR plan in full.
What is a PEO?
One of the most distinguishing features of a Professional Employer Organisation or PEO is that they become the employer of record when you partner with them. PEOs provide a wide range of HR-related services, namely benefits, payroll, safety, and risk management.
PEOs also have the experience to offer strategic services, namely career transitions, leadership training, safety training, and recruitment.
Since a PEO becomes the employer of record, outsourcing them will remove the administrative burden and burden of risk from your business. Here some of the benefits of a PEO model:
- Better State Unemployment Tax or SUTA rates
- Manages all of your business’s HR functions, which covers strategy and administrative functions
- Manages vendor interactions
- Responsibility for risk management, tax filing, and compliance
- Shared risk
- Sponsors workers’ compensation and other benefits
However, working with PEOs also has several drawbacks, namely:
- Less flexibility in choosing benefits providers
- Potential for unexpected changes in coverage
- Since PEOs work with other clients, their services will seem less personal and in-depth than an in-house HR office
Generally, small and mid-size business owners opt to work with PEOs because they are often understaffed and over-stressed managing their business’s HR functions and compliance.
However, as your organisation grows, it’s best to gradually transition to an in-house HR team using Human Capital Management or HCM technology. Taking this direction will allow you to save more money in the long run.
If you plan to partner with a PEO, take time to weigh its pros and cons first.
What is an ASO?
When you work with an Administrative Services Organisation or ASO, your business gets to retain a unique Tax ID number. Unlike PEO, ASO isn’t the employer on record. The ASO will only manage the daily operations of HR-related tasks, not sponsor or provide workers compensation coverage or benefits.
Although you can add these functions to their service agreement, expect that doing so will entail more costs.
Additionally, ASOs will not hold the final responsibility on issues concerning compliance, benefits, and legal questions. These organisations will only offer information about these issues.
Outsourcing an ASO for your business allows you to experience these benefits:
- Offers a la carte services, which means that you’ll only pay for services that your business actually needs
- You will retain functional control over your business’s HR processes
- Provides high-quality back office and administrative support
- Experts in many different HR functions, namely legal questions, tax filing, and compliance
On the other side of the coin, the ASO model has some cons, namely:
- Doesn’t sponsor benefits coverage and provide workers’ compensation coverage
- You’ll be responsible for vendor interactions
- Doesn’t assume the risk
Experts suggest that business owners should utilise the ASO model when they have between 40 to 75 employees, as they’ll have time to establish their own lower SUTA rates. This will also allow the business owner to leverage or maximise a “large group” status for health benefits.
What is an HRO?
Similar to ASO, the Human Resource Outsourcing model doesn’t provide an employer partnership, which means that you remain the employer of record. An HRO provider will manage your business’s HR processes on your behalf using their own technology and tools.
An HRO provider also offers flexibility because you can choose to outsource the entire HR department or specific HR tasks for which you need additional manpower and expertise.
Choosing to use the HRO model for your business has its perks, such as:
- Allows staff to be more strategic
- Saves money
- Vertical expertise
But, this model isn’t flawless because it also comes with several cons, namely:
- Less availability
- Loss of in-house expertise
- Reduces human touch
Generally, the HRO model works best for large and established businesses that want to maintain an added measure of control over their business practices but need professional help with their HR functions.
Difference between PEO, ASO, and HRO
The PEO is an arrangement defined as a co-employment relationship wherein the PEO assumes the employer of record. The ASO, on the other hand, offers a suite of HR services but doesn’t retain the employer of record.
The HRO model also doesn’t have the employer of record and allows you to choose what specific HR functions you will outsource from them.
Comparing PEOs, ASOs, and HROs: fees; access to benefits; flexibility and control
Besides weighing the pros and cons of each model, you should also understand the fees, access to benefits, and flexibility and control associated with PEOs, ASOs, and HROs. This information will help you come up with a sound decision.
Among all the models mentioned in this article, PEOs tend to be a more expensive solution as the business continues to grow. PEO companies usually charge their clients in one of three ways:
- A certain percentage of the payroll
- A flat fee per employee or paycheque
- A flat minimum amount per period
These fees can range from 2% to 11% on your payroll depending on the number and kind of services you’re going to get from the PEOs. This amount can be expensive, especially for small or new businesses.
When it comes to access to benefits, the PEO is the best among the other models because they have a larger pool of benefits options, can negotiate more, and lower group incurrence costs and unemployment insurance rates.
As for flexibility and control, ASO and HRO models are better because these companies don’t become the employee on record of your business. Although PEOs can provide complete HR services to businesses, you’ll have no access to information once you decide to use this service because all transactions and communications go through the PE.
The PEO, ASO, and HRO models can help your business improve its HR functions, but these models are different from each other. If you’re planning to outsource human resources soon, it’s vital that you understand how these models work and how they are different from each other.
You should look at different aspects — the pros and cons, costs, and many others — before deciding which model to use for your business.
About the Author
Jessica Perkins is a writer and SaaS marketing consultant who helps businesses scale up their marketing efforts. She is obsessed with learning new stuff every day and her hobbies include running and sculpting.