January 9, 2018Outsourcing

Beyond Payroll: The 3 Models Available for Outsourcing Your HR

Nearly all Small to Medium Size Businesses (SMBs) have taken the first baby step in outsourcing a portion of their HR: they have outsourced their payroll. For many years, ADP, Paychex, and many other payroll companies have grown steadily while providing this valuable service.

Since the mid-1980’s there has been an emergence of significantly more robust options for HR Outsourcing to assist SMBs in areas well beyond the payroll function. With the trifecta of HR becoming more complicated than ever, the rise of computer technology, and the general trend to outsource non-core functions, HR Outsourcing has become the logical area to experience an explosion of innovation and growth.

A very large part of HR Outsourcing has resulted from the development of new technology including Cloud Computing. Most notable, the acronym “HRIS” stands for Human Resources Information System, and years ago such systems were available only to very large companies at a very high cost. Large companies with tens of thousands of employees could afford the investment in this expensive software application. And having an HRIS was a clear advantage.

Today, with the advent of new HR Outsourcing models serving SMBs, even the smallest companies can benefit from an HRIS via Cloud Computing and experience the advantages that not long ago only large companies could afford.

Below is a description of the three models for HRO. The two more advanced models for HR Outsourcing provide HRIS for SMBs.

 

Multi-Vendor Approach

This basic model, while the most common, does not include HRIS. Therefore, all administration and reporting are manual processes. Since outsourcing payroll covers only a small portion of the HR and Employee Administration tasks, SMBs must find a combination of internal resources and outside vendors to handle all the other areas of employer responsibilities. These employer responsibilities include:

  • Payroll and Payroll Taxes (commonly handled by a Payroll Company)
  • Employee Administration
  • HR Consulting
  • Government Compliance
  • Policies, Procedures and Employee Handbooks
  • Employee Benefits including medical, FSA, HSA, dental, vision, life, disability, EAP, etc.
  • Retirement Benefits
  • Workers Comp Insurance
  • Communication to Employees
  • Management Reports

Depending on their circumstances and internal capabilities, SMBs will often make changes to the combination of using their own staff and teaming up with outside vendors in order to meet the evolving needs of their company. They usually engage a payroll company and as many as ten additional vendors to handle their employer responsibilities.

In this model, the SMBs are completely liable for every aspect of being the employer. And since HR and Employee Administration are not core competencies, SMBs choosing this model are at risk every time they try to coordinate all the vendors providing employer services in combination with the actions of their own management team.

While most companies start out with the Multi-Vendor Approach, it can be daunting to keep it going. Without an HRIS they must rely on spreadsheets and little or no automation. And by having a variety of vendors assisting with all of their employer responsibilities, SMBs become overwhelmed with trying to coordinate each vendor relationship. When they hit a benchmark, often 20 – 25 employees, they find themselves hiring a full-time person to manage this Multi-Vendor HR and Administration model.

 

Administrative Services Organization (ASO)

A step up from the Multi-Vendor Approach is to team up with an ASO. SMBs that choose this option are usually well-established with more than 50 employees. These SMBs have good systems in place for most responsibilities, but they need a more modern approach to handle the primary areas of:

  • Payroll and Payroll Taxes
  • Employee Administration
  • Management Reports
  • HR Consulting (Optional)

An ASO will provide a complete cloud-based HRIS at very low cost because they are able to amortize the expense of building and maintaining this software among thousands of customers. For SMBs, transitioning to an HRIS is a leap forward because it provides cloud-based, automated, paperless administration that employees can access themselves for self-service. Management Reports are also automated. Accuracy is better, too. And the improvement in efficiency is remarkable.

For an additional cost, ASOs can provide HR Consulting as well. However, regardless of how much administrative (and optional HR) service is provided by the ASO, the SMBs choosing this model are still fully responsible and liable as the official employer of all their W2 workers.

 

Professional Employer Organization (PEO)

For SMBs looking to focus on their business operations and outsource as much of their HR & Employee Administration function as possible, the optimal solution is often PEO. Utilizing a PEO is truly a partnership; the PEO assumes most of the responsibility and liability of being an employer for each of their clients. Let’s re-examine the list of Employer Responsibilities:

  • Payroll and Payroll Taxes (commonly handled by a Payroll Company)
  • Employee Administration
  • HR Consulting
  • Government Compliance
  • Policies, Procedures and Employee Handbooks
  • Employee Benefits including medical, FSA, HSA, dental, vision, life, disability, EAP, etc.
  • Retirement Benefits
  • Workers Comp Insurance
  • Communication to Employees
  • Management Reports

A PEO provides full service in each of these areas, freeing up their SMB customers to concentrate on growing and improving the operations/finances of their businesses.

The “Secret Sauce” of a PEO lies in the Co-Employment Agreement they enact with each of their clients. This document makes the PEO the official “Employer of Record” for all the client’s W2 employees, including the owners and managers. Under Co-Employment, the employees suddenly have two employers: the client company is in charge of operations, and the PEO is the “Employer of Record” in charge of administration.

There are significant advantages to having a PEO as Co-Employer and thus the Employer of Record. First of all, there is the advantage of huge buying power because the PEO can combine all of the “Worksite Employers” of their many customers into one large employee pool. The result is better access and pricing for Benefits such as medical and dental insurance, and lower pricing on Workers Comp Insurance. There is also the ability to have all the clients on one HRIS thus reducing administration costs. Moreover, the employees have a professional HR company handling their individual needs.

Most of all, since the PEO takes over the Employer of Record status, they become responsible and liable for government compliance and taking care of your employees. This is a huge advantage!

PEOs serve SMBs with as little as a few employees all the way to 500 or more, depending on the circumstances. The best fit is usually with dynamic companies that are growing or changing in some way, and therefore they need to focus on the successful implementation of these changes to their businesses. There is also a good fit with companies that have a dispersed workforce operating from more than one location, especially more than one state.

The team at HRO2GO has been helping SMBs evaluate and transition to either a PEO or ASO model of HRO since 1996. Most of the companies we have helped elected to go with the PEO model. But for some customers an ASO model has been a better fit. Whatever your needs might be, we will consult with you to help you determine if HRO is right for you, and if the answer is yes then we will help you to find the best fit HRO Service Provider, PEO or ASO, to help you improve your company.