Eighty percent of companies outsource human resources. In fact, human resources is the most commonly outsourced business unit, beating IT (53%), marketing (63%), and customer service (~50%) by a significant amount.
For most business owners, those numbers aren't surprising. The average business owner spends as much as 40% of their time dealing with HR administration, and the majority of business owners outright admit that they're simply not happy with their HR processes.
Are you trying to figure out if HR outsourcing is right for your business?
If so, you probably have some questions. What are your options? How much money does HR outsourcing save your company? How can you find the perfect partner in this $32 billion industry that's set to explode to over $45 billion in the next 7 years (CAGR 4.9%)?
Here's an FAQ to help guide you through the promises and perils of HR outsourcing.
What Are My Options for HR Outsourcing?
We can break the HRO industry down into three core offerings:
- Payroll Service Providers (PSP)
- Administrative Services Organization (HRO)
- Professional Employer Organizations (PEO)
What Are Payroll Providers?
Payroll Service Providers (PSPs) sit wedged somewhere between HR and accounting. The sole purpose of a payroll provider is to handle your payroll needs. This means they pay your employees, calculate work hours, validate attendance, and prepare federal taxes for your company. It's important to note that this is the only function that payroll providers offer. PSPs do not handle compliance, workers' compensation, benefits, or any other HR administrative need. They also cannot remit payroll taxes.
What Are Administrative Service Organizations (ASOs)?
Administrative Service Organizations (ASOs) are HR outsourcing partners that handle a larger bucket of HR administration. ASO responsibilities may include processing payroll, assistance in benefits selection, and risk management. In other words, ASOs handle the same duties as payroll processors, but they also tackle your larger HR problems.
What Are Professional Employer Organizations (PEOs)?
Professional Employer Organizations (PEOs) are HR outsourcing partners that offer the same services as both payroll processors and ASO — with some added benefits. PEOs handle compliance, payroll, workers' compensation, and all of those other pesky HR administrative duties. But, unlike ASOs, PEOs carry unique benefits due to their structure.
What Are the Advantages of a PEO Over an ASO?
PEOs offer a higher overall value than ASOs to most organizations. But, before we focus on the benefits of PEOs, let's quickly cover the responsibilities that both PEOs and ASOs handle:
- Risk reduction
- HR strategy
- Posting requirements
- Employee handbooks
- Payroll processing
These are areas that both PEOs and ASOs are capable of tackling. But, PEOs also provide additional value that ASOs can't provide (both technically and legally), including:
- Better Benefits: PEOs provide you access to better benefits at lower costs.
- Shared liability: Due to the structure of the PEO-business relationship, PEOs share legal liability for any HR mistakes.
- Lower EMOD ratings for workers' compensation: Lowering e-mod ratings means lower premiums. PEOs can help you reduce your e-mod rating by bringing you into their workers' compensation plan.
- Simplified payroll: PEOs have the ability to remit payroll taxes under their FEIN.
How Can PEOs Lower the Cost of Benefits?
PEOs operate under a co-employment relationship. It's easiest to think of co-employment as a legal tool that allows PEOs to tackle some of your most complex, nuanced, and company-specific HR needs. The co-employment contract allows PEOs to list your employees as their employees. In other words, you "share" employees with the PEO.
This seemingly simple legal tool helps PEOs produce some major value for your business. For starters, they can significantly reduce benefits costs while simultaneously improving the quality of your benefits.
Since PEOs partner with hundreds of companies, they can pool employees from ALL of those companies together. This gives them economies-of-scale (i.e., a massive pool of workers that reduces risk for the benefits provider) at the benefits negotiating table. So, instead of paying small business rates for benefits, you score enterprise-grade rates on enterprise-grade benefits.
But co-employment goes far beyond benefits. It allows PEOs to remit payroll taxes under their FEIN, share HR risk with your business, and handle some of the more nuanced HR needs — like SUTA rates.
Does PEO Co-employment Mean a Loss of Control?
Co-employment does not mean that PEOs co-control your business. You still make hiring decisions, firing decisions, and handle your day-to-day business operations. PEOs use co-employment as an HR tool — nothing more. It allows them to list themselves as an employer of record for your employees. This opens up unique HR possibilities that can help save your business serious money and headaches.
There's a reason that 98% of businesses that have tried a PEO would recommend one to a friend: co-employment is a powerful HR tool.
Which Outsourcing Option Has the Highest ROI?
When it comes to ROI, Payroll Service Providers (PSPs) offer, by far, the lowest ROI. To be fair, PSPs are also the cheapest option, and they certainly work for some businesses — especially if you're a large company that only needs payroll outsourced. But PSPs provide a very small ROI... if it exists at all.
This comes down to outsourcing scale. PSPs are only tackling a single HR function. So, your time-savings and cost-savings are much smaller than they would be with an ASO or PEO — both of which provide more solutions.
ASOs have a higher ROI than PSPs by nature. ASOs provide multiple outsourced HR disciplines (e.g., payroll, compliance, handbooks, etc.), and working with an ASO helps you alleviate a wider range of HR woes. However, ASOs provide a lower ROI than PEOs due to the co-employment relationship and cost factors. When it comes to costs, ASOs and PEOs both cost more than PSPs. But, there's little-to-no difference in cost between PEOs and ASOs.
The average ROI of using a PEO is 27.2%. Not only are PEOs competitively priced, but they generate tremendous value with co-employment. So, in addition to the benefits offered by ASOs, PEOs give you access to cheaper benefits, payroll remittance, lower e-mods, access to best-in-class workers' comp with no upfront deposit, and claims management.
Will a PEO Replace Your Current HR Staff?
Absolutely not. PEOs aim to complement your existing HR staff by relieving them of administrative burdens such as processing payroll. While PEOs can act as a one-stop shop for all HR needs, they primarily work as a resource for a business’ HR employees.
Is A PEO The Right Choice for Your Business?
Over 160,000 small businesses rely on PEOs to handle their HR needs. Compared to their peers, these businesses grow 7 to 9 percent faster, have 10 to 14 percent lower turnover, and are 50% less likely to go out-of-business. PEOs are, without question, the most cost-effective outsourced HR solution on the market.
Unless your business has hundreds of employees, a fully-staffed HR department, and a great E-mod, you will find PEOs both save money and enable your existing HR staff to focus on core business issues.