The Definitive Guide to HR Outsourcing
Should you outsource HR administration? Small businesses have a lot of options, including PEOs, ASOs, HROs, or an HRIS solution.
Businesses of all sizes need cost-effective, efficient employee benefits and HR administration. Some groups work with outside entities to accomplish this, including Professional Employer Organizations (PEOs), Administrative Services Organizations (ASOs), Human Resources Organizations (HROs) or Human Resource Information Systems (HRIS).
PEO, ASO, HRO, HRIS—it’s an alphabet soup of options. How do you know which is the best fit for your organization?
We’ll define these entities, demonstrate how they differ, and provide key questions and considerations to determine which strategy makes the most sense for your organization.
HR Outsourcing Glossary
Professional Employer Organizations:
A PEO is a business entity that provides a variety of administrative tasks for an organization, including HR, payroll, benefits and more. This is done through a co-employment relationship, in which PEOs effectively become the employer of record, and they “lease” employees back to the organization.
Administrative Services Organization:
ASOs manage many of the same tasks as PEOs, but they generally do not become the employer of record. As a result, they typically do not offer benefits such as major medical coverage or workers’ compensation insurance, though they may assist organizations in securing this coverage.
HR Resources Organization:
Human resources organizations are similar to ASOs in that there is no co-employment relationship and your organization remains the employer of record. They differ from ASOs in that they generally only handle the “human” aspects of human resources, and do not typically manage benefits, tax or payroll related issues.
Human Resources Information System:
An HRIS is an all-in-one software solution that streamlines transactional administrative HR tasks. An HRIS system should accommodate the whole employee lifecycle, from recruitment and hiring to benefits, time management and ultimately, termination. An HRIS cannot provide access to benefits, but it can manage the administrative tasks associated with providing, enrolling in and managing benefits. Many HR software platforms are provided through a benefits broker, which allows employers to both access and administer benefits to employees.
Finding the Right HR Outsourcing Option
Outsourcing HR administration to a PEO, ASO, or HRO can help smaller organizations reach economies of scale, but this dynamic can create other challenges and a lack of flexibility for business owners.
To determine what arrangement makes the most sense for your organization, first make a list of all the HR, benefits and payroll-related tasks your organization needs to manage. The list will likely look something like this:
- Recruiting and onboarding new hires
- Managing employee relations
- Training and professional development
- Culture development and maintenance
- Tracking time & attendance
- Managing PTO
- Processing payroll
- Ensuring workplace compliance
- Workers’ compensation insurance
- Health and ancillary benefits
- 401(k) administration
- COBRA administration
Generally, HR administrators want to spend the majority of their time on strategic efforts that support team members and organizational growth. Freeing up time associated with administrative tasks allows these professionals to focus on employee relations, professional development, and company culture, which is why finding the right arrangement for HR administration is so crucial.
To compare PEO, ASO, HRO, and HRIS arrangements, consider the following.
Fees for a PEO are typically as a percentage of payroll or on a per-employee per-month (PEPM) basis. These costs range, but are generally between 2% to 12% of payroll, or $500 to $2,000 PEPM annually.
ASOs generally charge a flat rate per employee and per service purchased. This can make it easier to project ASO expenses versus a PEO. On average, ASOs range between $600 to $1,800 per employee annually.
Because of variability of services, HRO pricing varies widely. Pricing models may include per-employee per-month, fully-fixed pricing for a defined scope of services, and fixed-based plus variable adjustments, in which pricing may increase as a result of the number of transactions or resources required.
HRIS pricing depends first on point of access. Some software solutions market directly to employers, and generally charge on a per-employee per-month basis. However, many benefits brokers provide access to HR and benefits administration solutions as part of their value proposition to clients and prospects. Often these products are offered for free or at a reduced price.
If you choose a standalone HRIS, you will still need to work with a benefits broker to access and administer health, ancillary and worksite benefits. HR systems that aren’t broker-supported generally lack core benefits administration functionality, which is why the broker-provided HRIS model provides the best results.
Access to Benefits
That brings us to the next factor in the HR outsourcing decision. Every organization faces different needs with it comes to accessing benefits, including health, dental, vision, and worksite products such as disability coverage and workers compensation insurance.
PEOs have their own health plans and benefits products, which can create savings for the group, or create a larger expense. This depends on the employer’s prior coverage experiences.
ASOs can help you access benefits products, but cannot customize benefits packages, and HROs generally do not manage benefits at all.
An HRIS provided through a benefits broker produces the best results when it comes to employee coverage, because advisors can both build a custom benefits plan unique to your organization’s needs, and manage the administrative responsibilities through an HRIS.
Flexibility and Control
Finally, consider how important control and flexibility are when it comes to your HR needs.
Some employers do not wish to lose control as the employer of record of their employees. There are many reasons for this, including creating confusion with employees—the name on their paycheck and benefits documents will be the PEOs, not yours. These groups often prefer working with an entity that doesn’t use a co-employment arrangement for this reason, such as an ASO, HRO, or HRIS.
Second, small organizations may initially find it valuable that a PEO can provide benefits such as workers’ compensation, retirement plans and health benefits. However, PEOs and ASOs often employ a one-size-fits-all strategy, and many organizations find that they need or want more customization in benefits or payroll. Especially as the hiring environment has become so competitive, many organizations are looking to provide personalized, customized benefits to employees. This is typically not possible when accessing benefits through HR outsourcing.
PEO, ASO, HRO or HRIS?
Still not sure which arrangement makes the most sense for your team?
Here are some key questions to ask:
Do you want to retain control as the employer of record?
Yes: Consider an ASO, HRO, or HRIS.
No: Consider a PEO.
Do you want to access less customized benefits through a larger organization, or develop a more personalized benefits package custom to your organization?
Less customized benefits through a larger organization: Consider a PEO or ASO.
Personalized benefits custom to my organization: Work with a benefits broker who provides an HRIS.
Do you primarily need a solution for HR tasks, or are additionally looking for payroll, taxes and benefits access and management?
Primarily HR tasks: Adopt and implement an HRIS.
HR, payroll, taxes, and benefits: Consider a PEO or ASO.