The Definitive Guide to HR Outsourcing
Should you outsource HR administration? Small businesses have a lot of options—including PEOs, ASOs, HROs, or HRIS solutions—but how does HR outsourcing actually work? In this guide, we cover the different types of HR outsourcing arrangements and how to decide which HR strategy is best for your organization.
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).
Find out what these HR outsourcing options are, how they differ, and learn key questions and considerations that help human resources professionals determine the best strategy for their organization.
HR Outsourcing Glossary
Types of HR Outsourcing
Professional Employer Organizations (PEO)
A professional employer organization (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 “lease” employees back to the organization.
Administrative Services Organizations (ASOs)
Administrative services organizations (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.
Human Resources Organizations (HRO)
Human resources organizations (HRO) are similar to ASOs in that there is no co-employment relationship and the client 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 (HRIS)
A human resources information system (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 employee 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.
Step by Step Guide: How Does HR Outsourcing Work?
What Are the Pros and Cons of Outsourcing HR Functions?
Outsourcing HR functions may provide sets of pros and cons from one employer to the next. They include:
Advantages of HR Outsourcing
- Economies of Scale: Smaller organizations can use HR outsourcing companies like PEOs, ASOs, or HROs to reach economies of scale.
- Potential Savings: Outsourcing HR can also save time and money for human resources team members.
- Access to HR Tech: The best HR outsourcing companies will use top-of-the-line human resources tech solutions that make employers’ lives easier.
Disadvantages of HR Outsourcing
- Lack of Flexibility: This detached dynamic can create other challenges and a lack of flexibility for business owners.
- Diminished Accessibility: Team members may become frustrated with a remote or offsite HR professional—particularly in an emergency.
- Upfront Costs: The addition of an HR outsourcing solution adds another line item to the company’s annual budget.
What is the Process to Outsourcing in HR?
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. This can include everything from open enrollment to compliance and more.
Once organizations have identified all the different tasks and processes that HR manages on a daily basis, the next step is to determine which functions can be completed by HR outsourcing companies and which can be accomplished by the internal HR team.
What Functions of HR Are Typically Outsourced?
In general, some of the most common HR functions that are outsourced include:
- Recruiting and onboarding new hires
- Managing employee relations
- Training, professional development, and performance management
- Company culture development and maintenance
- Implementing and tracking time & attendance
- Managing PTO
- Processing payroll
- Ensuring workplace compliance
- Workers’ compensation insurance
- Health and ancillary benefits
- 401(k) administration
- COBRA administration
When Should You Outsource HR?
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.
PEOs vs. HROs vs. ASOs: What's the Difference?
What is the difference between HRO and PEO? Or between PEO and ASO? Refer to the following guide to determine which HR outsourcing option might make the most sense for your organization.
How Much Does it Cost to Outsource HR?
Refer to the following possible cost breakdowns to determine the expenses that might be associated with different HR outsourcing solutions:
Fees for a PEO are typically calculated 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. ASOs can range between $600 to $1,800 per employee annually.
Because of the 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 an organization chooses a standalone HRIS, HR administrators will still need to work with a benefits broker to access and administer health, ancillary, and worksite benefits.
How Do HR Outsourcing Solutions Impact an Employer's Access to Benefits?
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.
However, employers’ benefits options may be limited depending on the HR outsourcing solution. Here’s how:
- 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 employers access benefits products, but cannot customize benefits packages, and HROs generally do not manage benefits at all.
- An HRIS operated by the employer or provided through a benefits broker produces the best results when it comes to employee coverage. Why? More control and fewer middlemen complicating the process. Also, advisors can both build a custom benefits plan unique to the organization’s needs and manage the administrative responsibilities through an HRIS.
How Do HR Outsourcing Options Impact an Employer's Flexibility and Control?
Some organizations don’t want to lose control as the employer of record for many of their employees’ benefits and processes. There are many reasons why this is the case:
- Confusion for Employees: The name on their paycheck and benefits documents will be the PEO’s, 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.
- One-Size-Fits-All Limitations: Small organizations may initially find it valuable for a PEO to provide benefits such as workers’ compensation, retirement plans, and health insurance 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.
- Benefits Trouble: With a particularly competitive hiring environment, many organizations are looking to provide personalized, customized benefits to employees. This is typically not possible when accessing benefits through HR outsourcing.
HR Outsourcing: How to Decide Between a PEO, ASO, HRO, and HRIS
Some organizations still might be sure which HR outsourcing arrangement makes the most sense for their 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.