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April 23, 2021
To free up valuable time and manage costs, entrepreneurs and small business owners often consider outsourcing their human resources function. Contract HR services range from straightforward payroll services to comprehensive HR offerings, and the choice will vary depending on the level of expertise and management sought by each client. With a plethora of potential payroll and HR scenarios, there is no one-size-fits-all solution. So how does a business owner figure out which one to choose?
Broadly put, there are four main buckets for outsourced HR services. Each offers the benefit of managing employee responsibilities in some capacity, and prices increase in keeping with the level of responsibility being outsourced. Which one to choose hinges on many factors, but the most important considerations typically depend on the size of the business, whether the business wishes to maintain its employer of record status, the potential unemployment tax to be paid and how much flexibility is needed.
Ranging in comprehensiveness and price, these outsourced HR services are often referred to as acronyms and comprise the following four types:
How do outsourced HR services differ? Below is a guide on the key parameters of each of the four types. It is important to have a firm understanding of the options before making a selection, as some services offer month-to-month agreements, while others require a contract with a cancellation penalty. Additionally, there can be different state unemployment tax rate consequences based on the type of service. Keep in mind that, while delivered differently, each type of outsourced HR service has the same premise: To provide some level of HR services so that business owners can spend more time on the key tasks that generate revenue.
With PSPs, the hiring business maintains its status as the employer of record. This is an important distinguisher, as it means that the level of state unemployment tax rate paid is based on that of the client rather than the payroll service. PSP services primarily provide payroll processing, but in nod to the fact that all business owners must be covered for workers’ compensation in accordance with state law, some PSPs also offer options for workers’ comp, typically through local insurance agents. This is a type of flexibility that many business owners find useful. PSPs also may offer two types of payment programs for workers’ comp: a traditional program with a down payment and monthly payments paid by the hiring business, and a pay-as-you-go program based on the client’s actual payroll.
Among PSPs’ key benefits is that they normally do not require a contract. Service typically spans from pay period to pay period and entails no cancellation penalty. Another upside is that because the business remains the employer of record, with good practices its state unemployment tax rate may go down over time.
Also known as co-employment services, PEOs are designed to let employers outsource the heavy lifting of most of their HR-related responsibilities, including payroll, employee benefits, tax compliance and workers’ compensation. These services normally provide the pay-as-you-go workers’ comp insurance payment plan that is based on the client’s actual payroll. A significant differentiator of the PEO, as opposed to other types of outsourced HR, is that only with the PEO does the service itself become the employer of record. This means employers must pay at the PEO’s ratel for state unemployment tax, and that upon entering a contract with a PEO, whatever plans the PEO uses for benefits and insurance, the client must use too. Also, the client’s brand name and its employee data become facets of the PEO after a contract is signed, as the PEO becomes the company of record.
In addition to acting as employer of record, PEOs usually have cancellation penalties once they are under contract with a business. They are sometimes described as less service-oriented than competing options, as they tend to have a larger volume of customers per representative. However, PEOs are often a good option for new or very small companies as they can ensure that all HR is covered, and they frequently are able to offer more affordable health insurance and 401K plans than would otherwise be available.
If flexibility is a priority for the client, an HRO service may be the best fit. They are sometimes compared to an a la carte option as they give more leeway as to which HR duties employers can choose to have managed. In general, an HRO acts as a partner to the hiring company, which can be useful when it comes to matters such as compliance issues. The HRO, unlike the PEO, remains a separate entity, which allows the client to continue its growth without issues and maintain control over employee data.
HROs are often a top choice for larger companies because they can provide options that can be tailored to the specific needs of individual clients. For example, a business may already have the internal staff to cover most HR issues but still need some level of outside expertise to be managed by the HRO. In addition, established companies can retain their identity under the terms of the HRO while still getting help with selected HR tasks.
In an ASO, employers retain their employer of record status, so all payroll taxes are reported and filed using the client’s federal employer identification number, or FEIN. Another major difference between a PEO and an ASO is that while both offer a suite of outsourced HR services such as payroll, insurance, employee benefits and workers’ comp, the client still maintains control over employees and the company brand with an ASO.
An ASO may be preferable for companies that are happy with their current benefits and workers’ comp broker. This is because the ASO allows the client to retain existing relationships with insurance brokers and carriers while also gaining access to a team of professionals through the ASO to help manage time-consuming administrative functions on their behalf. But unlike a PEO, an ASO does not assume any liability. Responsibility for safety, regulatory compliance and insurance stay with the client company.
Payroll service providers: Depending on the level of engagement, annual fees per employee range roughly $150 to $200. ADP, Paychex and Gusto are a few examples of companies that offer PSP services.
A quick snapshot of some of the most-common HR functions companies choose to outsource include:
In summary, the type of HR outsourcing service you choose will depend on your specific needs, including budget, employee headcount and the complexity of issues the client needs to have handled. A payroll service provider or PSP is the most popular choice as it allows businesses to eliminate paperwork and minimizes the chance of fraud, and it also frees up employers from the time-consuming duty of running payroll. When a more comprehensive plan is needed, a human resources outsourcing firm or HRO could be the right choice, particularly if you need a service tailored to your business rather than a one-size-fits-all approach. A professional employment organization or PEO is generally recommended for companies with less than 100 employees, as a larger staff makes bringing HR functions in-house a more economically viable option. Finally, an administrative service organization or ASO is often the choice for clients looking to outsource the administration of some aspects of their HR plan, for example, to keep their in-house team from dealing with matters with which they are unfamiliar but that could cost the company money in the event a mistake is made.
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