Types of HR Outsourcing Explained
Updated: September 20th, 2023
Managing HR and administrative tasks can become a hassle as your business grows. This can distract you from your main business goals and productivity. That's where HR outsourcing companies come in, especially for small and medium-sized businesses (SMBs). They help SMBs streamline HR processes, save money, work more efficiently, and create a better work environment so employees can do their best work where it matters.
However, you will find so many options out there that it can be confusing to pick the one that’s appropriate for you. In this post, we'll break down the concept of HR outsourcing and then talk about its different manifestations and what makes them different. We will touch on the benefits they offer to solve common problems, their pricing, and how to choose the one that is best for your business.
Understanding HR Outsourcing
When a company decides to outsource its human resource responsibilities, it shares some or all of the human resource management liability with a third-party company or a co-employer under contract terms. This contract specifies which HR services the outside company will handle and how much they will cost.
Outsourcing your HR can be very advantageous for your business, regardless of its size. For instance, it can help you streamline administrative tasks so that you have more time to focus on more strategic human resource functions. Because of its experience in these areas, an outside HR partner is likely to know more about how the market works than any single organization.
Small companies can access the expertise and resources of HR professionals through the service provider, even if they don't have a large internal HR team, which helps mitigate risks and share responsibility. Also, some HR outsourcing companies offer solutions for processing payroll and managing employee benefits that are cost-effective and easy to use, which helps in effortlessly navigating complicated HR regulations and compliance requirements. It gives businesses the flexibility to hire more talented people, locally or globally, without needing to operate HR services in-house.
Today, reputable businesses across the US offer cutting-edge human resource outsourcing solutions like HR software, self-service options, and mobile apps. This makes HR responsibilities more convenient and accessible to both you and your team members. The innovative training and development methods they provide for your team when it comes to HR functions will boost your business. A large company can benefit from these services as well, especially if yours is thinking of branching out.
Generally speaking, HR outsourcing costs are lower than in-house workforce costs. More and more businesses are turning to outsourcing solutions to improve their sustainability and growth. In our research, we found that more than half of all small businesses in the United States planned to outsource at least one of their functions in 2019, and HR is one of the most common business functions to outsource. Because of this, it’s expected that by the year 2027, the global HR outsourcing market will be worth more than $45 billion.
What's the cost of outsourcing HR?
Many important factors affect how much it costs to outsource HR, including the model and service provider you pick, the number of employees you have, and the services your business needs. The monthly cost can be anywhere from $45 to $1,500. There are fees that range from 4% to 8% of each employee's monthly earnings before taxes, or you can pay a flat monthly fee.
What functions of HR are typically outsourced?
Some of the most commonly outsourced functions include payroll administration, background screening, risk management, employee counseling, talent acquisition, etc. HR outsourcing also involves managing employee compensation, calculating taxes and deductions, and ensuring accurate and timely payments to employees.
Types of HR Outsourcing
There are several different types of human resources outsourcing options to choose from based on your business size and company's needs. Each type has its own approach to the contract agreed upon; some act as co-employers, while others offer their services as third-party providers. The four main types to consider are: Professional Employer Organizations (PEOs), Administrative Service Organizations (ASOs), Human Resources Outsourcing (HROs), Payroll Service Providers (PSPs), and Employers of Record (EORs). It’s important to understand the different types of services, products, and benefits they offer, as well as the drawbacks they might have.
Professional Employer Organization (PEO)
A Professional Employer Organization (PEO) is a company that provides a range of HR services under a client service agreement (CSA), through which the PEO firm and client company start a co-employment relationship.
PEOs become the employer of record and share responsibility and legal liability with your business, which means they pay wages and taxes as well as collect and report payroll tax information to the IRS or any governmental institution on your behalf. It's possible for a PEO to be the employer of record, but as you will see below, there are also Employer of Record (EOR) companies that do almost everything that comes with hiring people.
A survey by the National Small Business Association (NSBA) shows that each month, 14% of small business owners spend more than 20 hours a month on government regulatory compliance paperwork, and 25% of owners lose more than 10 hours of work time because of the regulations.
They also provide different software applications for time management and recruiting services to increase productivity and efficiency in the business. Your business will still be responsible for internal processes like hiring new employees, processing terminations, updating employee information, and other daily tasks. Under the PEO's contract, the PEO's human resources managers will address employee concerns and workplace safety.
Even though PEOs are available to almost all business sizes and types, most of them specialize in working with small or medium-sized businesses with fewer than 100 employees. Some of the drawbacks of partnering with a PEO include not being able to choose your own provider for health insurance, retirement plans, and other benefits. A PEO will typically manage 40 to 70 companies, so you might not always receive the same level of service from them.
Human Resources Outsourcing (HRO)
Human Resources Outsourcing (HRO) can give your business the most basic and important HR solutions. Instead of hiring a group of people to do these basic tasks and paying each of them a salary, many small businesses choose to work with an outside company and save themselves a lot of money. Larger companies with up to 6,000 employees also find benefits from working with an HRO. Some of the services you can make use of include time and employee management, employee health benefits, recruitment, and payroll management. While certainly important, these tasks are time-consuming and frustrating if you’re growing your business.
HROs are usually more cost-effective and efficient, making them a better choice for larger companies or businesses that can handle general HR tasks but need help in one or more specific areas.
Administrative Services Organization (ASO)
An Administrative Service Organization (ASO) is an HR outsourcing solution that provides your business with a wide selection of HR activities and administrative services. They allow you to choose from a suite of services, including payroll processing, benefits administration, risk and performance management, and so on, to build a customized package that tackles your specific needs. They and your business are similar to a standard vendor-client relationship, which works better for larger companies with a more established HR infrastructure. This means they aren't an employer of record and don’t share any legal obligations or risks with your company.
Similar to any provider, their services have a few exceptions and limitations. An ASO can provide most of the benefits that a classic or standard PEO does, except for some specific tax-related and insurance tasks. This means your organization will retain its unique tax ID but get a lower workers' compensation and benefits plan. They’re not responsible for anything related to employment or compliance; they'll only give you basic information and training about them. This model doesn’t sponsor benefit coverage, which means you’ll have to find companies to provide benefits to your employees.
Industry experts suggest that business owners can take advantage of an ASO model when their employee count falls between 40 and 75.
Payroll Service Provider (PSP)
A Payroll Service Provider (PSP) handles some HR tasks, such as payroll and tax compliance. If you work with a PSP company, they will handle the payroll and ensure that employees are paid on time. They also make sure the correct amount of tax is deducted as per regulations and handle employee benefit premiums. They will also provide their clients with sophisticated software to manage their operations. Unlike PEOs, you won’t sign a co-employment contract with them, which means they will not share any legal burden with you. They aren't integrated into your business as much as PEOs are, and they will only lease a team of experts to help with the mentioned tasks.
Employer of Record (EOR)
An Employer of Record (EOR) is a third-party provider who works with larger businesses to become the legal employer of staff and takes on all of your company’s employer-related duties and tasks in locations where your business doesn’t own an entity. They are in charge of your company’s human resources, which means they bring on new employees no matter where they’re located, pay them, and manage them while you run the day-to-day business. They also handle taxes, unemployment claim reporting, and benefit administration. This HR outsourcing model reduces your liability and risk, which gives you peace of mind knowing that you can focus on your business's core responsibilities. However, their services aren't as extensive as those of a PEO.
Which HR Outsourcing Model Is Right for You?
You might be wondering which human resources outsourcing model is right for your company; you’ll need to determine what your needs are and which model best serves you based on what they offer and their cost. Consider factors such as your business’s size, budget, the tools your business needs, and HR requirements. Evaluate the pros and cons of each type of provider before making your final decision. ASOs can help businesses access some benefits, but they will not manage them. The value of HROs lies in their ability to offer customized services for your company's specific needs, but they only make sense for larger companies that have a solid HR infrastructure. PEOs, on the other hand, are better positioned to offer important and extensive employee benefits to small and medium-sized businesses, such as health, dental, and vision insurance.
Why Might PEO Be the Right Choice for You?
While all the other HR outsourcing models bring unique value based on the business size and needs, PEOs can be a great option that offers an extensive list of services for small and mid-sized businesses that still need help building the infrastructure of their human resources department. They shift a lot of time-consuming and risky responsibilities away from your business so that you can focus on making all the critical decisions and growth activities with peace of mind. If you're considering growing your smaller business, the additional HR support that PEOs can provide is a step in the right direction. If you are looking for a close relationship with an HR outsourcing firm, they can provide you with a co-employment agreement to take some of the burden of running a business off your shoulders.
In conclusion, HR outsourcing can greatly help businesses of all sizes. Whether you choose to work with a PEO, ASO, PSP, EOR, or HRO, you can expect lower costs, streamlined processes, access to expert services, and effective risk management. The different HR outsourcing models can improve your company's culture and drive growth and productivity.
If you’re considering PEO services for your company but can't decide which service provider best meets your needs and budget, we recommend you research the different companies thoroughly and read reviews about them. Also, when selecting a PEO, look for certifications from different official institutions in the industry, such as the Employer Services Assurance Corporation (ESAC) and the National Association of Professional Employer Organizations (NAPEO).