There are still some companies that handle every aspect of their business in-house. However, most employers are finding that it makes more sense to outsource at least some administration roles to external experts. Outsourcing allows businesses to leverage the extensive knowledge of a trusted partner organization. They can do this instead of relying on a handful of generalists or hiring additional specialists. The outsourcing relationship allows employers to ensure more compliant processes. Plus, they can enjoy the benefits of Best of Breed technology. But deciding which processes to outsource depends on what a company is hoping to achieve. Let’s take a look at the processes from payroll to PEOs.
Many Options for Many Circumstances
In the world of Human Resources Outsourcing (HRO), businesses can dip their toes in the water or take the full plunge into farming out responsibility for their entire workforce. With all the options available, it can be confusing to sort out the different terminology and levels of outsourcing. Here is a look at some broad categories that employers may consider.
This is a very straightforward arrangement with a third-party company handling payroll processing without creating any kind of co-employment relationship. Calculating and withholding taxes, filing taxes, garnishing wages, and making other deductions are common services a payroll agency provides. They may also assist with recovering tax credits. (Many providers use our WOTC software to help ensure employers take advantage of the full amount of tax credits they qualify to receive). Companies of all sizes across a broad variety of industries can benefit from payroll outsourcing.
Human Resource Outsourcing takes many forms. Some agencies provide mostly administrative support. For example, they may handle the management of health insurance benefits, unemployment, retirement, time & attendance, and more. In general, if it can be done using automation and virtualization, “Administrative Services Outsourcing” or ASO is an option for HR. The focus is typically on shifting highly regulated but fairly repetitive administrative tasks to an outsourcing partner that has the right software and expertise to ensure compliance. Small to mid-sized businesses often choose this option because it takes a worry off their plate.
Companies that want to reduce their need for internal HR expertise further may outsource other functions such as recruiting, hiring, termination, and employee support. In these cases, the employer is still making high-level decisions about the workforce. But the HRO partner is there to handle day-to-day issues. It’s a common choice for well-established businesses that have a sizable workforce to manage. Outsourcing HR affords an organization the ability to focus more strategically on initiatives that support growth and profitability while knowing that employees are in good hands. This option tends to work best for companies that have standardized processes in place. For example, outsourcing recruiting isn’t possible unless an organization has (or is able to develop) job descriptions and qualifications a third party can implement.
PEO (Professional Employer Organization)
A PEO is as close to total workforce outsourcing as it gets. This type of organization hires employees and leases them back to the client organization. A business using a PEO to supply and manage its workforce is still considered a co-employer and shares some risk. However, since a Professional Employer Organization is well versed in employment law and best practices for compliance with IRS, DOL, EEOC, OSHA, and other regulatory agencies, that risk shrinks overall. The PEO creates the employee handbook and helps ensure the creation and enforcement of policies with compliance in mind.
Depending on the terms of the contract, a PEO may take primary responsibility for managing claims that arise from hiring or firing practices, workplace injuries, harassment, unemployment, and other legal issues. These matters are typically outlined in the Client Services Agreement and are essential to managing risk. A PEO can also bring economies of scale to bear on issues such as health benefits. Obviously, the PEO also handles all the payroll and other administrative aspects of HR, since they are the Employer of Record for the workforce.
Small and mid-sized employers may benefit when shifting from payroll to PEOs outsourcing model. That’s because it allows them to focus on getting work done and they can treat labor costs as a budgetary line item. The arrangement has additional attraction for startups. That’s because they have little experience with hiring and workforce management. They may face serious compliance and litigation risks as they add to their headcount. For a PEO relationship to work well, management and employees must be comfortable with using self-service technology. PEOs typically offer this as a core part of their virtual support.
Shifting from Payroll to PEOs Outsourcing Only Works with the Right Software
There is one thing payroll outsourcing firms, HROs, and PEOs have in common. They can benefit from the integration of onboarding with payroll processing software. At Efficient Hire, we consider this type of integration to be an important part of any comprehensive HRIS (HR Information System). No matter what type of outsourcing you are considering—or if you are an outsourcing partner—we encourage you to contact us for more information on shifting from payroll to PEOs.