Which type of HR outsourcing company is right for you?

It’s probably a safe bet that you didn’t go into business because you love learning acronyms or tracking laws. But, love them or not, there’re many acronyms that business owners deal with daily. From FMLA, FICA and ADA to COBRA, ERISA and HIPAA, the laws, rules and regulations behind these acronyms can overwhelm and confuse even the most astute business person.

Fortunately, there are two more acronyms that can help keep you from drowning in the alphabet soup: PEO (professional employer organization) and HRO (human resource outsourcer).

These two types of companies provide HR support and administrative relief, allowing business leaders and managers more time to concentrate on core business initiatives. They’re structured to either work in conjunction with your company’s internal human resources department, if you have one, or support your human resource needs, if you don’t have a department in-house.

And, the argument for outsourcing portions of your human resources tasks is a compelling one. The National Association of Professional Employer Organizations (NAPEO) found that businesses in a PEO arrangement grow 7-9 percent faster, have 10-14 percent lower turnover, and are 50 percent less likely to go out of business.

Vendor versus trusted advisor

Though both types of companies perform functions similar to a human resources department, HROs are outsourced and completely independent from your business, while PEOs function with your company in a co-employment arrangement.

Under a PEO contract, a “co-employer relationship” is created where the PEO and client both employ the workers, allowing the PEO to assume or share certain liabilities and responsibilities. The companies outsource many of their human resource activities to the PEO but maintain control of their core business, while the PEO provides human resource services such as employee benefits, payroll administration and workers’ compensation.

Most PEOs will perform the following HR tasks:

  • Payroll processing
  • Payroll record maintenance and management
  • Payroll tax reporting and deposits
  • Paycheck/paystub preparation and delivery
  • Garnishment and deduction administration
  • Employment verification
  • PTO accruals
  • Workers’ compensation administration and claims management
  • Employment practices liability insurance coverage
  • Unemployment claims administration
  • Recruiting support

Depending on the contract or service agreement, the PEO may also provide training and development courses, individual coaching for managers, employee relations support, salary surveys, succession planning and other strategic HR functions.

Although HROs also handle employment-related issues for client companies, a very important difference is that they do not assume any employer-related liabilities or obligations. The HRO can provide a full scope of functions for the company, everything from employee acquisition to payroll, but it does so as a third party.

With both PEOs and HROs, the range of services offered can usually be tailored to the business. Associated costs will vary by the number of employees covered and services provided.

Think you can’t afford to hire a PEO to help you with your HR tasks? Maybe you can’t afford not to, according to recent statistics. In 2016, the NAPEO conducted a survey that found PEOs provide access to more HR services at a cost that is almost $450 lower per employee, compared to companies that manage their HR services in-house.

Nimble, scalable HR infrastructure

If you’re uncertain about how the FMLA applies to your newly hired administrative assistant who’s adopting a child, or if you dread spending countless hours interpreting health insurance plans, outsourcing to a PEO or an HRO may be the answer.

As a business leader at a small- or medium-sized company, you and your employees probably wear many hats. Maybe you only have one HR specialist. Or, perhaps there’s an office manager who coordinates routine HR tasks with the leadership team and multiple HR service providers (e.g., benefits broker, payroll processing company, workers’ compensation insurance carrier, etc.).

When you add to, subtract from, or restructure your workforce, how much time is spent communicating the changes and coordinating services with this complex set of providers?

And what does this complexity mean for the workplace experience and the productivity of your team? An HR partner can help simplify your human resources management.

PEOs can also help your company compete for top talent by offering employee access to retirement plans and a full suite of health insurance and other desirable, big-business benefits that may not be available outside of the PEO. When it comes to your company’s long-term vision, a PEO may be the best choice for scalable HR infrastructure and services that support your business as it evolves.

Common misconceptions about co-employment (PEOs)

Many business owners assume that turning over their human resources administration to a PEO means they’ll lose control of their company. However, a PEO should enhance your company and support your workforce, not get in the way.

For example, if you need to terminate an employee, a PEO can help you make sure the process is handled in a professional and proper way.

Hiring a PEO also doesn’t mean that the need for your existing HR staff will be eliminated. Many companies find that a PEO helps their existing staff get more done, supported by much-needed expertise, so that the business can grow without hiring additional HR employees.

Plus, external resources can prove invaluable when your business is faced with high-risk HR situations. With the PEOs’ expertise in HR, they can significantly help reduce your liability exposure.

Strategic support

Not only can a PEO assist your company with its day-to-day HR operations – it can also provide the support and guidance to help you make decisions more strategically. As a result, you might improve customer service, increase revenue or achieve other goals in line with your vision. In comparison, an HRO may only offer assistance in the tactical aspects of your HR administration (e.g., payroll processing, time and attendance, etc.).

Here are a few examples of how a PEO might help you:

  • The PEO can help you create new employee onboarding and state-wide training programs that help reduce turnover. This leads to greater customer service continuity for your clients, boosting engagement and renewals.
  • The PEO’s online employee self-service portal reduces the amount of time your management team spends fielding HR-related questions from employees. This opens up new opportunities to “be on the floor” building relationships with customers or pursuing other revenue-generating activities.
  • With the help of the PEO’s HR advisors and payroll team, you are able to navigate the intricacies of hiring full-time versus part-time employees. You also receive advice on implications this may have on your health care reform compliance.

So, when choosing a PEO, focus on finding a service provider with a proven capability to help you increase your productivity and profitability, not just provide a temporary cost saving.

Your growth in mind

A good PEO employs HR specialists who have experience supporting businesses of your size, in your industry and near your location. They know the challenges you face because they’ve helped businesses like yours overcome those same challenges previously. So, when you have questions about market salary expectations or certain state-specific employer requirements, they have the answers.

Say, for example, that you need to open new offices in unfamiliar territories. If you partner with a PEO with a nationwide presence, it can work with your current HR team to help make sure employee-related business processes and procedures comply with best HR practices in the new region.

Certification as a differentiator

Certain PEOs have the added distinction of being a certified professional employer organization (CPEO)*. As a result of the Small Business Efficiency Act (SBEA), the IRS developed the CPEO designation exclusively for PEOs that undergo and pass its rigorous certification process. The process includes an extensive review of a PEO’s financials and other background information, and not all PEOs qualify for certification.

Here’s a detailed look at what a CPEO is – and what it can do for your business.

Employees are the cornerstone of any business. They also represent an enormous liability if your organization doesn’t properly handle all the employment-related issues. But don’t worry. Help is available.

Learn more about your options. Download our free e-book, A Buyer’s Checklist: How to Compare Professional Employer Organizations.

*The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to IRS.gov.