Human Resources Outsourcing - The Whole Story
by Layne Davlin, Vistage Member and the Founder & CEO of NetPEO
When a small business launches, there's little need for a full-scale human resources department. But as employees are added, the workload mounts for C-level officers. They find it hard to stay on top of orientation and training; keep track of hours worked, vacations and sick days; procure and manage health insurance programs and other benefits such as flexible spending and 401(k) programs; terminate employees; and keep up with general employment.
Additionally, government regulations begin to affect small business as they grow. Among the laws that may affect businesses are the Americans with Disabilities Act (which kicks in at 15 employees), Title VII (15 employees), Age Discrimination in Employment Act (20 employees), the Family Leave and Medical Leave Act (50 employees), and the Employee Retirement Income Securities Act.
An increasing number of small and mid-sized employers have turned to Human Resources Outsourcing (HRO) firms to help them navigate these responsibilities and regulations. HROs are third party administrators of human resource functions, and they come in three forms as described below:
- PEO-- A professional employer organization (PEO) typically provides payroll, workers' compensation, and human resources outsourcing as well as employee benefit administration. PEOs hire, or co-employ, a client company's employees and act as their employer of record. PEOs then lease the employees back to the original employer. This practice allows employers to transfer certain risks and liabilities to the PEO.
- ASO-- Administrative Services Organizations (ASO) provides payroll, workers' compensation, human resources, and employee benefit administration without a co-employment or employee leasing arrangement. ASOs do not assume compliance or labor law risks, as PEOs do.
- Payroll Processor -- Payroll processing companies handle items that apply to payroll: issuing pay checks, W-2's, 1099s and calculating employment taxes.
Outsourcing the responsibilities of a human resources department can be a cost-saving move for businesses with fewer than 250 employees or for business with multiple offices. When a business crosses that 250-employee threshold, the price of a provider's services may equal the cost of having a full-time HR staff.
Associated Costs
Typically, the cost of outsourcing your HR needs is calculated as a percentage of total payroll. For example, a payroll processing company typically charges between one and a half to four percent of total payroll costs. An HRO handling the whole gamut of HR responsibilities and regulatory compliance will charge five to eight percent of payroll. This cost is generally somewhat less than the equivalent of hiring, training, and providing benefits to an internal HR staff. Many HROs offer a la carte services, allowing businesses to piece together the plan that best fits the company.
Benefits
The chief benefits of the HR outsourcing relationship is that the solutions provider assumes responsibility for numerous administrative and compliance activities. With the stress of these complexities removed, business owners are free to focus on day-to-day operations and overall profitability. The time saved on non-revenue-producing activities contributes directly to the company's bottom line.
Also, a provider serves as a legal counselor to an employer as it relates to employee issues. HROs employ experts who specialize in subjects such as sexual harassment, the proper way to fire an employee, etc. HROs also offer training on these and other practices that frequently come up in the workplace-issues that can be costly to an employer that does not receive the appropriate advice.
Drawbacks
HROs have three drawbacks. They require businesses to adhere to a strict payroll schedule, which a smaller business sometimes find difficult to comply with, especially in formative days. Under an HRO relationship, companies must stick to a strict reporting schedule. Also there is no lag time for the payment of payroll tax liability (employee wage withholdings of Social Security, Medicare and federal income tax and employer's matching share of Social Security and Medicare taxes). In an HRO relationship, all of these fees must be paid simultaneously.
Another drawback to this relationship is that someone from the client company has to monitor the activities and services offered by the HRO provider. Like any other vendor relationship, an employee must communicate with the vendor as needed and hold the vendor accountable for any issues that may arise. The most common complaint from HRO clients, according to the National Association of Professional Employer Organizations, is a lack of communication from HRO vendors. It is essential that someone on the client end be responsible for managing the relationship.
The final drawback is not having an on-site HR department to deal with employee issues. Someone on your staff must serve as the HR liaison to your employees. This person does not need specific skills, as the HRO can train them, but they need to be someone that the employees trust to act in their best interests.
Finding the Right Solution
If you're thinking of using an HRO, it's best to perform due diligence. Here is a quick list of considerations when choosing a provider:
- Ask the HRO for references from current clients and check them thoroughly. A reputable provider will be happy to give you the information needed to research their company thoroughly. A provider that isn't forthcoming could be hiding something.
- Ask for some demonstration that payroll taxes and insurance premiums are paid properly and on time. A reputable vendor can show proof that the HR responsibilities they are managing are being properly handled.
- Ask for proof that any past client's legal issues have been correctly and efficiently handled.
- Compare providers based on quality and track record of service. Responsible providers don't tout cost cutting as their main function. You may save some money by partnering with one, but be suspicious of savings greater than a small percentage.
HRO providers can offer small and mid-sized companies some relief in their struggles with human resources. Thoroughly evaluating your company's needs will help you determine what help, if any, these providers can offer. If you are in need of human resources help, carefully research each provider you are considering and be sure that you have the internal resources to properly manage the vendor relationship. A provider, when used correctly, can help you focus less time on HR and more time on revenue-generating activities.
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