The search for affordable employee benefits and the growing workload of modern HR is driving small and medium-sized businesses (SMBs) to consider outsourcing. While large companies can support sizable in-house HR teams, SMBs don’t have the same luxury.
The most common options for such outsourcing include:
1. Payroll processors
2. ASO (Administrative Services Only)
3. PEO (Professional Employer Organization)
All the above choices can take a significant burden off the small business owner's shoulders, helping employees focus on core tasks. However, only one solution gives SMBs access to Fortune 500 benefits at Fortune 500 prices.
Let's go into further detail to help you decide which partnership can benefit your business the most.
A payroll processor handles all payroll-related functions of the company. The benefits of working with such a company include:
1. Saving money: When you outsource payroll to a processor, you don't need to hire in-house payroll staff or invest in purchasing and maintaining appropriate payroll software.
2. Staying compliant with payroll tax requirements: Managing payroll can be complicated, especially when you consider fast-changing legislation. The processor stays up to date with tax requirements.
3. Saving time: Payroll is one of the most time-consuming administrative duties faced by businesses of all sizes. When you outsource this task to a processor, your entire team can gain time to focus on other tasks.
While highly beneficial, outsourcing payroll processing comes with several downsides:
1. Errors: choosing the wrong payroll processing partner could lead to serious errors, which in turn result in fines and lawsuits.
2. Responsibility: if the payroll processor makes a mistake when calculating payroll or filing taxes, your business is still ultimately responsible for all its actions.
Payment processors can save your company time. However, they don't provide any tangible cost savings. These service providers remove only a small part of the HR-related administrative workload, leaving your team to deal with the rest of the tasks.
Administrative Services Only
An ASO handles all the elements of payroll processing but also assists with other aspects of HR. By working with an ASO, you can get assistance with:
1. HR administration
2. Payroll support
3. Updating employee handbooks
4. Regulatory compliance
5. Benefits administration
The benefits of working with an ASO include:
1. You get administrative support in multiple areas of HR.
2. You work with experts in areas like tax filing, regulatory compliance, and legal questions.
3. You can save time on HR functions and allow your internal HR staff to focus on other tasks.
The downsides of hiring an ASO are:
1. Just like with a payment processor, you don't get access to cost-savings on benefits coverage or workers' compensation insurance.
2. You are responsible for handling all risks related to the work done by an ASO.
An ASO can deal with a variety of administrative work for your organization. It offers more time savings than a payroll processor does. However, there aren't any tangible cost savings.
Professional Employer Organization
A Professional Employer Organization (PEO) provides a comprehensive set of HR solutions for businesses of all sizes.
Besides providing all the same services as ASOs and payment processors, a PEO calculates and remits taxes on behalf of the company. They make sure all taxes are done correctly and filed on time.
The main advantage of a PEO over other HR outsourcing services is the opportunity to access affordable, Fortune 500 caliber benefits regardless of the size of your business. Using economies of scale, PEOs aggregate all of their clients worksite employees together to acquire the same benefits as large enterprise companies at a price SMBs can afford.
Depending on the location and business, a PEO can also provide access to its worker's compensation experience modifier, thus lowering premiums for new businesses and companies with multiple workers comp claims.
Other benefits of working with a PEO include:
1. Reduced liability: PEOs take responsibility for tax filing. That means they will be held partially liable for any mistakes.
2. Lower turnover: by improving your HR routine and providing appealing benefits, a PEO allows you to retain existing employees and attract top talent.
3. Compliance: employment legislature tends to change frequently. With compliance experts working by your side, the risks of missing an update are minimal.
4. Time savings: just as ASOs and payment processors, PEOs save businesses a tremendous amount of time by freeing the rest of the team from its HR responsibilities.
Unlike payment processors and ASOs, a professional employer organization offers tangible cost savings. The ROI of using a PEO is 27.2%.
Which HR Outsourcing Option is Right for You?
All three HR outsourcing options are an excellent solution for companies that lack time and money to handle HR functions on their own.
You may want to hire a payment processor if you already have an internal HR team that manages to deal with the majority of other functions. Meanwhile, hiring an ASO is reasonable if you only need extra assistance with administrative tasks. Companies choose PEOs over ASOs when they want to save money on top-notch employee benefits.
A PEO can act as an external arm of your HR department or take on all HR responsibilities. Working with such a partner can help your business save time and money while retaining top talent and gaining a competitive advantage.