Human Resources Outsourcing: One Size Does Not Fit All

Outsourcing human resources management functions to experts in the Professional Employment Organization (PEO) industry is an increasingly popular choice, particularly among franchisees. In addition, the PEO industry adds, on average, 6,000 new clients and approximately 100,000 worksite employees per year. According to the National Association of Professional Employer Organization’s research, PEOs provide services to between 156,000 to 180,000 small and mid-sized businesses, employing between 2.7 and 3.4 million worksite employees. There are three primary types of human resources outsourcing arrangements in the industry: co-employment (also referred to as employee leasing), human resources outsourcing (HRO), and administrative services outsourcing (ASO).

Co-Employment/Employee Leasing

When franchisees decide to partner with PEO in a co-employment relationship, franchisees receive significant benefits. The PEO becomes employees’ employer of record for wage reporting, tax paying, workers’ compensation, and certain other purposes.

Business owners are able to control costs and maximize internal resources while the PEO assists with regulatory compliance, human resources support, unemployment and workers’ compensation claims management, FICA, FUTA, SUTA and other employer tax withholdings and returns. In a co-employment relationship, small and mid-size businesses gain access to big-business employee benefits such as 401(k) plans and robust health, dental, vision and other insurance packages. Additionally, the co-employment concept is attractive to franchise owners because of the potential access to Employment Practices Liability Insurance (EPLI) coverage, which is critical for risk mitigation in increasingly litigious times, and the added human resources support with managing EPLI claims from inception to outcome.

The HRO Relationship

While the co-employment concept is a comprehensive resource for back office support, it may not be the solution of choice for all franchisees. Therefore many PEOs, including Modern Business Associates, also offer HRO arrangements. In these arrangements, clients receive the same type of administrative human resources assistance, including access to EPLI coverage, but unlike in a PEO arrangement, a co-employment relationship is not established; all employment related wages and taxes are paid under the client’s federal ID number. HRO clients may have in-house human resources personnel and use their PEO professionals to provide assistance and guidance on more complex human resources and compliance matters. The PEO’s staff may handle high-level or riskier personnel issues, draft handbooks and other employment-related documents, and respond to inquiries from federal and state agencies, allowing the franchisee’s in-house personnel to focus on day-to-day administrative issues.

The ASO Relationship

Lastly, PEOs may offer an Administrative Services Outsourcing (ASO) arrangement. Similar to an HRO arrangement, no co-employment relationship is established; essentially, clients customize the services they want the PEO to perform. In an ASO arrangement, a PEO may offer a franchisee access to services including employee recruitment, EPLI claims assistance, compliance auditing, and access to its technology suite, including HRIS systems, time and attendance solutions, or databases that track unemployment claims administration. All additional services are charged a la carte. For example, in most PEO or HRO relationships, the cost for EPLI claim assistance is generally an included service to the client, but in an ASO arrangement, the client may be charged on an hourly basis.

Flexible, service-oriented PEOs understand that one size does not fit all. Franchisees must communicate with the PEO about their human resources needs in order to determine which outsourcing arrangement works best. This type of customization ensures the franchisee is satisfied with the services it receives from the PEO and creates a long-term and rewarding relationship for both parties.

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