The Ins and Outs of HR Outsourcing: Part I

 
May 31, 2010
In Part 1 of our two-part series, Milan Yager, president and CEO of the National Association of Professional Employer Organizations, explains the difference between HR-outsourcing solutions. Friday's Part 2 will take an in-depth look inside Professional Employer Organizations and how operators can pick the one that is right for them.
  
Managing employees today is a costly and potentially dangerous proposition. Failure to comply with laws such as EEOC, FLSA, FMLA, ADA, COBRA, OSHA, and others, could prove very costly. A restaurant owner could possibly lose his business as a result of a legal action for wrongful discharge.
 
More restaurants are finding it advantageous to outsource the entire lifecycle of employment in order to improve operations. Restaurants routinely outsource payroll processing and accounting because they have no other choice. With an average employee turnover rate of 90 days and the $171,000 yearly cost of employment and its administration for a 100-unit pizzeria with 2,000 employees, restaurants are finding relief in outsourcing human resources just like all other small businesses.
 
When exploring HR-outsourcing solutions, many companies encounter unclear and unexplained acronyms: HROs (Human Resources Outsourcers); ASOs (Administrative Service Organizations); and PEOs (Professional Employer Organizations). Since these three-letter terms often appear hand-in-hand, it's easy to assume that they refer to the same thing. But that's not necessarily the case.

Most people use HRO when they're talking about either breed of service provider, so it's easy to get confused and assume that HRO is the blanket term for HR outsourcing. While HROs, ASOs and PEOs do offer similar services, fundamental differences exist between the approaches. And every restaurant — whether a startup just breaking into the market or a franchisee with years of experience — needs to understand these differences before choosing an HR outsourcing solution.

HROs

An HRO is a third-party provider of common HR services. Depending on its range and scope, an HRO can address all or only a few of businesses' various HR needs, including payroll, benefits administration, training, risk management and recruitment. Most HRO companies offer services à la carte so that you can pick and choose which HR responsibilities you want to outsource.

PEOs

PEOs, on the other hand, take care of all HR responsibilities for their customers. A PEO handles every HR task — from workers' compensation to creating an employee handbook. A PEO also shares liabilities and legal responsibilities for its clients.

In order for this relationship to work, a PEO delivers its services by establishing and maintaining an employer relationship with the employees at the client's worksite and by contractually assuming certain employer rights, responsibilities and risk. The shared employment relationship of a PEO provides a number of benefits for companies over the agent role of an HR outsourcer model. Put another way, PEO shares responsibilities and takes care of all the administrative back-office responsibilities such as payroll, benefit enrollment, HR manuals, workers' compensation and unemployment compensation.

With the much larger size of a PEO's workforce, they can provide economies of scale and scope on health benefits and retirement packages that you might not have the time and expertise to offer on your own. PEOs also are responsible for improving compliance with local, state and Federal regulations. Allocating all HR responsibilities to a PEO allows growing businesses to devote their attention to issues that will make or break them.

Single Source Outsourcing

Single source outsourcing providers or Administrative Service Organizations (ASOs) enable businesses to take advantage of outsourcing without transferring the entire HR organization to a service provider. The approach provides a model under which companies outsource one or several difficult or time-consuming HR processes, such as payroll, recruiting or benefits-plan administration, while retaining control over other applications.

In an ASO arrangement, the vendor is an agent and the business client remains fully liable and responsible, unlike with a PEO where there is a sharing and allocation of responsibilities. It's not unusual for a company to maintain a business relationship with two or more single source outsourcing providers, with each firm offering a critical service in its own area of expertise.

HR Specialist

One alternative to outsourcing is to hire an in-house HR specialist. Finding one person who is an expert in HR, payroll, employee benefits and risk management can be difficult and expensive. Most restaurants don't have the budget for a position like this.

Which One's Right for You

Determining whether an ASO or PEO is right for your company requires a significant amount of consideration and planning. But a few key facts may help direct your decision process.

If you are new to the restaurant industry, you may be wise to consider a PEO. Startups have a host of issues on their plates — from determining the right number employees to creating an effective marketing strategy — and may not have the budget to hire a dedicated HR professional. A PEO can save you a tremendous amount of time and effort.

In addition, if you have a small restaurant organization, it's worth hiring a PEO to be able to offer your employees health insurance or 401(k) plans. If your organization is going to compete with larger chains for talent, you need to provide benefits that are up to snuff.

If your company has more experience under its belt, an HRO might be the better choice.
 
Switching any HR system can be a difficult task for an already established company and has the potential to cause major problems. For instance, integrating an HRO's system with a company's legacy payroll system may be cause for consternation. And you might have already hired an HR professional that you trust and value. Outsourcing one of your time-consuming tasks — but not all — may be the best bet.

The Final Choice

Outsourcing HR, especially PEOs, has shown itself to be a fast-moving trend that has caught on throughout the restaurant industry. Companies that were hesitant to add another monthly bill to operating expenses are finding the removal of such a stressful operation to be worth the expense and provide way more value than ever expected.

Topics: Staffing & Training


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