OneSource Business Solutions Blog
HR outsourcing can help your business cut costs and give your employees time back to focus on your core business needs. However, understanding which HR outsourcing pricing model works best for your company can be confusing.
There are four primary HR outsourcing options, each with advantages and disadvantages. As a business owner, choosing how much your company can spend will be a major factor in determining which model works best for your HR outsourcing needs.
Types of HR Outsourcing
An HR outsourcing partner can complement your internal team and give them time back to grow your business. Determining your objectives of HR outsourcing can help you figure out which vendor to choose, giving you the ability to forecast your costs better.
Payroll Processor
Payroll processing companies do exactly what it sounds like they do - process your company's payroll. They will validate your employees' work hours, calculate their wages and overtime, issue checks and direct deposit payments, and provide pay stubs for record-keeping.
But that's it. A payroll processing vendor will not provide any additional services. They also do not take any liability for mistakes. So, it still requires you or an internal team member to review their work and ensure accuracy with their payroll calculations.
Administrative Services Organization
An Administrative Services Organization (ASO) does everything a payroll processor company does, plus a little more. An ASO also provides:
- HR administrative duties
- Employee training
- Benefits administration
So, an ASO can provide your organization with additional services that might take some burden off your internal team,
Professional Employer Organization
A Professional Employer Organization (PEO) can do everything that a payroll processor does, plus what an ASO does, and more. By entering into a co-employment relationship with a PEO, your business can receive countless benefits.
Co-employment allows a PEO to become the employer of record for your employees. This does not take any decision-making control away from you, and you still keep all authority over hiring, firing, and employment decisions.
Co-employment has many benefits to your company, including:
- Cost-effective employee benefits
- Affordable workers' compensation insurance
- Payroll tax remittance
Besides salary, the most often requested perk from employees is a comprehensive benefits package. But that can be cost-prohibitive for small businesses. With a PEO, you can give your employees exactly what they want while not breaking the bank.
HR Outsourcing Pricing Models
As with any business decision, you have concerns over cost. Knowing exactly what your budget allows will naturally narrow down your choices.
Charge a Percentage of Payroll
One way in which HR outsourcing companies receive a fee is through charging a percentage of your payroll. After each payroll run, they calculate a flat percentage of your payroll and charge that amount to you for their services.
The problem with this model is that it penalizes your company when you give employees raises. Because increasing salary will increase your payroll, it will also increase the fee you pay for this service and can be cost-prohibitive.
Charge by Service
When an HR outsourcing company charges you per service, they set a rate for each service they offer. Whatever services you choose, that's the monthly or annual rate you pay.
This often leads to underutilized services. Because you pay per service and you want to keep your costs down, you may not select services that you actually need.
Charge Bundled Service
With a bundled service plan, your company pays a lump sum to get all of the services offered by the vendor. This seems comprehensive because you get access to every service they offer.
In reality, this pricing model can lead to overpaying. Your company has access to a whole host of services but many of the services you may not need.
Charge a Flat Fee Per-Employee Per-Month
When an HR outsourcing company charges a per-employee per-month (PEPM) flat fee, your company pays a flat rate for every employee you have on staff. This fee is not tied to the salaries you pay, your total payroll, or the services you select to receive.
This is the most efficient way to pay for HR outsourcing services. Because this payment model does not penalize high salaries and does not lead to underutilization of the services offered, you get high value with a positive ROI.
Which HR outsourcing model is best?
The PEPM pricing model is the ideal pricing model for your company's HR outsourcing needs. You get access to the services you need, and your costs only go up as you add more employees, a cost you can anticipate because of the transparent pricing model.
