Professional Employer Organizations (PEOs) offer valuable outsourced human resources (HR) services, such as payroll, benefits, and retirement plan administration for many growing businesses. However, companies may outgrow their PEO over time as their needs change and expand.
If you’re considering moving away from a PEO, know that other service models may have the features you want to maintain a cost-effective HR program that aligns with your company’s goals.
Comprehending the Different Service Models
Outsourcing all or some of your administrative and human resources tasks can be more efficient than handling them in-house. Deciding between the different service models can be challenging and requires carefully evaluating your needs, budget, and expectations.
Common service models include:
Professional Employer Organization (PEO)
A professional employer organization arrangement occurs when a company chooses to partner with a PEO. They enter into a co-employment relationship in which the PEO serves as the “employer of record,” meaning the company gives the PEO authority to perform a range of administrative and HR-related tasks on behalf of the business. There is also shared liability, which means that the PEO assumes some of the risk.
Administrative Services Offering (ASO)
An administrative services offering refers to a company that contracts with businesses to provide HR and administrative services. This outsourcing partnership allows employers to carefully compare and choose from multiple service offerings, such as payroll, benefits administration, and recruitment. This a la carte approach is favored by employers who prefer to customize their service models to suit their needs.
Direct Services
Under a direct employment model, there is no co-employment; the client is the sole employer. While this is the most autonomous service option, companies are ultimately responsible for administrative and HR tasks. Companies that choose direct services must meet compliance and initiate services such as payroll without co-employment.
Comparing Fundamental Features Across Services
Choosing the suitable service model for your business requires a thorough look at the different features and differences. Some aspects to consider include:
Employment Model and Legal Implications
Under a PEO, co-employment exists in which the PEO co-employs the client’s employees. With an ASO and direct services, there is no co-employment, and the client is the sole employer.
When comparing these service models, it’s also important to consider the legal implications, especially when it comes to industry restrictions. PEOs have industry-specific and occupational restrictions, while ASOs and direct services do not. However, some industries may not be able to receive payroll services under ASOs and direct services.
Health Benefits and Workers’ Compensation
Health benefits requirements can differ based on the service model. PEOs have minimum underwriting requirements, which vary from PEO to PEO, that need to be met in order to qualify for enrollment in the master plan. With ASOs and direct services, clients can bring their own small or large group health benefits or select a new benefit plan.
Workers’ compensation requirements under a PEO typically require clients to be covered by an eligible workers’ compensation policy. However, ASOs and direct services allow clients to bring their own workers’ compensation policy or shop for a new plan.
Payroll and Tax Management
Payroll tax accounts are handled differently depending on the service model. PEOs and ASOs are responsible for creating and maintaining all local and state payroll tax accounts, such as state unemployment insurance (SUI) accounts and state-mandated disability and paid family leave. Under direct services, clients are responsible for state and local payroll tax creation and maintenance.
HR and Compliance Support
All service models, including PEOs, ASOs, and direct services, have access to various compliance products and services. PEOs and ASOs typically offer HR and compliance support as part of their standard fee arrangements. Clients under direct services can usually purchase HR and compliance support on a subscription basis.
Transitioning Between Services
While PEOs remain a popular HR model for businesses that want assistance handling HR and administrative tasks, they are not right for everyone. You may decide to leave a PEO due to headcount growth, to improve the employee experience, high costs, or due to a growing HR team. When transitioning between services, consider the following:
Flexibility to Switch Services
While employers are free to switch service models when the time is right, there are factors to consider to create a smooth transition. Make sure that you understand the termination requirements of your existing contract and speak with an HR professional for support before making any major decisions.
Practical Considerations for Switching
Having the most up-to-date information available can make switching services a more positive experience. Compensation information, COBRA participants, termination records, and similar documents should be available and organized.
Let New City Assist With Your PEO Switch
At New City, we work with all major PEOs and provide businesses with the best recommendations based on their individual needs and budget. Contact New City Insurance today at 888.210.2765 for assistance with your PEO switch.