Delivering HR Services: PEO vs. ASO/HRO

Delivering HR Services: PEO Delivering HR Services: PEO vs. ASO/HROvs. ASO/HRO

Alphabet SoupAlphabet Soup

HRO HRO Human Resources OutsourcerHuman Resources Outsourcer

PEO PEO Professional Employer OrganizationProfessional Employer Organization

ASO ASO Administrative Services OrganizationAdministrative Services Organization

BPOBPO Business Process OutsourcerBusiness Process Outsourcer

HRO, PEO, ASOHRO, PEO, ASO

The terms are used interchangeably.The terms are used interchangeably. It can lead to confusion within the It can lead to confusion within the

Company and in the marketplace.Company and in the marketplace. Employees need to understand differences Employees need to understand differences

and common traits .and common traits . Every PEO is an HRO, but not every HRO Every PEO is an HRO, but not every HRO

is a PEO.is a PEO.

HRO, PEO, ASOHRO, PEO, ASO

HUMAN RESOURCES OUTSOURCINGHUMAN RESOURCES OUTSOURCING

PEOPEO ASO/BPOASO/BPO

Why Do We Need To Discuss?Why Do We Need To Discuss?

Market realities and demands have convinced Market realities and demands have convinced many PEOs to deliver HR services in new many PEOs to deliver HR services in new ways .ways .

Reasons include:Reasons include: Client sophistication Client sophistication Client sizeClient size Economics Economics NecessityNecessity Risk profile.Risk profile.

HR Services Delivery ModelsHR Services Delivery Models

HR delivery model may or may not HR delivery model may or may not include co-employment.include co-employment.

Business model variations:Business model variations: With co-employmentWith co-employment

Payroll reported under PEO FEIN.Payroll reported under PEO FEIN. Client may secure Workers Compensation.Client may secure Workers Compensation. Client may sponsor health plan.Client may sponsor health plan.


Business model variations:Business model variations: Without co-employment (ASO/BPO)Without co-employment (ASO/BPO)

Payroll reported under client FEIN.Payroll reported under client FEIN.PEO is agent of client.PEO is agent of client.No employment relationship intended.No employment relationship intended.““A la carte” services.A la carte” services.

The same or similar expertise and The same or similar expertise and technology required for both models .technology required for both models .


In some PEOs the non-employer/ASO model In some PEOs the non-employer/ASO model has “evolved”.has “evolved”.

Other PEOs have intentionally charted a Other PEOs have intentionally charted a course to capture this market.course to capture this market.

Nonetheless, most PEOs have one or more Nonetheless, most PEOs have one or more clients in an ASO relationship.clients in an ASO relationship.

Our focus today will be on the structural, Our focus today will be on the structural, strategic and operational challenges strategic and operational challenges presented by a “bi-furcated” HR delivery presented by a “bi-furcated” HR delivery business model .business model .


An HRO that provides HR services An HRO that provides HR services through both a PEO and ASO has two through both a PEO and ASO has two fundamentally different legal and fundamentally different legal and practical business relationships.practical business relationships.

EmployeeEmployee

PEOPEO

ClientClientCompanyCompany

Employment Employment relationshiprelationship

EmploymentEmploymentrelationshiprelationship

Contractual relationshipContractual relationship

Co-employment (PEO)Co-employment (PEO)

EmployeeEmployee

ASOASO

ClientClientCompanyCompany

No employment No employment relationshiprelationship

EmploymentEmploymentrelationshiprelationship

Contractual relationshipContractual relationship

ASO/BPOASO/BPO

The Structure of an HROThe Structure of an HRO

Legal:Legal: Organizational structure of the entity.Organizational structure of the entity. Consider separating operations by legal Consider separating operations by legal

entity.entity. Contracts:Contracts:

Employer status requires materially different Employer status requires materially different contracts.contracts.

TPA status and licensingTPA status and licensing Insurance Insurance

Differences in the DeliveriesDifferences in the Deliveries

Organizational StructureOrganizational Structure

National HRO, Inc.National HRO, Inc.

National PEO, LLCNational PEO, LLC Universal ASO, LLCUniversal ASO, LLC V.P PEOV.P PEO V.P. ASO V.P. ASO SalesSales Sales Sales

Shared Services, LLCShared Services, LLC((ITIT, Payroll, Accounting/Finance, Risk Management, , Payroll, Accounting/Finance, Risk Management,

Benefits Administration, HR advice and products)Benefits Administration, HR advice and products)

Strategic ConsiderationsStrategic Considerations

Start with the end in mind.Start with the end in mind. Is your goal to sell HRO with PEO?Is your goal to sell HRO with PEO? Do you want to create flexibility to sell Do you want to create flexibility to sell

either ASO or PEO?either ASO or PEO? Can you separate the two businesses for sale?Can you separate the two businesses for sale? Can IT and the Back Room be separated?Can IT and the Back Room be separated? What would you be selling?What would you be selling?

Valuations can be very different.Valuations can be very different.

Strategic Considerations Strategic Considerations

Organizational Structure and ReportingOrganizational Structure and Reporting Is there a need for “Division” Presidents?Is there a need for “Division” Presidents? Board of Director buy-in and input is required.Board of Director buy-in and input is required. IT investment considerations:IT investment considerations:

ASO clients are generally larger and more sophisticated.ASO clients are generally larger and more sophisticated. Expect employee self-service.Expect employee self-service. Expect online training.Expect online training. You need robust system – not just payroll processing.You need robust system – not just payroll processing. You need qualified personnel to deliver and train clients.You need qualified personnel to deliver and train clients.

continuedcontinued


SalesSales

Can be very different sales .Can be very different sales .

Insurance is not part of the sale.Insurance is not part of the sale.

Purely consultative, value added sale.Purely consultative, value added sale.

The biggest difference is the target marketThe biggest difference is the target market (market opportunities are different).(market opportunities are different).

It probably requires two sales teams (PEO and It probably requires two sales teams (PEO and ASO).ASO).


IT investment could be substantial.IT investment could be substantial. Benefits Administration: Benefits Administration:

It’s much more complex for an ASO.It’s much more complex for an ASO. Each market has a handful of dominant carriers.Each market has a handful of dominant carriers. Each carrier has multiple plans.Each carrier has multiple plans. It can become a large undertaking to “please It can become a large undertaking to “please

everyone”.everyone”. You cannot please everyone.You cannot please everyone. It’s too expensive and cumbersome.It’s too expensive and cumbersome. Identify 2-4 carriers that cover 80% of the market.Identify 2-4 carriers that cover 80% of the market. Select 2-4 of the most popular plans (HMO and PPO).Select 2-4 of the most popular plans (HMO and PPO). You may also need to be prepared to handle HSAs .You may also need to be prepared to handle HSAs .

Legal ConsiderationsLegal Considerations

Contracts – no employer relationship – Contracts – no employer relationship – must be addressed.must be addressed. Benefits Administration – define it carefully – Benefits Administration – define it carefully –

avoid fiduciary duty.avoid fiduciary duty. No employer responsibilities – consultant No employer responsibilities – consultant

only.only. There are privacy issues because you are There are privacy issues because you are

not the employer.not the employer. IT services – define them carefully.IT services – define them carefully.

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Legal ConsiderationsLegal Considerations

Third Party AdministratorThird Party Administrator Seek legal counsel.Seek legal counsel.

There is no “employer exemption” from TPA There is no “employer exemption” from TPA statute.statute.

Threshold question: is the HRO engaging in Threshold question: is the HRO engaging in premium accounting? If yes, then you could be premium accounting? If yes, then you could be deemed a TPA.deemed a TPA.

State-by-state analysis – although most statutes State-by-state analysis – although most statutes are very similar.are very similar.

You may be able to partner with a third party that You may be able to partner with a third party that has licenses.has licenses.

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Other ConsiderationsOther Considerations InsuranceInsurance

Will the HRO assist in securing Workers Comp Will the HRO assist in securing Workers Comp and/or group health?and/or group health?Be sure there is E&O coverage .Be sure there is E&O coverage .Be sure the HRO is complying with licensing statutes.Be sure the HRO is complying with licensing statutes.

You need to advise the WC carrier of ASO You need to advise the WC carrier of ASO contracts. contracts.

Have a strong indemnity in ASO contracts for Have a strong indemnity in ASO contracts for personal injuries.personal injuries.

Errors and omissionsErrors and omissions Essential because of consultant role.Essential because of consultant role. Will coverage apply to PEO and ASO?Will coverage apply to PEO and ASO?

EPLI – Will not cover ASO.EPLI – Will not cover ASO.

Customer Service Customer Service

ASO will likely demand a higher level of service ASO will likely demand a higher level of service because expectations are higher.because expectations are higher.

A typical PEO Account Executive may not be A typical PEO Account Executive may not be able to handle the higher level of service.able to handle the higher level of service.

It may require involving outside help more often It may require involving outside help more often (HR consultants or legal).(HR consultants or legal).

Can the HRO centralize the HR “horsepower” Can the HRO centralize the HR “horsepower” needed?needed? It will need very experienced personnel for larger It will need very experienced personnel for larger

ASO clients. Should the HRO hire or retain this ASO clients. Should the HRO hire or retain this expertise?expertise?

Customer ServiceCustomer Service

Centralized HR Expertise ModelCentralized HR Expertise Model

Legal Legal

(in-house or outside)(in-house or outside)

HR Professional(s) HR Professional(s)

(Very Experienced – SPHR – Problem Solver) (Very Experienced – SPHR – Problem Solver)

PEO AEsPEO AEs ASO AEsASO AEs


Will the client demand on-site Will the client demand on-site presence?presence? What are the qualifications for such a What are the qualifications for such a

resource?resource? At what employee count does on-site At what employee count does on-site

support make economic sense?support make economic sense? You probably need to hire as needed.You probably need to hire as needed.


PersonnelPersonnel Common skills and expertise exist in an HRO to Common skills and expertise exist in an HRO to

service the ASO and PEO (benefits service the ASO and PEO (benefits administration, payroll, HR advice, IT support).administration, payroll, HR advice, IT support).

How to deploy?How to deploy? Cross-train?Cross-train?

Are the skills capable of cross-training?Are the skills capable of cross-training?Is it preferable to have separate teams to create better Is it preferable to have separate teams to create better

focus and customer service?focus and customer service?Example: Account Executives may require a higher level Example: Account Executives may require a higher level

of HR background for ASO client but more payroll of HR background for ASO client but more payroll experience for PEO.experience for PEO.


Examples of services Examples of services Investigations/assistance with regulatory inquiries.Investigations/assistance with regulatory inquiries.

All investigations done by HRO personnel are not protected from All investigations done by HRO personnel are not protected from discovery.discovery.

HRO personnel are not accting in furtherance of legal counsel for HRO personnel are not accting in furtherance of legal counsel for client.client.

Client will expect trained, experienced investigators.Client will expect trained, experienced investigators. You must advise clients carefully (not your employees).You must advise clients carefully (not your employees). Ask your client if It wants legal counsel. Who will pay the cost?Ask your client if It wants legal counsel. Who will pay the cost? HRO in-house counsel cannot advise without written agreement HRO in-house counsel cannot advise without written agreement

with client.with client.

Administrative/regulatory hearings and inquiries:Administrative/regulatory hearings and inquiries: A non-lawyer is more restricted because matter involves a A non-lawyer is more restricted because matter involves a

separate entity and not the HRO’s employees.separate entity and not the HRO’s employees.


Reporting structureReporting structure Will “higher end” HR professionals be comfortable Will “higher end” HR professionals be comfortable

reporting through the PEO Customer Service reporting through the PEO Customer Service chain of command?chain of command?

Reward systemReward system It may be different for a PEO and an HRO.It may be different for a PEO and an HRO. Retention is always a common denominator.Retention is always a common denominator. Retention goals may require different actions (i.e. Retention goals may require different actions (i.e.

in person visits are not as economical for PEO).in person visits are not as economical for PEO). Can the reward system be the same for both?Can the reward system be the same for both?


Will internal pressures affect level of service?Will internal pressures affect level of service? Example:Example:

Size of ASO client (i.e revenue stream):Size of ASO client (i.e revenue stream):There may be pressure to focus on larger ASO clients at There may be pressure to focus on larger ASO clients at

the expense of PEO clients.the expense of PEO clients.However, PEO client issues present liability risk to the However, PEO client issues present liability risk to the

HRO.HRO.

EPLI will not cover ASO. Can this affect the level EPLI will not cover ASO. Can this affect the level of service? Should it?of service? Should it?


Other challengesOther challenges IT – ASO/BPO client will expect high level of IT – ASO/BPO client will expect high level of

technology.technology. AE will need to understand technology in order to AE will need to understand technology in order to

service customers.service customers. Such background is not usually required for a PEO .Such background is not usually required for a PEO .

Example:Example:An ASO client calls AE with question on how to run a An ASO client calls AE with question on how to run a report or how to make a change or to elect different report or how to make a change or to elect different benefits. Will AE be trained to respond? benefits. Will AE be trained to respond?

Revenue OpportunitiesRevenue Opportunities

ASOASO Risk management consulting (can be a Risk management consulting (can be a

“lead-in” to PEO or full ASO sale).“lead-in” to PEO or full ASO sale). A la carte HR consulting (projects, A la carte HR consulting (projects,

products, or advice).products, or advice). Background checks and screening; Background checks and screening;

resume screening.resume screening. On-line training.On-line training.

Revenue OpportunitiesRevenue Opportunities

Commissions From Sale of InsuranceCommissions From Sale of Insurance How?How?

Not based on arbitrageNot based on arbitrageThrough licensed agency (with proper agent licensing).Through licensed agency (with proper agent licensing).ASO clients are the insured under WC and Group Health.ASO clients are the insured under WC and Group Health.For WC, HRO may be able to produce and share in For WC, HRO may be able to produce and share in

commissions (consult state law).commissions (consult state law).Group HealthGroup Health

No ERISA violation – less risk of prohibited transactions No ERISA violation – less risk of prohibited transactions (unless Affiliated Party).(unless Affiliated Party).

Consult legal counsel.Consult legal counsel.

Delivering HR Services: PEO vs. ASO/HRO

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