Delivering HR Services: PEO vs. ASO/HRO

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

2. Alphabet Soup HRO • Human Resources Outsourcer PEO • Professional Employer Organization ASO • Administrative Services Organization BPO • Business Process Outsourcer

3. HRO, PEO, ASO • The terms are used interchangeably. • It can lead to confusion within the Company and in the marketplace. • Employees need to understand differences and common traits . • Every PEO is an HRO, but not every HRO is a PEO.

4. HRO, PEO, ASO HUMAN RESOURCES OUTSOURCING PEO ASO/BPO

5. Why Do We Need To Discuss? • Market realities and demands have convinced many PEOs to deliver HR services in new ways . • Reasons include: • Client sophistication • Client size • Economics • Necessity • Risk profile.

6. HR Services Delivery Models • HR delivery model may or may not include co-employment. • Business model variations: • With co-employment • Payroll reported under PEO FEIN. • Client may secure Workers Compensation. • Client may sponsor health plan.

7. HR Services Delivery Models • Business model variations: • Without co-employment (ASO/BPO) • Payroll reported under client FEIN. • PEO is agent of client. • No employment relationship intended. • “A la carte” services. • The same or similar expertise and technology required for both models .

8. HR Services Delivery Models • In some PEOs the non-employer/ASO model has “evolved”. • Other PEOs have intentionally charted a course to capture this market. • Nonetheless, most PEOs have one or more clients in an ASO relationship. • Our focus today will be on the structural, strategic and operational challenges presented by a “bi-furcated” HR delivery business model .

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

10. Co-employment (PEO) PEO Employment relationship Contractual relationship ClientCompany Employee Employmentrelationship

11. ASO/BPO ASO No employment relationship Contractual relationship ClientCompany Employee Employmentrelationship

12. The Structure of an HRO • Legal: • Organizational structure of the entity. • Consider separating operations by legal entity. • Contracts: • Employer status requires materially different contracts. • TPA status and licensing • Insurance

13. Differences in the Deliveries • Organizational Structure National HRO, Inc. National PEO, LLCUniversal ASO, LLC V.P PEO V.P. ASO Sales Sales Shared Services, LLC (IT, Payroll, Accounting/Finance, Risk Management, Benefits Administration, HR advice and products)

14. Strategic Considerations • Start with the end in mind. • Is your goal to sell HRO with PEO? • Do you want to create flexibility to sell either ASO or PEO? • Can you separate the two businesses for sale? • Can IT and the Back Room be separated? • What would you be selling? • Valuations can be very different.

15. Organizational Structure and Reporting Is there a need for “Division” Presidents? Board of Director buy-in and input is required. IT investment considerations: ASO clients are generally larger and more sophisticated. Expect employee self-service. Expect online training. You need robust system – not just payroll processing. You need qualified personnel to deliver and train clients. Strategic Considerations continued

16. Strategic Considerations Sales Can be very different sales . Insurance is not part of the sale. Purely consultative, value added sale. The biggest difference is the target market (market opportunities are different). It probably requires two sales teams (PEO and ASO).

17. Strategic Considerations • IT investment could be substantial. • Benefits Administration: • It’s much more complex for an ASO. • Each market has a handful of dominant carriers. • Each carrier has multiple plans. • It can become a large undertaking to “please everyone”. • You cannot please everyone. • It’s too expensive and cumbersome. • Identify 2-4 carriers that cover 80% of the market. • Select 2-4 of the most popular plans (HMO and PPO). • You may also need to be prepared to handle HSAs .

18. Contracts – no employer relationship – must be addressed. Benefits Administration – define it carefully – avoid fiduciary duty. No employer responsibilities – consultant only. There are privacy issues because you are not the employer. IT services – define them carefully. Legal Considerations continued

19. Third Party Administrator Seek legal counsel. There is no “employer exemption” from TPA statute. Threshold question: is the HRO engaging in premium accounting? If yes, then you could be deemed a TPA. State-by-state analysis – although most statutes are very similar. You may be able to partner with a third party that has licenses. Legal Considerations continued

20. Other Considerations • Insurance • Will the HRO assist in securing Workers Comp and/or group health? • Be sure there is E&O coverage . • Be sure the HRO is complying with licensing statutes. • You need to advise the WC carrier of ASO contracts. • Have a strong indemnity in ASO contracts for personal injuries. • Errors and omissions • Essential because of consultant role. • Will coverage apply to PEO and ASO? • EPLI – Will not cover ASO.

21. Customer Service • ASO will likely demand a higher level of service because expectations are higher. • A typical PEO Account Executive may not be able to handle the higher level of service. • It may require involving outside help more often (HR consultants or legal). • Can the HRO centralize the HR “horsepower” needed? • It will need very experienced personnel for larger ASO clients. Should the HRO hire or retain this expertise?

22. Customer Service Centralized HR Expertise Model Legal (in-house or outside) HR Professional(s) (Very Experienced – SPHR – Problem Solver) PEO AEs ASO AEs

23. Customer Service • Will the client demand on-site presence? • What are the qualifications for such a resource? • At what employee count does on-site support make economic sense? • You probably need to hire as needed.

24. Customer Service • Personnel • Common skills and expertise exist in an HRO to service the ASO and PEO (benefits administration, payroll, HR advice, IT support). • How to deploy? • Cross-train? • Are the skills capable of cross-training? • Is it preferable to have separate teams to create better focus and customer service? • Example: Account Executives may require a higher level of HR background for ASO client but more payroll experience for PEO.

25. Customer Service • Examples of services • Investigations/assistance with regulatory inquiries. • All investigations done by HRO personnel are not protected from discovery. • HRO personnel are not accting in furtherance of legal counsel for client. • Client will expect trained, experienced investigators. • You must advise clients carefully (not your employees). • Ask your client if It wants legal counsel. Who will pay the cost? • HRO in-house counsel cannot advise without written agreement with client. • Administrative/regulatory hearings and inquiries: • A non-lawyer is more restricted because matter involves a separate entity and not the HRO’s employees.

26. Customer Service • Reporting structure • Will “higher end” HR professionals be comfortable reporting through the PEO Customer Service chain of command? • Reward system • It may be different for a PEO and an HRO. • Retention is always a common denominator. • Retention goals may require different actions (i.e. in person visits are not as economical for PEO). • Can the reward system be the same for both?

27. Customer Service • Will internal pressures affect level of service? • Example: • Size of ASO client (i.e revenue stream): • There may be pressure to focus on larger ASO clients at the expense of PEO clients. • However, PEO client issues present liability risk to the HRO. • EPLI will not cover ASO. Can this affect the level of service? Should it?

28. Customer Service • Other challenges • IT – ASO/BPO client will expect high level of technology. • AE will need to understand technology in order to service customers. • Such background is not usually required for a PEO . • Example: An ASO client calls AE with question on how to run a report or how to make a change or to elect different benefits. Will AE be trained to respond?

29. Revenue Opportunities • ASO • Risk management consulting (can be a “lead-in” to PEO or full ASO sale). • A la carte HR consulting (projects, products, or advice). • Background checks and screening; resume screening. • On-line training.

30. Revenue Opportunities • Commissions From Sale of Insurance • How? • Not based on arbitrage • Through licensed agency (with proper agent licensing). • ASO clients are the insured under WC and Group Health. • For WC, HRO may be able to produce and share in commissions (consult state law). • Group Health • No ERISA violation – less risk of prohibited transactions (unless Affiliated Party). • Consult legal counsel.