Should you outsource HR or keep it inside your business? This guide explains the pros and cons of HR outsourcing to help you decide.
- HR outsourcing is the use of an outside service to handle some or all of your company's HR tasks.
- HR outsourcing functions include payroll processing, employee benefits administration and other business needs unrelated to day-to-day company functions.
- Outsourcing HR saves time and money, but your employees may prefer interacting with in-house HR staff.
- This article is intended for new business owners deciding whether to outsource HR or keep it in-house.
Few resources are more important to your company than your employees. When you properly tend to your employees, you improve the daily experience of the people you count on to execute your day-to-day business tasks.
As necessary as proper employee management is, not every company has the capacity (or desire) to handle it all in-house. That's why many business owners outsource HR. In this guide to HR outsourcing, we'll walk you through situations in which HR outsourcing may help, the many kinds of HR outsourcing functions that third-party HR companies offer, and the pros and cons of outsourcing HR.
What is HR outsourcing?
HR outsourcing is an arrangement through which a business owner hires a third-party company to oversee some or all of the business's HR functions. You can outsource your company's payroll processing, employee benefits administration, talent acquisition, or all of the above and more.
Types of HR outsourcing
If you plan to outsource your HR, you have two main options – HR outsourcing (HRO) or a PEO (personal employer organization) – to handle your HR tasks. The services each option provides overlap heavily; it is the way they are legally structured that differs.
- A PEO uses a co-employment model, which means your employees will appear on the books of your PEO provider for legal and tax purposes. However, you still have control over your employees in terms of what they are working on, whether they can be promoted or fired, etc. A PEO typically handles all of your HR tasks, though some providers allow you to pick and choose the specific services you want them to take on. With this model, the PEO bears the full legal and financial weight of all your company's employment practices.
- An HRO does not use the co-employer model, which means your employees will remain on your business's books and you bear the legal responsibility for their actions. There is a bit more flexibility in the services an HRO handles for you – you can outsource one or two tasks, if that's all you need, or all of them.
Key takeaway: HR outsourcing is the hiring of an external company to execute some or all of your HR tasks.
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Who is HR outsourcing for?
In theory, HR outsourcing is for any business that needs it. You might need HR outsourcing for your company if you face the following challenges with handling your HR tasks in-house:
- Disproportionate amount of time spent on HR tasks compared to other business needs
- Prior or predicted lawsuits or liability exposure
- Lack of money to hire new employees or pay and cover benefits for in-house HR staff
- HR functions spread among employees from other departments
- Not enough in-house HR staff to properly balance hiring tasks with employee management
Our sister site business.com offers an in-depth guide on each of these indicators that you might need to opt for HR outsourcing.
Even if none of these ring a bell for your company, you should consider outsourcing HR if your company just isn't large enough to have an in-house HR team. As long as your business isn't so large – say, not as big as a household-name department store – that its network of employee relations, variations in compensation rates and number of locations could prove challenging to explain to a company outsider, you could benefit from outsourcing your HR. [Read related article: 6 Essential Tech Tools for Your HR Department]
Key takeaway: HR outsourcing may be for you if time, staff, business size or budget constraints prevent you from hiring an in-house HR department.
What functions does HR outsourcing provide?
If you think your business might benefit from HR outsourcing, use the below list of common HR outsourcing functions to determine how your needs overlap with what third-party HR professionals offer. (These are just the most common HR outsourcing functions – some providers offer a host of additional services.)
Payroll processing may well be the most commonly outsourced HR function. Calculating all the deductions to withhold from your employees' paychecks yourself can quickly get confusing and complicated, and you certainly don't want to make any mistakes in this area. In addition to benefit premiums, payroll deductions include wage garnishments and taxes, so errors can lead to trouble with courts and the IRS. This is why many companies choose to pass off the task to payroll professionals rather than handle it themselves.
Employee benefits administration
A strong employee benefits package – one with health insurance, a retirement plan and more – can keep your current employees happy and give your company a competitive advantage in recruiting. That doesn't mean administering benefits is easy. Many companies outsource their employee benefits administration to relieve themselves of the work that accompanies researching plans and complying with benefits regulations.
Employment law compliance
As a business owner, you'll need to comply with more rules than just benefits and tax laws. You also have to follow equal employment opportunity (EEO) laws and workers' compensation regulations. Hiring HR compliance experts can keep you in line with all EEO and workers' comp guidelines on a day-by-day basis with little to no extra work on your end.
If you lack the time to tend to employee-manager conflicts and create company policies, you may need to outsource your employee relations tasks to a third-party HR team. A dedicated outside HR department can mediate conflicts and modify long-standing company policies to reflect employee concerns. As part of employee relations, your HR outsourcing company can even help you create your employee handbook.
When you're eager to find that perfect new employee, you might not be as thrilled about the prospect of working through stacks of applications and setting up interviews. To take this workload off your plate, you can outsource HR professionals to oversee your talent acquisition process.
Annual reviews, salary negotiations and other performance-related conversations are an inescapable part of running a business. While you'll likely want your own team to lead these conversations, you may not have the time or expertise to prepare for or work through these moments. If that's the case, outsource your performance management tasks to a third-party company. Your HR firm of choice can also help you determine your performance goals and disciplinary routes for poor performance.
Background screening and reference checks
When hiring employees, it is always good practice to conduct background screenings and reference checks. This helps give you a clear picture of the person you are welcoming into your business. However, both these processes – especially the phone calls often involved with reference checks – can be quite time-consuming. That's why so many companies rely on third parties to conduct their background and reference checks. [Read related article: 32 Reference Check Questions You Should Ask]
HR teams don't just oversee anti-discrimination efforts and employee relations. They minimize the risks of worst-case scenarios in these and other important employee management matters. To avoid workplace conflicts or even lawsuits, you can outsource your risk management efforts to HR experts so your team stays happy and you have less work that isn't strictly business-related.
Although HR experts have debated the merit of drug testing in recent years, you can still hire an HR consulting or outsourcing firm to handle this task for you. The provider you choose will walk your employees through the process, send all samples to a laboratory for testing and report the results back to you. If the results call for disciplinary action or termination, you can task your HR consulting firm to carry out these actions as well.
Perhaps the most recent addition to the services that comprise HR, employee counseling is the practice of helping your staff access mental health services. Employee assistance programs (EAPs) are common routes for connecting your employees with short-term counseling, and third-party HR teams can manage these programs on your behalf. These programs can promote your employees' attendance, productivity and morale.
Key takeaway: Common HR outsourcing functions include payroll processing, benefits administration, employee relations, hiring and employee counseling.
What are the pros and cons of HR outsourcing?
Now that you know what HR outsourcing comprises and what kinds of companies might benefit from it, you might feel ready to decide whether your business should outsource HR. Before making a final decision, you should have a solid understanding of the pros and cons.
Pros of HR outsourcing
It saves money. Yes, you'll pay to outsource your HR tasks, but your yearly HR outsourcing bill will come nowhere close to the average in-house HR employee salary. If the yearly cost of outsourcing your HR is so much less than hiring one HR employee, imagine how expensive it would be to hire a full team – and that's before adding in their employee payroll taxes and benefit administration costs.
It can lower your benefit premiums. HR firms tend to have strong relationships with benefits providers. As such, if your HR firm is attempting to secure a benefits package for a large group of people (such as your entire workforce), it may have more power to negotiate lower plan rates than your company might.
- It saves time. If you can't afford an in-house HR staff, someone at your company will have to handle all your HR tasks unless you outsource them. If you hire a third party, the employees who previously handled those responsibilities will have more time for their main tasks. As a result, your company's productivity and efficiency will likely see a boost.
Cons of HR outsourcing
It might feel impersonal. Some employees may find that dealing with a third party – especially one located offsite as HR outsourcing providers are – for employee relations and performance management feels cold and impersonal. For some employers, the personal touch that comes with hiring a small in-house HR staff to tend to these needs is worthwhile to avoid a dip in employee satisfaction.
Corrections take longer to make. If an employee notes an error in their payroll, you'll need to contact your HR outsourcing firm and request the required changes. While sending a request may take just minutes, your HR firm may take longer to acknowledge your request, since it has many other clients. An in-house HR staff, on the other hand, can likely make these changes at a moment's notice.
- It presents recruitment challenges. Although talent acquisition is among the many HR outsourcing services available, you could face more challenges in your hiring process when you outsource it. No matter how reputable an HR firm you choose, there's no way a third party can quite understand your company culture as well as someone who works in your office full time can. As a result, your HR firm could recruit new employees who just don't fit your company culture.
Key takeaway: Outsourcing HR saves time and money, but your employees may find interactions with third-party HR professionals impersonal and slow, and HR outsourcing providers may have a flawed understanding of your company culture.
What are examples of HR outsourcing services?
If you've decided that HR outsourcing will benefit your company, you should compare and contrast several services. As you do, ask yourself the following questions:
- How user-friendly is the HR software?
- What tools will my employees have?
- How accessible is customer support?
- Can I add more HR outsourcing functions down the line?
- What do internet reviewers and other employers in my field say about this company?
Prioritize these considerations as you compare your options. You may want to start your search with these HR solutions:
- Oasis by Paychex might be your best bet if your company is relatively new. It includes cloud-based HR software you can access by desktop or mobile app, as well as extensive customization and HR expert access.
TriNet may be best if your company operates in an industry with many hyper-specific rules. It offers support teams divided by client industry, per-employee pricing options, short-term contracts and scalable HR plans.
ADP may be best if your company's priority in an HR partner is excellent customer service. It provides full-service customer support for all membership tiers, nationwide coverage, and bundled HR plans with optional add-ons and no long-term contract requirements.
- Insperity may be best for small businesses in general. It offers customizable services, flexible contracts, thousands of online training resources and per-employee pricing plans.
You can learn more about each company or visit their websites through our guide to the best PEOs of 2020. If you think an HR outsourcing relationship is a better fit, check out the best picks on our sister site business.com.
Key takeaway: The best HR outsourcing service for your company depends on factors such as your company's age, industry, size and customer service needs.