Outsourcing HR Starter Guide: Learn the Basics

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From recruiting and onboarding new employees to managing payroll and benefits, there is a lot that goes into keeping your team happy and healthy. If you’re not careful, it can be very easy for HR to drain your time and resources.

The time wasted on HR-related tasks in the United States and the United Kingdom adds up to 40 million hours each month, equating to about $8.16 billion in productivity losses.

And here’s the kicker: most of these tasks can be automated or outsourced—an HR employee or manager no longer needs to spend their time dealing with the administrative headaches of monitoring and managing employee data to the extent that they used to. Read on to learn the best ways to outsource your HR tasks and get back all that lost time. 

The 9 Best HR Outsourcing Services for Saving Time and Lowering HR Costs

We’ve tried countless HR outsourcing services over the years. Here are our top 9 recommendations for anyone who wants to save time on HR:

• Rippling — Best for saving time on HR tasks
• Paychex — Best HR outsourcing for complex payment cycles
• Insperity — Best HR outsourcing service that runs itself
• ADP — Best HR outsourcing to handle some (or all) of your HR needs
• TriNet — Best for big business benefits on small business budgets
• Zenefits — Best HR platform to wrangle your current HR systems together
• Engage PEO — Best HR outsourcing for unique compliance needs
• G&A Partners — Best HR outsourcing for employee training and development
• Tandem HR — Best HR outsourcing for minimizing your risk liability

What Is HR Outsourcing?

The human resources department is responsible for various important functions within a company, from payroll and benefits administration to recruiting and training.

Managing these functions internally can be challenging for small businesses, which is why many companies outsource their human resources needs. In some cases, large companies may even outsource specific human resources functions, such as benefits administration.

HR outsourcing is the process of hiring an external firm to handle all or some of the human resources functions for a business. By outsourcing these functions, businesses can save money and free up internal resources to focus on other priorities.

In addition, HR outsourcing can help to improve company compliance with employment laws and regulations. Because of its time-saving, pain-killing, and cost-saving benefits, this model can be an attractive option for businesses looking to streamline their operations.

How Outsourcing HR Works

How HR outsourcing works depends on how you choose to outsource it. In general, you have two options:

• HRO: When you outsource some aspects of your HR program to an external individual or team
• PEO: When you outsource your full HR program to an external provider

The big difference here is that, with HRO, you’re partnering with a company to supplement your internal HR team. With PEO, your employees are still under their employer, the PEO partner.

HR Outsourcing (HRO)

When you use the HRO model, you won’t need to worry about the day-to-day tasks of HR. You’ll have a dedicated team of HR professionals working on your behalf to manage as many of the HR tasks as you need.

HRO services can be a great option if you don’t have the internal resources to dedicate to HR or if you want to free up your current HR team to focus on strategic initiatives.

With an HRO, there’s also flexibility in what services you can outsource. For example, you might only want to outsource your payroll function, or you might want to outsource the entire HR function. It all depends on your needs.

Payroll is often one of the most popular functions to outsource because it’s complex and time-consuming. But benefits administration, recruiting, and employee onboarding are also popular functions to outsource.

Partnering with a Personal Employer Organization (PEO)

If you don’t have the resources to handle most HR duties internally, partnering with a PEO might be a better option.

The co-employment model used by PEO providers means your employees will appear on the books of your provider for tax and legal purposes. However, you still maintain control over employee work assignments, promotions, firings, etc.

A PEO manages your HR tasks and responsibilities. Some PEOs permit you to pick the specific services related to employment that you want them to handle. If you utilize this model, then the PEO has control over all of your company’s legal and financial practices associated with employment.

This model is most commonly used by small to mid-sized businesses that don’t have the internal resources to dedicate to HR.

When to Use a PEO and When to Use an HRO

Both PEOs and HROs can be great options for businesses looking to outsource their HR needs. But how do you know which one is right for you?

In most cases, the answer is to use an HRO to supplement your internal HR team and a PEO to outsource HR liability.

However, there are some exceptions to this rule.

For example, a PEO might be a better option if you’re a small business with very limited resources because they can lower your insurance premiums. Although they may seem expensive at first, PEOs might actually save you money in the long run.

That said, companies that use PEOs usually hire contractors or contract-to-hire team members rather than W-2 employees. They are also popular among companies that need employee visa sponsorships or other international HR support.

Who Is HR Outsourcing For?

The truth is, almost everyone could benefit from outsourcing their HR function to some degree.

Here are a few boxes that you can check off to see if HR outsourcing is right for your business:

• You spend a disproportionate amount of time on HR tasks.
• You’re growing quickly and don’t have the internal resources to keep up.
• You want to free up your internal HR team to focus on strategic initiatives like employee engagement, interviews, or hiring.
• You want to supplement your internal HR team with experts in specific areas like benefits or payroll.
• You have a complex payroll, commission, and/or benefits structure.
• You want to reduce your exposure to HR liability.
• You find that HR duties are spread across employees from other departments.

Even if none of the above apply to you, there’s a good chance that outsourcing at least some of your HR tasks can help improve efficiency and reduce costs.

Any business that isn’t enterprise-level (i.e., they don’t have a network of employee relations, complicated salary variations, and numerous locations that would be challenging to explain to an outsourced provider) can likely find a way to outsource some part of their HR function.

What Functions Do HR Outsourcing Services Provide?

There are plenty of services that HR outsourcing services provide. Here are a few of the most common.

Payroll Processing and Administration

One of the most commonly outsourced HR functions is payroll processing and administration. This includes tasks like calculating hours worked, withholding taxes, and issuing paychecks or direct deposits.

It can also include more complicated tasks like managing 401(k) contributions, calculating commissions, and dealing with garnishments.

Payroll is often outsourced because it’s time-consuming and requires a high degree of accuracy for bookkeeping and liability purposes (in addition to employee retention). It’s also a compliance-heavy task, meaning there’s a greater risk of error.

Mistakes made on employee payroll can be minuscule—maybe a few dollars were left off an employee’s commission check.

But sometimes, payroll errors can result in lawsuits, legal trouble with the IRS, or employee termination.

In other words, outsourcing payroll is a good idea if you want to minimize the risk of making a mistake.

Benefits Administration

Another popular HR function that’s often outsourced is benefits administration. This includes tasks like enrolling employees in health insurance, calculating premiums, and managing retirement accounts. 

Benefits administration is often outsourced for the same reasons as payroll—it’s time-consuming, detail-oriented, and compliance-heavy.

However, there’s an additional reason that benefits administration is commonly outsourced: because it can be infinitely complex.

Especially if you offer a lot of different benefits (like health insurance, dental insurance, vision insurance, etc.), managing them all internally can be a daunting task.

Enrolling employees in the right benefits, calculating premiums correctly, and keeping up with ever-changing regulations is a lot to handle—especially if you’re not a benefits expert.

Legal Compliance

Worker’s compensation regulations and EEO (Equal Employment Opportunity) laws are critical to any business—but they’re also ever-changing and difficult to keep up with.

That’s why many businesses choose to outsource their compliance needs to experts. These experts can help you stay up-to-date on the latest compliance issues, ensuring that your business is protected from legal trouble.

Employee Training and Onboarding

Sometimes, the employee onboarding and training processes can be tricky, especially if you have many new employees or your business is growing quickly.

In these cases, it can be helpful to outsource employee training to an expert. These experts can help design and implement training programs that will ensure that your employees are properly trained and equipped to do their jobs.

Recruiting

One of the most popular HR functions that companies outsource is recruiting and staffing. This includes tasks like posting job openings, searching for candidates, screening them, conducting interviews, and background and reference checks.

Recruitment agencies often have a large network of candidates they can reach out to, which saves businesses the time and effort of finding candidates on their own.

They also often have expertise in screening and interviewing candidates, which can help businesses find the best employees for the job.

Performance Management

Quarterly reviews, annual performance evaluations, and setting goals are all important aspects of performance management. But they can also be time-consuming and difficult to keep track of, even if there is a manager who can take care of everything.

Outsourced experts can help design and implement incentive programs, bonuses, and other ways to improve employee productivity and motivation.

They can also help with setting goals and objectives and measuring and tracking progress. Especially if an organization lacks the expertise to go about these challenges on its own, outsourcing performance management can be a great solution.

The Pros and Cons of Outsourcing Your HR Program

Of course, like anything else, there are pros and cons to outsourcing your HR program.

Benefits of Outsourcing HR

Outsourcing saves money. It may seem counterintuitive that paying someone else to do something would save your company money. But when you factor in the cost of training, benefits, and compliance, it’s often cheaper to outsource HR than to do it yourself.

It frees up time. Time is money, and with HR outsourcing, you’ll save both. By offloading the time-consuming tasks of HR to an outsourced partner, you and your team will have more time to focus on other aspects of running your business.

It offers expert help. When you outsource HR, you’re getting the expertise of a whole team of HR professionals. This is especially helpful if you don’t have an in-house HR team or if your team is small.

Your benefit premiums will be lower. When you outsource HR, your business will often be able to take advantage of the economies of scale and get lower benefits premiums.

Cons of Outsourcing HR

Offloading certain activities makes the overall employee experience impersonal. When recruitment or performance management is outsourced, it can often feel like a cold process. This is because the people conducting these activities are often doing them for multiple clients and won’t have the time to get to know each employee.

It can be difficult to build trust with an outside partner. This is especially true if you’re outsourcing HR for the first time. It’s important to do your research and find a reputable HR outsourcing partner that you can trust.

You might lose control. When you outsource HR, you’re giving up some control of the process. This can be difficult for businesses that like to have a lot of control over their operations.

HR corrections will take longer to make. Since you won’t be handling HR in-house, there will be an inherent lag time that comes with making changes. For example, if you need to change your benefits package, it will take longer to implement when you outsource HR.

What to Look for In an Outsourced HR Partner

If you’ve decided that outsourcing HR is the right decision for your business, the next step is choosing an HR outsourcing partner. Here are a few factors to keep in mind when making your decision.

Compatibility

It’s important to find an HR outsourcing partner that is compatible with your business. This means they should understand your industry and your company’s culture well.

Keep in mind that this will require some input from you. Before you start looking for an HR outsourcing partner, take some time to document your company’s culture and what you’re looking for in your new hires. This will help you find a partner that is compatible with your business.

Cost

Of course, you’ll want to find an affordable HR outsourcing partner. But be careful not to choose the cheapest option. The most important thing is to find an HR outsourcing partner that provides good value for the price.

Reputation

When you’re entrusting someone with your HR needs, you’ll want to ensure they have a good reputation. Do some research and read online reviews to get a sense of what other companies think about the HR outsourcing partner you’re considering.

Industry Expertise

In some cases, it can be helpful to find an HR outsourcing partner with expertise in your industry. Some HR outsourcing service providers offer tailored services based on the niche or industry you operate in. This is particularly true for industries with complex HR needs, such as healthcare and emerging tech spaces like mobile app development.

Final Thoughts About Outsourcing HR

When outsourcing your human resources operation, there are a lot of moving parts. You need to inform your new partner about your company culture, values, and important things to your business.

Outsourcing HR can be a great way to free up time and resources so you can focus on other aspects of your business. It can also help you lower your benefit premiums and access the expertise of a team of HR professionals.

But without an effective communications plan, it can be easy for things to fall through the cracks. Establishing a good relationship with your new HR outsourcing partner is critical to the arrangement’s success.

And if you want to maximize employee retention, you’ll need to put a little extra effort into making sure your employees feel valued and appreciated.