SMBs (small and midsize businesses) that can't afford large HR teams struggle with overwhelming HR responsibilities. In fact, 45% of small business owners spend 15% to 20% of their work time (one day per week) on administrative HR issues.
With the complexity and diversity of HR functions growing every year, outsourcing is becoming more and more popular. One of the benefits of comprehensive HR outsourcing is an average ROI of about 27.2%. Other advantages include time savings, access to better benefits, higher retention rates, and more.
In this guide, you'll learn what HR outsourcing is and how it can benefit your company's bottom line.
HR outsourcing is the delegation of HR functions to a third party. Depending on the provider you choose, you could also delegate liability.
The HR outsourcing partner can complement your HR department or take over the majority of responsibilities. For example, you can decide to outsource payroll processing only or delegate benefits administration, attendance management, HR compliance, human resource management (HRM), and much more.
Human resource outsourcing (HRO) can help SMBs gain a competitive edge without the expenses of supporting a large HR department.
The type of services you can take advantage of depends on the outsourcing partner you choose. Keeping your business requirements, plans, and reasons to outsource HR in mind, you can explore the following options:
Payroll processing companies provide payroll services. These HR outsourcing partners handle all payroll-related functions for your business. Duties of such service providers can vary but usually include:
Since accurate payroll is one of the most time-consuming administrative tasks, outsourcing it can give your HR team more time to focus on other activities.
Administrative Services Only (ASO) provides the same HR outsourcing services as a payroll processor while handling other administrative functions. Besides payroll, you can delegate such tasks as:
When it comes to employee benefits, an ASO only provides administrative services, not the benefits themselves. To get tangible cost savings on employee benefits, you should work with the most comprehensive HR outsourcing provider: Professional Employer Organizations (PEOs).
A PEO can handle the same responsibilities as payroll companies and ASOs in a more comprehensive manner. It also provides cost-saving solutions and additional benefits that affect the company's bottom line.
By working with a PEO, you enter a co-employment agreement that allows the HR outsourcing partner to share responsibilities and liability. You choose which responsibilities to split and which to keep while the PEO customizes the services offered according to your company's needs.
For tax and insurance purposes, the PEO is an "Employer of Record." If legal issues related to the HR function arise, the PEO assumes some of the risks.
While you are sharing responsibilities and liability, you aren't giving up authority. You still have full control over day-to-day operations such as hiring and terminating employees while the PEO handles other HR functions.
Think about the PEO as an external arm of your HR department, who takes over responsibilities and some liabilities while still following your leadership.
Outsourcing payroll functions can be highly beneficial to SMBs with small HR departments.
Payroll is a complex, time-consuming, and often tedious task. Small business owners spend up to 5 hours per pay period on payroll taxes.
Working with a payroll processor can save time for your HR department and reduce the number of errors busy employees make. It can also improve employee satisfaction rates since your team members gain time to focus on their main responsibilities.
To make sure that payroll gets sufficient attention from the HR department, a company might need to hire additional in-house employees.
This can be taxing on the budget since supporting in-house staff involves salaries, benefits, and many additional costs. By delegating the task to a payroll service, you can avoid these extra expenses.
Overwhelmed HR employees are likely to make unfortunate payroll mistakes. By delegating the responsibility to a third party, you can keep errors to a minimum. However, this only works if you find a reliable partner. A poorly chosen payroll processor can increase the number of errors.
A payroll company doesn't share liability with its partner, making you fully responsible for all the errors it makes.
Payroll processors only ensure compliance with payroll taxes and withholdings. The laws they a PEO monitors include:
Keeping track of all changes and updates is time-consuming. With payroll companies taking care of this issue, HR teams can focus on other tasks.
Why outsource HR functions to an ASO? Working with an ASO can be beneficial for companies of all sizes.
While helping you save time in the same manner as a payment processor, the ASO takes on more administrative workload, allowing your HR team to work on other issues.
A big appeal an ASO has for large companies is the reduction of the time-consuming administrative workload. This HR outsourcing partner deals with:
While it does all the administrative work, the ASO doesn't offer employee benefits. It works with the benefits the company has already purchased. Accordingly, it can't give you access to better health insurance, workers’ compensation insurance, or retirement benefits.
Administrative HR tasks are time-consuming and require the attention of a number of HR experts. To ensure error-free operation, a company would need to hire additional members for its HR team. That comes with sizable costs, which SMBs can rarely cover.
By outsourcing the administrative tasks to an ASO, you can control HR costs while getting high-quality timely services.
Just like with payment processors, it's imperative to find a reliable HR outsourcing partner. Otherwise, you may end up spending money on rectifying errors, nullifying all cost control benefits.
According to a survey, HR and payroll departments spend about 36 hours a week on compliance-related activities. Delegating at least some of the compliance functions can be a significant relief for SMBs.
Some of the laws and regulations a company needs to stay up to date with include:
The applicability of HR-related laws changes depending on the size of your company. For example, the Affordable Care Act only applies to companies with 50 or more full-time or full-time equivalent (FTE) employees.
Working with a Professional Employer Organization can help SMBs improve their bottom line and retain top talent.
PEO can handle the same administrative tasks as an ASO or a payment processor, thus saving your HR team a significant amount of time. Additionally, this HR outsourcing partner can remit taxes on your behalf.
Unlike ASO and payroll companies, a PEO can provide tangible cost savings.
The savings can significantly impact the company's bottom line and increase the ROI of HR outsourcing.
Working with a PEO can increase employee retention rates by:
Besides helping you hold on to top talent, outsourcing HR tasks can increase job satisfaction rates for your HR department. Delegating time-consuming administrative tasks creates time for improving company culture. A great company culture further contributes to high retention.
A PEO handles the same aspects of compliance as an ASO. That means a PEO saves your company time and money by monitoring legislation and regulation updates while reducing errors and claims.
Unlike other HR outsourcing options, a PEO shares some liability for any errors that are made.
By entering a co-employment agreement, you can split liability pertaining to:
However, this arrangement doesn't work in all states. Each state has its own requirements for PEOs operating in it.
The choice of an HR outsourcing service depends on your company's parameters and requirements, including the size of your HR team, the number of employees, quality of benefits, and any plans for scaling or growth.
Companies of all sizes may consider payment processors to reduce the burden on their internal HR departments. Meanwhile, ASOs are a good choice for large companies that don't need benefits-related cost savings.
For SMBs, PEOs are the best HR outsourcing solution because they provide comprehensive HR services. That’s why the average ROI of working with a PEO is 27.2%. Neither payroll processors nor ASOs can claim to produce such results.
To learn more about how a PEO can help your company, contact us today.
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