What is HR Outsourcing?
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.
What Are Your HR Outsourcing Options?
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 Service
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:
- Employee time and attendance monitoring
- Calculating payroll taxes
- Ensuring correct deductions
- Providing electronic payroll records
- Ensuring compliance with payroll-related federal and state laws
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
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:
- Regulatory compliance
- Benefits administration
- Designing and updating employee manuals
- Background checks
- Safety training
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).
Professional Employer Organization
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.
Benefits of Outsourcing to a Payroll Service
Outsourcing payroll functions can be highly beneficial to SMBs with small HR departments.
Saving Time
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.
Saving Money
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.
Reducing Errors
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.
Compliance
Payroll processors only ensure compliance with payroll taxes and withholdings. The laws they a PEO monitors include:
- Fair Labor Standards Act (FLSA)
- Federal Insurance Contributions Acts (FICA)
- Federal Unemployment Tax Act (FUTA)
- Equal Pay Act (EPA)
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.
Benefits of Outsourcing to an ASO
Why outsource HR functions to an ASO? Working with an ASO can be beneficial for companies of all sizes.
Time Savings
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.
Reduced Administrative Workload
A big appeal an ASO has for large companies is the reduction of the time-consuming administrative workload. This HR outsourcing partner deals with:
- Benefits administration
- Unemployment claims administration
- Workers' compensation administration
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.
Cost Control
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.
Compliance
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:
- Family and Medical Leave Act (FMLA)
- Affordable Care Act
- Americans with Disabilities Act
- Employee Retirement Income Security Act (ERISA)
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.
Benefits of Outsourcing to a PEO
Working with a Professional Employer Organization can help SMBs improve their bottom line and retain top talent.
Time Savings
PEOs 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.
Cost Savings
Unlike ASO and payroll companies, a PEO can provide tangible cost savings.
- Employee Benefits — a PEO can provide access to enterprise-level benefits packages at an affordable price.
- Workers' Compensation Insurance — if the PEO has a lower experience modifier than your company, you can adapt it to lower your premiums. However, this option isn't available in all states.
- Unemployment insurance — a PEO handles unemployment insurance deductions and payments. It can also challenge invalid claims on your behalf.
- Retirement plans — a PEO can provide your company an opportunity to offer a 401(k) plan to its employees by becoming a plan's co-sponsor. Just as with benefits administration, the PEO pools employees from different companies together to reduce administrative costs. PEOs also pay for the required yearly audits.
The savings can significantly impact the company's bottom line and increase the ROI of HR outsourcing.
Employee Retention
Working with a PEO can increase employee retention rates by:
- Providing better benefits than the competition (about 60% of employees rate benefits as a highly important contributor to job satisfaction)
- Increasing engagement
- Streamlining onboarding
- Lowering costs associated with hiring
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.
Compliance
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.
Risk Management
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:
- Unemployment claims
- Payroll tax remittance
- Workers' compensation claims
However, this arrangement doesn't work in all states. Each state has its own requirements for PEOs operating in it.
