Human Resource Outsourcing

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A Human Resources Outsourcing Buyer's Guide

A small business owner works for several years to grow and build their business. They spend countless hours improving their workflow and growing their team. As their business grows, they find themselves restricted by the new administrative tasks that come with a growing business. Instead of being able to focus on the aspects of their business that makes them money, they’re sitting behind a desk after hours trying to file paperwork.

Does that sound familiar?

It’s an all-too-common story for small or medium-sized business owners. Oftentimes, these owners don’t have the administrative knowledge to handle such tasks. Moreover, it is detrimental for them to be working in the office instead of out in the field with their crew. Business owners trap themselves in a cycle in which they should be doing administrative work, but they also need to be out in the field with their crew.

Many business owners try to solve this by hiring human resources or administrative staff, but without the proper knowledge and training for this staff, it can become a detriment rather than a benefit. This problem has left many bewildered, but it doesn’t have to! You can receive top-notch human resources services at a fraction of the cost and time of traditional methods. The solution is human resource (HR) outsourcing services. Not only can these services help streamline and improve your payroll process, but they can help set your business up for success.

What is HR Outsourcing?

HR outsourcing is the process of taking common and strategic human resource tasks and outsourcing them to a third-party company or specialist. The company will handle these tasks for you so you can focus on other duties and tasks. These third-party HR services can also recommend software or equipment to help your HR duties run more efficiently. Businesses use these services to improve their HR capabilities without having to hire and train staff. Human resource outsourcing can be categorized into two different sections.

ASO Vs. PEO

ASO (Administrative Services Organization)

An ASO HR service are typically targeted at small to medium-sized businesses. They provide multiple services such as payroll, compliance support, benefits administration, and more. However, these entities do not use a co-employment model. Your business will act as the sole employer of employees and are responsible for the legal ramifications that come with it. Many ASO HR services act as an a la carte service.

Generally speaking, businesses use ASOs to outsource only some of their HR duties, but still keep other duties within the business. Payroll and taxes are paid using the client’s federal ID number.

PEO (Professional Employer Organization)

PEOs are targeted at medium to large-sized businesses, not only because they host a wide range of services, but because they offer complete HR management outsourcing under co-employment. This means that the HR outsourcing service requires a company to enter a co-employment partnership by leasing employees to the employer which allows the PEO to act as the “employer of record.” They share legal employment responsibility when entering the contractional agreement. Large companies find this contract structure preferable because it mitigates responsibility for HR duties with their employees. The client is still required to fall local, state, and federal compliance laws.

Additionally, PEOs usually handle most, if not all, HR duties and responsibilities for a company.   However, they do not handle factors related to:

  • Making decisions regarding your business independently
  • Providing marketing, sales, or product distribution
  • Dictate pay raise or the number of hours worked

Differences Between ASO and PEO

ResponsibilitiesASOPEO
Who is the employer of records (EOR)?The client is the EORPEO is the EOR, allowing them to share employment-related risks
Human Resources AdministrationHR responsibilities are supported, but the client is responsible for following proper HR policies compliant with laws and regulationsHR responsibilities are supported, but the client is responsible for following proper HR policies compliant with laws and regulations
Workers’ Compensation CoverageClient selects and provides own coverage at market rates.Coverage is provided under PEOs master policy at rates negotiated by the PEO.
Employee Benefits and AdministrationCoverage obtained by the client or obtained through ASO. ASO can help with administration.Coverage can be offered under PEO master policies, or the client may choose to use their own policy. PEO administers the plans.
Risk and Safety ManagementProvides safety program support but cannot provide claims managementPEO administers claims management and safety program compliance.
Payroll Tax LiabilityThe employer maintains all payroll tax liability.The PEO is liable for federal taxes. State rules vary.
Regulatory ComplianceASO manages responsibilities related to regulatory compliance.PEO manages responsibilities related to regulatory compliance.
Unemployment ClaimsClient or ASO can manage unemployment claims.PEO manages unemployment claims.

HR outsourcing providers tackle many different assets of HR duties. While some companies may specialize in specific areas, many can tackle a wide range of duties. Some of the most common tasks performed by HR outsourcing companies include but are not limited to:

  • Payroll implementation and setup
  • Full payroll duties including benefits & other deductions
  • PTO
  • Employee onboarding
  • Recruiting
  • Hiring & new hire reporting
  • Keeping compliant with HR laws
  • Employee benefit management
  • Payroll taxes & payroll tax filing
  • Remote worker management
  • Employee training
  • Special HR Tasks (creating safety handbooks, creating employee guidelines, etc.)
  • And more!

Some services can also take on specialized tasks such as:

  • Bookkeeping
  • Accounting
  • Client management
  • Unemployment claims
  • Employee termination
  • Compliance & risk management

All these tasks can be outsourced to a third-party company. Even if you have HR staff already, you can still outsource select duties to a third-party service. For instance, you could have the staffing to actually hire employees, but you outsource the recruiting and screening of candidates to an HR service.

In-House Responsibilities:

Even with a full services HR outsourcing partner, most companies are still responsible for certain items unless under special circumstances. These could include:

  • Employee relations
  • Compensation program design
  • Talent development
  • Capital strategy planning
  • HR strategy
  • HR department management

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Who Uses HR Outsourcing?

HR outsourcing can be used by a wide variety of businesses in different industries. There are a couple of factors that can determine if a company should use HR outsourcing services.

1.   Businesses looking to grow quickly

Small to medium-sized businesses are usually looking to grow their business quickly and easily to keep up with demand. This makes HR outsourcing a perfect fit for business owners who want to stay focused on the actual work projects of the company. HR outsourcing can also recruit hundreds of employees at much faster rates than an individual business owner who must manage multiple duties.

2.   Owners who want to offload duties

We’ve touched on this already, but it bears repeating. Business owners have so much to tackle on a daily basis that handling HR duties can be a distraction to getting work done. With HR outsourcing, you can relieve some of that duty onto certified professionals.

3.   Businesses that need specific roles executed

In some industries, it can be difficult to scale your business without the right specialized staff. HR services can help you recruit that staff in a much faster time frame than hiring more HR staff.

4.   Fill a knowledge gap

Some small businesses do want to have an HR department but don’t know where to start or how to grow that department. Some HR outsourcing services can help you set up HR policies, training, and staff for your own internal business. These services will not only provide you with software and personal recommendations but fill in knowledge gaps for HR duties such as benefit selection.

5.   Those who want to mitigate risk

Large companies may be looking to mitigate risks when it comes to HR services and their workforce. With a PEO provider, it is possible to mitigate this risk on a wide scale. Large companies can then focus on other in-house tasks such as building employee relations and improving employee retention.

7 Reasons You Should Use HR Outsourcing

HR outsourcing has a plethora of benefits that companies can take advantage of from day one. From helping improve your staffing options to providing better benefits, HR outsourcing services can help you navigate this and more.

1.   Save time

HR outsourcing can help you save time on hiring staff, completing HR duties like payroll, and eliminating roadblocks in your HR process. You’ll be working with trained professionals that can help you enact a more efficient HR process through software applications or take over those duties entirely for you. Instead of learning how to complete each HR process step-by-step, you can focus on the tasks that make you money. 

2.   Recruiting and hiring tools

Tired of posting jobs on job boards and sifting through an endless number of applications? HR outsourcing can tackle this for you. Not only can they post job postings, but they can use software to narrow down candidates to your specific needs. They can perform duties such as screening, interviewing, hiring, and onboarding employees.

3.   Better HR tools

If you are looking to upgrade your HR capabilities or improve your HR team, outsourcing can help with that as well. HR service can perform audits to spot where problems arise and help you fill in the gaps with better tools or operations. This can be a great trial process to see if outsourcing your HR needs is right for you. Employers gain access to the best tools, processes, and technology in the HR industry all without having to invest in a larger team.

4.   Help to navigate benefit selection

Most small business owners don’t have the knowledge to choose the right benefits and insurance selection for their employees. Do you go with the cheapest option? Is life insurance necessary? What about 401ks and retirement plans? HR outsourcing firms can help with the knowledge gaps for benefit selection and help you choose the right plan for your company.

5.   Better payroll processing

Do you want to run payroll more efficiently? Are you having a hard time calculating taxes and benefit deductions? HR outsourcing can do this all for you and give you detailed reports about your payroll. From tracking hours worked to managing taxes, HR outsourcing can complete the entire payroll process. Oftentimes, they can complete payroll at much faster rates than business owners or small in-house teams. If you need better payroll, HR outsourcing can help you do that.

6.   Stay compliant with state and federal law

One of the most overlooked components of HR duties is staying compliant with state and federal law. This law can often be complex and confusing for those not familiar with the industry. HR outsourcing can help your business be in regulatory compliance with state and federal law. You never have to worry about being penalized for not knowing the rules or making a mistake. The HR outsourcing service can take this burden off your shoulders.

7.   Employee performance reporting

Would like to be able to set up measurable goals for employees and have someone track them for you? If so, HR outsourcing can help with this! They can help you draft and implement goals for employees and measure performance. This can be a great tool to help employees reach certain milestones or institute a performance-based review system. This can lead to a bonus or permanent raise system that your employees feel is fair and justified.

5 Disadvantages of Using HR Outsourcing Service

While many companies use HR outsourcing services, there are some common drawbacks that we feel you should be aware of. Some of these are perceived and others are a byproduct of using such services.

1.   Perceived loss of control

Some business owners report a lack of control when using an external HR service. This is due to the fact that you are using an outside business to help your business function. Some owners worry that they won’t have enough data or in-depth knowledge to make critical decisions about their business.

2.   Culture changes

If you have a small HR team already, it can be hard for business owners to shift control away from that team even if it is the best decision. It could change the culture in your team and company.

3.   Cost

Depending on the services you need, costs can rise significantly. Especially if you are paying on a per employee basis, which means as your team grows, so will your HR costs. However, there are a ton of options on the market to choose from. Doing your research before choosing a partner can ensure that you get the best deal.

4.   Data insecurity

With the transfer of employee data to outside vendors, there is always the risk of data being misplaced or stolen. Most HR outsourcing companies do use encrypted methods of transferring data and use protocols to keep outsiders from employee data. However, that doesn’t mean it is always 100% effective.

5.   Lack of access to an HR rep

Some business owners like walking down the hallway and being able to talk to an HR rep about any matter. When you outsource part or all of your HR duties this option isn’t always available. If a problem occurs you’ll need to call your HR provider and talk with a dedicated specialist to resolve the issue. The response time won’t be as quick as having an internal HR department or team member. Some HR outsourcing services will pair you with a direct line to your specific specialist that handles your account. However, that specialist may handle multiple accounts, or an HR service may not offer that.  

How Much Does it Cost to Outsource HR Duties?

The cost for HR outsourcing will be dependent on a couple of factors, mainly:

  • Your budget per month/year
  • Services needed
  • Size of business
  • Software additions or implementations

Most businesses will enter a contract with an HR outsourcing company. Even for short-term HR usage, companies will be at least required to sign a contract month-to-month. A typical contract length usually lasts five years.

Because HR outsourcing is a diverse field with many competitors, pricing can fluctuate. There are a couple of different pricing models that services follow as well:

  • A flat fee per month, quarter, or yearly
  • A fee per employee on a monthly basis
  • An hourly fee on days used
  • A percentage of gross employee income

There are varied numbers we found when it comes to the general cost. Inc. puts their range for pricing around $45-$1500/month, while Milestone averages cost to be around $500-$2500/month. For the percentage of gross employee income, you can be expected to pay around 4%-10%.

Again, this will be dependent on the service needed and the scope of your business. If you choose the “fee per employee” method, businesses usually pay around $20-$200 per employee per month depending on the services provided.

Because there are so many services on the market, you have a lot of choices when it comes to outsourcing your services. For instance, you can use part-time outsourcing or only pay for payroll outsourcing. Most companies are able to find the tools they need at a price point that benefits them.

Next Steps for Using HR Outsourcing

While there are some downsides to HR outsourcing, most of them can be mitigated with the right provider. HR outsourcing is a must-use tool, especially for small businesses. The service is going to pair you with industry-leading HR professionals and help you have the tools to have better HR implementation.

With pricing starting as low as $45 a month for some services, HR outsourcing can definitely be a game-changer for your business. If you are interested in using HR outsourcing services for your business we can help. You can fill out our form here in 1-2 minutes and be paired with up to 5 suppliers who can help you with your HR needs.

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