Outsourcing HR is popular amongst businesses, especially smaller ones, for good reason.
As managing the human resources function becomes more complex and time-consuming—especially when workforces grow internationally—it pays to bring in professionals.
In this article I’ll take you through:
- What Is HR Outsourcing?
- The Functions That HR Outsourcing Can Assist With
- The Benefits Of Outsourcing HR
- What HR Outsourcing Options Are Available?
Let’s dive in.
What Is HR outsourcing?
HR outsourcing involves contracting with a third-party, typically a skilled individual or specialized business, to perform some or all of your company’s human resource functions.
It's often the perfect middle ground between having no HR department and an in-house human resources team.
The former can be downright dangerous for employers. Most employers have little knowledge of what policies and procedures they need in place to be compliant with the law, and those lack of written documents can be expensive if they are ever hit with a legal claim.
The latter is a necessity once a company grows to a certain size. But many companies simply aren’t there yet and want to find a workable solution that keeps them compliant without completely giving up their workplace culture.
Roughly 25% of small businesses are outsourcing to increase efficiencies, and outsourcing HR can do exactly that.
If small business owners were to take the time to learn the ins and outs of regional employment law and labor standards, it would take hours and hours of billable time that could be spent on generating revenue.
Instead, more and more companies are turning to outsourced HR organizations that offer a full suite of services for a small company’s needs.
HR consulting is the most commonly used service, with many providers offering full-suite or a-la-carte options including recruitment, benefits administration, time tracking, insurance, training, performance management, and employee transition services.
An outsourced HR firm is exactly that—they stay offsite, effectively in an arm’s length relationship from your business. They might have many clients across a variety of fields, but they are able to offer strategic, usually customized advice that best suits your business.
What Functions Can HR Outsourcing Perform?
Outsourcing can be beneficial for some of the HR tasks mentioned above such as payroll work, benefits administration, recruitment, and performance management.
- Payroll setup
- Payroll tax filing
- Online payroll submission
- Payroll reporting
- Vacation and sick leave tracking.
- Better buying power for employee benefits such as health care, dental, vision care, disability, etc.
- Answering employees’ questions about the benefits plan
- Processing enrollment into the benefits program
- Removing employees who leave the company from the benefits program.
- Creating and posting job ads
- Collecting and filtering resumes
- Conducting initial interviews and candidate screening
- Assisting with reference checks.
- Training employees on policies and procedures
- Implementing and managing formal employee performance review
- Handling ongoing performance feedback
- Implementing extended training on topics such as harassment, DEI, etc.
- Handling employee records.
The Benefits Of Outsourcing HR
Improve your processes
When you only had a few employees, it was easier to onboard them and set them up for success. You likely didn’t have an employee handbook, or any sort of written policies, and you may not even have had written employment contracts!
But those sorts of documents are necessary if you want to grow the company properly. Working with an HR outsourcing service means that you have an expert preparing your employee handbook, which is the document that will tell your new hires exactly what you expect from them in order to succeed in their role.
It also means that you have policies that are suited to your workplace, which is crucial. If you were to pull policies off the internet ad hoc because they look good to an untrained eye, they’re probably not applicable to your particular workplace and they’ll do little to protect you from a legal standpoint.
Remember, policies are the rules that employees need to work by, and policy violations are what allow you to punish, suspend, or even dismiss troublesome employees without too many headaches. An HR outsourcing company can make these policies watertight.
Save time and money
Not only is it hard to get HR right on your own, but it takes a tremendous amount of time!
Most employers are simply too busy to learn labor and employment law because they have to deal with sales, business development, marketing, operations, and everything else that demands their time.
With outsourcing, not only do employee relations improve in the hands of skilled professionals, HR is no longer taking up valuable time senior management time (and therefore money).
The other savings are financial. Errors cost businesses, and outsourcing HR will reduce errors.
Further, a full-time HR person can cost a business $50,000 a year (or even more for someone experienced) and that’s just for a single salary!
Eventually, a large enough company will require a person or team in-house. Yet, for businesses under 100 people, HR outsourcing—either fully or partly—means getting all your necessary HR services at a fraction of that cost.
When it comes to HR compliance, what an employer doesn’t know CAN hurt them. If an employee files a legal claim for wrongful dismissal, bad policies and procedures, that have not been followed thoroughly, will do little to protect the employer’s interests and can lead to a costly judgment against them.
Other human resources tasks need careful handling as well, especially where large sums of money are involved.
HR tasks such as payroll and benefits administration can be complicated for someone without expertise, and HR outsourcing can offer the benefit of experienced HR administration so as to avoid costly mistakes.
What HR Outsourcing Options Are Available?
There are multiple options available for outsourcing depending on the human resources services that your business requires and where it operates.
For example, a business that is highly localized may simply require a local-based consultant for their HR needs, whereas a business that operates around the world may have far more involved needs.
Professional employer organization
Professional Employer Organizations (“PEO”s) are common in the United States, where 15% of all businesses under 100 employees have already partnered with their services.
PEOs commonly assist with HR administrative functions such as payroll processing, tax filing, consulting, benefits administration, workers’ compensation, recruitment, and other administrative tasks.
PEOs are more common for employers that only operate within one country. They come to the table with a lot of HR knowledge and can take on some of the tasks that an HR specialist would embark upon in a larger organization.
Learn more: What is a PEO?
Employer of record
An Employer of Record (or “EOR”) functions as a third-party, legal employer of your staff. As such, an EOR performs a lot of the core functions of an employer, such as employee onboarding, employment contracts, payroll processing and taxes, employee benefits, and termination of employees.
The core benefit to working with an EOR specifically is the ability to hire internationally or across states without any added headaches. If your business is based in the United States, for example, but you are looking to build a sales team in Europe, you’re likely unfamiliar with the nuances of employment law throughout the various European countries.
EORs act as an HR experts on the ground in that particular jurisdiction and can function as an employer for administrative purposes in the person’s respective country so that they can perform services for your company with few headaches.
Learn more: What is an EOR?
Localized HR Consultants
If you're not in a position to hire a large service provider for your human resources outsourcing, no problem!
There are countless smaller, locally-based services that provide human resources consulting and other administrative resources specifically targeted to small corporations, many of whom may have direct knowledge of your particular industry.
These consultants usually operate on a smaller scale for a monthly retainer fee and have in-house experts that are available to employers as an outsourced HR department on an as-needed basis.
They may be the right fit for a growing team that is looking to put the right tools in place as they grow from that 20 to 50 employee benchmark, or as they work towards making the transition from 50 employees to 100.
Some are well-suited to working with larger organizations, but others may function as the perfect temporary solution before hiring in-house.
Key Considerations For Outsourcing HR
While outsourcing HR can be a smart solution for a growing business, it’s not always without its challenges.
Loss of Control
Both employees and managers sometimes have issues with moving human resource functions offsite. HR often has the pulse of the company, and so moving it offsite for a business owner can feel a bit like having your heart outside your body.
Also, outsourced HR providers often implement cultural changes in a company, which can be a bit jarring since they are not physically part of the team.
Team members may be used to having confidential conversations in the same room as an HR representative, and so it can be difficult for both managers and employees to form those close trusted bonds with someone not onsite.
Staff turnover is usually a challenge for employers, but can be a challenge for an entire company when their outsourced HR provider is training someone new.
A company may be assigned a representative from their HR provider who effectively acts as their offsite HR generalist.
If this person changes teams within their own organization, or leaves the organization suddenly, employers are faced with having to work with someone entirely new who does not know their business.
No HR outsourcing service can guarantee that their staff will stay permanently, but employers can shop around before signing any contracts. They can speak with references provided by the company, and even make inquiries with other clients, to make sure that they will receive the level of service and commitment that they expect from this relationship.
Freedom of Choice
For employers, outsourcing services to someone like a PEO means that you are likely connected to their vendors to handle tasks such as payroll and insurance. This may not be an issue, but some employers may feel restricted by not having multiple options at their fingertips.
The benefit, though, is that PEOs often have great relationships with their vendors, which can mean preferential rates.
There are also potential privacy concerns with having that sort of data offsite. If your HR outsourcing service falls victim to a data breach, your employees’ information is suddenly exposed. These companies store employees’ most sensitive data, so it can leave them feeling weary and exposed if their data is suddenly compromised.
A professional HR services provider recognizes these issues and takes extra measures to protect this sensitive data. Employers should review their provider’s data protection measures before signing any contracts, and can ask questions to make sure that security is a top priority.
The cost of outsourcing can also be a small mountain that some employers need to climb. If they have never retained HR services before, it can be overwhelming to suddenly pay a regular monthly fee per employee for these services. While there are low-cost providers on the market, quality services often come at a higher price point.
Yet the benefit of staying compliant often outweighs the risks of not being up-to-date with labour standards. While outsourcing may be an added expense, it’s usually less expensive than a full-service in-house HR team.
When you need some extra help, but you’re not ready for a full HR department, outsourcing HR is the natural solution.
Outsourcing gives you all of the skills and resources of talented HR professionals, at a reduced cost, and ensures that your business is operating as it should be so that you can focus on the other important tasks at hand.
If you think the time is right to start outsourcing HR, check out: