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Outsourcing HR is popular amongst businesses, especially smaller ones, for good reason.

As managing the technical function of human resources becomes more complex and time-consuming—especially if workforces grow internationally—it pays to bring in professionals that can offer flexibility or a specific area of expertise that you do not have internally.

In this article I’ll take you through:

What is HR Outsourcing?

HR outsourcing is the process of 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 HR team. This is evidenced by the increased hiring of Fractional HR roles and the growth of Employers of Record who can help manage teams across the globe.

While the former can be dangerous for employers, the latter is a necessity once a company grows to a certain size.

Rather than spend hours learning the ins and outs of regional employment laws and standards, roughly 25% of small businesses are outsourcing to increase efficiencies.

HR consulting is the most commonly used service, with HR outsourcing provider offerings ranging from a full-suite to a-la-carte options including:

  • Recruitment
  • Payroll administration
  • Benefits administration
  • Time tracking
  • Insurance
  • Training
  • Performance management
  • Employee relations
  • Employee transition services

Typical HR Functions Perfect for Outsourcing

Outsourcing can satisfy a variety of HR needs, but the following are the most common choices for small to midsize businesses.

Payroll Administration

Outsourcing payroll is administration is a strategic decision that can help businesses deal with challenges related to scalability, compliance, reducing errors and enhancing security.

Tasks ripe for outsourcing include:

  • Payroll setup
  • Payroll tax filing
  • Online payroll submission
  • Payroll reporting
  • Termination compliance at the local level
  • Hourly worker time tracking and overtime calculations
  • Vacation and sick leave tracking.

Do a Tech Check

Perform an analysis of any potential partner’s tools and technology to ensure they’re compatible with yours, especially if you are including time tracking. This integration is key for maintaining data consistency, improving workflow efficiency and ensuring accurate and timely payroll management. Work with the potential partner to understand where they are and are not able to support the team. For example, calculations of bonuses and commissions often still have to be done in house, with the payroll provider just entering in the final payout for processing.

Benefits Administration

Benefits can be time consuming to research and difficult to structure. Outsourcing reduces administrative burden, improves the employee experience and removes the onus for staying up to date with the latest benefit trends from the employer.

Download our 2024 Workplace Trends Report to stay ahead in a transforming HR landscape. Get insights from leaders on trends that will define your strategies in AI, talent dynamics, and DEI.

Download our 2024 Workplace Trends Report to stay ahead in a transforming HR landscape. Get insights from leaders on trends that will define your strategies in AI, talent dynamics, and DEI.

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Advantages include:

  • 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 and managing COBRA enrollment.

Something to Remember

Outsourcing benefits can expand your access to a variety of benefit packages. Choose an HR outsourcing company, like a PEO, that offers customizable benefits packages. While there may not be a lot of customization you can do with the benefit plans, you can choose plans that best fit the needs of your team. You can then add in supplemental benefits through other partners such as wellness, financial or other perks that will provide value to your team.


Outsourcing recruitment can offer several benefits to organizations, particularly in enhancing efficiency, accessing specialized recruiters, giving the company flexibility to ramp up and down hiring as needed and improving the quality of hires.

Key advantages:

  • Creating and posting job descriptions that will attract the right talent
  • Proactive sourcing and review of inbound resumes.
  • Conducting initial interviews and candidate screening.
  • Assisting with reference checksCompliance with changing local laws.

Effective collaboration with a talent acquisition partner is based on mutual understanding of your business needs, culture and the specific requirements of the roles you're looking to fill. Create a feedback loop and agree on KPIs that you'll use to measure the partner's effectiveness. 

Identify Needs

Evaluate the kind of partner you are looking for based on your needs. There are several ways to partner with a recruiter, including contingent staffing agencies, contractors that work on commission based on hires and contractors that work on a set retainer based on the roles open and timeframe of the hiring needs.

Performance Management

Outsourcing performance management can support the creation of tailored developed plans for your employees and enhance objectivity in assessments.

  • 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, management skills, etc.
  • Partnering on employee relations issues or escalated performance concerns
  • Handling employee records.

It's a UX Universe

Your primary concern in outsourcing performance management is ensuring your partner aligns with your culture and goals. Look for a provider that is heavily focused on user experience so that your people remain the central focus of the partner’s efforts. Ask the partner how they will work with you when you have questions or concerns that come up about performance. This is one place where a Fractional HR professional will often be willing to partner with you on every level of performance management, while a PEO or HR Consulting Platform may only be able to give you the legal answer rather than more nuanced advice.

The Benefits Of Outsourcing HR

the benefits of outsourcing hr graphic

The volume of work involved in HR processes can create significant challenges for organizations as they grow. Scaling initiatives and maintaining consistency with policies and practices as the volume of people grows is a common pain point.

Outsourcing HR helps to 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.

Working with an HR outsourcing service means that you have an expert to:

The ROI is measured in time and money

Not only is it hard to get HR right on your own, but it takes a tremendous amount of time.

Outsourcing HR allows organizations to focus their efforts on sales, business development, marketing, operations and other aspects of the business that demand their time.  

As your business grows, you need someone to be the expert on the team, just as you do in other departments, and if you aren’t ready to hire someone full time, outsourcing HR is an impactful way for you and your team to get the support needed.

Financial savings from outsourcing HR comes from reduction in errors and lower salary expenses in the HR department.

Better risk management protects the business

Outsourcing HR reduces the burden on the organization to focus on compliance and keeping up with employment law changes.

Other areas of risk that are reduced include:

  • Data privacy and security
  • Worker's safety and worker's compensation
  • Employee disputes and grievances
  • Auditing current practices as the organization evolves
  • Policy development and implementation.

Types of HR Outsourcing

There are multiple options available for outsourcing depending on the human resources services that your business requires and where it operates.

PEOs for your local business

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. 

PEO services commonly assist with HR administrative tasks such as:

  • Payroll processing
  • Tax filing and consulting
  • Benefits administration
  • Workers’ compensation
  • Recruitment
  • Compliance training

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.  

Some examples of PEOs that claimed a significant portion of the market are ADP, Paychex, TriNet, Justworks, Insperity, Papaya Global and Deel, to name a few.

Which PEO is the best option for your organization depends on your needs and requirements. You can check out our shortlist of the best PEOs to help.

Go global with an EOR

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
  • Termination of employees

The core benefit to working with an EOR specifically is the ability to hire remote employees and 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 and creating business entities in those countries.

While risks of using an employer of record do exist, they can be an excellent option for international expansion.

In considering the needs of your business, it's important to know the difference between the EOR and a PEO, weighing the pros and cons of each to make a decision that fits your workforce planning goals.

HR consultants for local growth

If you're not in a position to hire a large service provider for your human resources outsourcing, there are plenty of localized HR consultants, or fractional HR professionals.

These services are tailored to small corporations, many of whom will 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.

These providers are often a good fit for a team growing from as little as 20 employees up to as much as 100.

Some key benefits include:

  • Localized recruiting strategies
  • On the ground HR support and accessibility
  • Cultural insight and relevance
  • HR Partner to leaders
  • Change management
  • Organizational design 
  • Training & coaching
  • Language proficiency
  • Networking and community relations
  • Adaptive to local market trends.

Key Considerations For Outsourcing HR

While outsourcing can be a smart HR solution for a growing business, it’s not without its challenges.

Loss of Control

Both employees and managers sometimes have issues with moving human resource functions offsite. HR has its finger on the pulse of the company, and so moving internal HR functions offsite for a business owner can be counterintuitive at times.  It’s important to consider which functions will support the business but not hurt the culture.

Team members may be used to having confidential conversations with an HR representative they had built a relationship with, and so it can be difficult for both managers and employees to form those close trusted bonds with someone not on the team directly.

If your company never had HR on the team, but you internally built processes and expectations over time that now need to change, it may be a hard transition. You may not have the flexibility to treat each situation independently and need to follow a process per the external partner, especially when working with a PEO or EOR.

Outsourced Staff Turnover

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 suddenly, employers are faced with having to work with a new hire who does not know their business. 

Keep Your Options Open

Shop around before signing any contracts. Speak with references provided by the company and even make inquiries with other clients to make sure you receive the level of service and commitment that you expect from this relationship and that they fit your culture and team as best as possible..

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.

Some employers may feel restricted by not having multiple options at their fingertips. 

The benefit, however, is that PEOs often have great relationships with their vendors, which can mean preferential rates.

Data Security

There will always be privacy concerns with having that sort of data offsite. If your HR outsourcing service falls victim to a data breach, your employees’ could experience identity theft or harassment.

A professional HR services provider recognizes these issues and takes extra measures to protect this sensitive data.

Do Your Due Diligence

Employers should review a provider’s data protection measures before signing a contract. Review their data security protocols, privacy policies, data access and controls, data breach response plans and employee data privacy training.

More Resources for Outsourcing HR

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 cost-effective way to get all of the skills and resources of talented HR professionals 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:

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By Karen Weeks

Karen has focused the last 20+ years on building amazing cultures within organizations so that individuals can ignite their careers. She cares about people's development so much that she is the Global Chief People Officer at Obviously, a VMLY&R company, and founded the coaching business, Shine at Work™. She hosts the career development podcast, also called “Shine at Work”, and is the author of “Setting the Stage: A Guide to Preparing for Any Feedback Conversation”. As a corporate speaker, she enjoys sharing stories and actionable advice so that people can shine at work and in life.