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Updated Apr 18, 2024

5 Warning Signs You Need to Outsource Your HR

Should you outsource your company's HR functions? Here are five signs that outsourcing HR may be your best strategy.

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Skye Schooley, Senior Lead Analyst & Expert on Business Operations
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Your company’s human resources (HR) chief is responsible for many critical aspects of your workforce. They’re tasked with finding, hiring, training and assessing the performance of your employees. Your HR team is also responsible for developing an appealing culture and ensuring the company complies with all labor and employment laws. They may also oversee payroll. If you have unionized employees, HR is the liaison between your company and the union. To say that HR carries responsibility for your company’s success is an understatement.

What is HR outsourcing?

HR outsourcing is exactly what it sounds like. It is handing off some or all of your HR functions to a third party. This can be an alternative to hiring an internal HR department or used in tandem with an in-house HR professional who handles some of your HR responsibilities.

Outsourced HR services depend on the contract between the company and the provider. The client service agreement often asks the contractor to handle payroll by managing all withholdings and taxes. The HR company may also be in charge of releasing all W-2s to worksite employees. You may also use the outsourced service to manage employee benefits or retirement plans.

Editor’s note: Looking for an HR outsourcing service? Fill out the below questionnaire to have our vendor partners contact you with free information.

Types of HR outsourcing

When it comes to HR outsourcing, you have a few options. Two of the most common HR outsourcing solutions are human resources outsourcing (HRO) services and professional employer organizations (PEOs). These resources offer similar HR services but they have different employment models:

  • HR outsourcing services: Allows you to outsource some HR functions while remaining the sole employer of your staff. Some HRO providers offer preset HR outsourcing services, while others let you create custom service packages.
  • Professional employer organizations: Another option for outsourcing HR services is enlisting the aid of a PEO. PEOs provide small and midsize companies with outsourced HR services via a co-employment model. This means you share ownership of your employees with the PEO and your workers will technically be on the PEO’s books. PEOs typically bundle their HR services together. [Learn more about the co-employment model PEOs work under.]
Did You Know?Did you know
According to NAPEO, small and medium-sized businesses (SMBs) that use a PEO have 10 percent to 14 percent less employee turnover and are 50 percent less likely to go out of business.

How do you know when it’s time to outsource your HR services?

If your company is growing and HR responsibilities are weighing heavily on you, outsourced HR could be the solution you need. Here are five signs that you should outsource your company’s HR.

1. You spend too much time managing HR problems.

There is no escaping that, as a business owner, you have to take on many roles in addition to providing the products or services for which you created your business. But HR problems can be very time-consuming, taking away from revenue-generating activities. The more time you spend trying to learn about employment law or searching for that full-time designer you need, the less you spend doing what your business does.

When you outsource HR, you pay someone else to deal with HR tasks and you free up that much more time to work on your actual revenue-generating functions.

FYIDid you know
SMBs benefit the most from outsourcing HR services. For companies with fewer than 50 employees, hiring a full-time HR professional may not be cost-effective.

2. You are worried about or have experienced liability exposure.

A skilled HR person must have a keen understanding of hiring rules, Equal Employment Opportunity Commission requirements, collective bargaining agreements, recruiting and training ― and they have to be able to find job candidates to fill your staffing needs. Some HR managers oversee payroll as well. The HR manager must understand where you could face liability in hiring or managing workers, and, if they oversee your payroll, they reduce your risk of a run-in with the IRS.

By outsourcing HR, you give responsibility to someone specifically trained in the practical and legal aspects of HR. The cost of just one tax reporting violation could pay for a year of outsourced HR.

3. You need to save money.

Outsourcing offers savings in many ways. For one thing, when you outsource HR, you gain the expertise of someone you won’t have to train or provide with benefits. You avail yourself of that HR person’s organization and its services, which may include time-intensive tasks like payroll.

When you have a competent outside agency handling your company’s HR responsibilities, you spend money, but you also gain time to devote to your core business functions and reduce your exposure to legal risks and violations. The overall effect is a healthier bottom line.

4. The HR lines of accountability are not clear in your business.

If your HR functions are allocated among managers and department heads, you may get all the HR tasks done, but you may be muddling the lines of accountability too. Employees might not know where to report a problem, managers may be unsure if they are passing along correct information and some HR tasks may get lost in the shuffle.

When you outsource HR, your managers and department heads can deal with their departments without worrying about HR responsibilities and you can be confident that you won’t face legal problems related to the haphazard allocation of HR responsibilities. [Related article: Employee Rights You’re Violating Right Now]

5. You can’t respond to changes as quickly as you need to.

Businesses have to be nimble and responsive to change. When a great opportunity comes along, you may have to find and hire employees quickly to meet your obligations and fuel business growth.

When you outsource HR, you have many more resources at your disposal for finding and hiring the individuals you need quickly. Losing an opportunity due to an overworked HR manager who suddenly has new hiring tasks on top of everything else gives the advantage to your competitors. Outsourcing HR is a great way to keep your business flexible and responsive to new opportunities.

Which HR functions can be outsourced?

Employers can choose to outsource all of their HR needs or opt for partial outsourcing of specific tasks. The type of outsourcing you need depends on whether you can fulfill each service on your own.

Here are some of the most commonly outsourced HR functions:

What are the benefits of outsourcing HR?

Partnering with an external HR provider can help your business in many ways. Here are the common benefits of outsourcing HR.

Cost savings

It isn’t always easy to afford someone who can handle HR responsibilities, especially for a startup. Instead, outsourcing HR functions can often be more cost-effective than maintaining an in-house HR department. You can save on salaries, benefits, office space and technology infrastructure.

TipBottom line
According to the NAPEO, outsourcing your HR functions to a PEO can result in an ROI of 27.3 percent in cost savings alone.

Affordable employee benefits

Offering comprehensive employee benefits can be key to attracting the best employees. However, benefits can be costly, causing many SMBs to struggle to offer them. When you outsource to a provider like a PEO, you can access comprehensive benefits at affordable rates.

Streamlined HR tasks

When business owners try to allocate various HR tasks to other non-HR employees, such as by assigning payroll responsibilities to the finance chief or having department heads handle employee issues within their departments, the results can be inconsistent at best and chaotic at worst. Hiring an external HR company can streamline your HR tasks.

Access to HR expertise and compliance

HR outsourcing providers typically have a team of specialists well-versed in HR laws, regulations and best practices. They can help you stay compliant by offering expertise in employment law, payroll processing, payroll taxes, recruitment, employee relations and benefits administration. This is especially helpful for growing businesses and organizations that want to expand across multiple states or jurisdictions.

Better HR reporting and analytics

HR outsourcing companies often provide detailed reports and analytics that can help organizations make data-driven HR decisions and track HR metrics more effectively.

What are the best HR outsourcing services?

If you’ve determined that you need to outsource some or all of your HR functions, the next step is to find a PEO or HRO that aligns with your budget and business needs. Some companies offer PEO and HRO service models, allowing you to transition as your business needs change.

Best PEO services to consider

Here are some of the best PEO services to consider:

  • TriNet: Offers bundled HR features with industry-specific support. Read our review of TriNet to learn more about its features.
  • Deel: Offers not only domestic PEO services but also global employer-of-record services. It can help you pay employees in more than 100 countries. Learn in our comprehensive Deel review.
  • Rippling: Employers looking to automate several HR functions will want to consider Rippling. This vendor offers PEO and standalone HR plans and allows employers to scale between the two conveniently as needed. Check out our Rippling review to learn more.
  • Justworks: This PEO comes with an HR platform that is intuitive and easy to use. It has transparent pricing and excellent customer service. Learn more in our Justworks review.

Best HRO services to consider

Here are some of the best HRO services to consider:

  • Bambee: When you partner with Bambee you are assigned your very own HR manager who can help audit your HR functions and create compliant HR policies for your business. Learn more in our comprehensive Bambee review.
  • Paychex: Midsize businesses looking for a comprehensive PEO to help with payroll processing, tax administration and compliance support will want to consider Paychex. It also offers plans via a PEO model. Learn more in our review of Paychex.
  • Insperity: Besides offering standard HR services like payroll processing, benefits administration and compliance assistance, Insperity offers a wealth of employee training resources with thousands of courses and books. Features are available via PEO and non-PEO models. Learn more in our Insperity review.
  • ADP: ADP is one of the largest HRO and PEO providers. It includes an intuitive platform with dedicated customer support. It’s also good for accessing comprehensive employee benefits at affordable rates. Learn more in our comprehensive ADP review.

When shopping for the right PEO or HRO for your business, compare features, pricing, technology usability and customer support.

author image
Skye Schooley, Senior Lead Analyst & Expert on Business Operations
Skye Schooley is a dedicated business professional who is especially passionate about human resources and digital marketing. For more than a decade, she has helped clients navigate the employee recruitment and customer acquisition processes, ensuring small business owners have the knowledge they need to succeed and grow their companies. In recent years, Schooley has enjoyed evaluating and comparing HR software and other human resources solutions to help businesses find the tools and services that best suit their needs. With a degree in business communications, she excels at simplifying complicated subjects and interviewing business vendors and entrepreneurs to gain new insights. Her guidance spans various formats, including newsletters, long-form videos and YouTube Shorts, reflecting her commitment to providing valuable expertise in accessible ways.
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