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5 Warning Signs You Need to Outsource Your HR

Skye Schooley
Skye Schooley

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

Your business's human resources chief is responsible for many critical aspects of your workforce. First of all, they're tasked with finding, hiring, training and assessing the performance of your employees. Your HR team is also in charge of making sure the company complies with all labor and employment laws. They may also oversee payroll. If you have unionized employees, HR is the liaison point between your company and the union. To say that HR carries responsibility for your company's success is an understatement.

Do you need outsourced HR services?

Many small businesses choose to outsource HR. It isn't always easy to afford someone who can handle HR responsibilities, especially for a startup. When business owners try to allocate various HR tasks to other employees (such as by assigning payroll responsibilities to the finance chief or having department heads handle employee issues within their own departments), the results can be inconsistent at best, chaotic at worst.

Outsourced HR services will depend on the contract between the company and the provider. In many cases, the client service agreement will ask 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 any type of insurance or retirement plans for each employee.

How to know it is 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're spending too much valuable time managing HR problems.

There is no getting away from the fact that, as a business owner, you have to take on many responsibilities 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.

FYIFYI: Small and midsize businesses benefit the most from outsourcing HR services. For companies with fewer than 50 employees, hiring a full-time HR representative may not be cost-effective.

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

A skilled HR person has to have a keen understanding of hiring rules, EEOC 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 who is 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.

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

 

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 to 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. The overall effect is a healthier bottom line.

Did you know?Did you know? According to the NAPEO, outsourcing your HR functions to a PEO can result in an ROI of 27.3% in cost savings alone.

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. An employee 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 haphazard allocation of HR responsibilities.

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

Businesses of the 21st century 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 they can opt for partial outsourcing of specific tasks. The type of outsourcing you need depends on whether you have the capacity to fulfill each service on your own.

Here are some of the most commonly outsourced HR functions:

Resources for outsourcing HR

If you've determined that you need to outsource some or all of your HR functions, you can consider a few resources, such as top professional employer organizations (PEOs) and highly rated HR outsourcing services (HROs). These resources offer similar HR services, but they have different employment models.

Professional employer organizations

One of the best resources for outsourcing human resources services is enlisting the aid of a PEO. The goal of a PEO is to provide small and midsize companies with outsourced HR services. NAPEO reports that organizations that choose a PEO have 10% to 14% less employee turnover and are 50% less likely to go out of business.

When you partner with a PEO, it is important to find an organization that aligns with your goals and business needs. For example, if you are looking for an industry-specific partnership, read our review of TriNet. If top-notch technology is top of mind, check out our Justworks PEO review. If you need a scalable PEO that can easily transition between a PEO and HR software, read our Rippling review.

HR outsourcing services

If you want to outsource some HR functions while remaining the sole employer of your staff, you can partner with an HRO. Some HRO companies offer preset HR outsourcing services, while others let you create custom HR outsourcing packages. Some companies (e.g., Paychex, ADP, Insperity) offer both PEO and HRO service models, allowing you to take advantage of their services regardless of what employment model you are looking for. Each of these companies has its own benefits and drawbacks. To learn more about these services and find the right one for your business, check out our Paychex review, ADP review and Insperity review.

Image Credit: Prostock-Studio / Getty Images
Skye Schooley
Skye Schooley
business.com Staff
Skye Schooley is a staff writer at business.com and Business News Daily, where she has written more than 200 articles on B2B-focused topics including human resources operations, management leadership, and business technology. In addition to researching and analyzing products that help business owners launch and grow their business, Skye writes on topics aimed at building better professional culture, like protecting employee privacy, managing human capital, improving communication, and fostering workplace diversity and culture.