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5 Warning Signs You Need to Outsource Your HR

business.com editorial staff
business.com editorial staff

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

  • By outsourcing your human resource services, you can hire a company to manage your payroll and deductions offsite.
  • Small and midsize businesses benefit the most from outsourcing HR services. For companies with fewer than 50 employees, a full-time HR representative may not be cost-effective.
  • A professional employer organization, or PEO, presents the perfect opportunity to outsource HR. The business and PEO create a contract that dictates what HR services are being outsourced.

Your business's human resources chief is responsible for many critical aspects of your workforce. First of all, they're responsible for finding, hiring, training and assessing the performance of your employees. Your HR person is in charge of making sure the company complies with all labor and employment laws. They may also be the overseer of 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.

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.

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

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 your time and energy 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.

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

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, your risk of a run-in with the IRS looms as well. 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.


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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.

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 may not know where to report a problem, managers may be unsure if they are passing along correct information, and some HR tasks may simply 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. 

Resources for outsourcing HR

One of the best resources for outsourcing human resources services is by enlisting the aid of a PEO, or professional employer organization. According to NAPEO, 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 turnaround and are 50% less likely to go out of business. [Check out our picks for the best PEOs and best HR outsourcing services to learn more about what these companies offer.]

Image Credit: Prostock-Studio / Getty Images
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