6 Advantages of Outsourcing HR Functions
Human relations (HR) is an essential part of any organization. The HR department is typically responsible for almost every facet of employee management, including recruiting employees, screening them, hiring them, training them, paying them, managing their benefits, managing employee complaints, and much more. In other words, HR management is both comprehensive and complex. Unfortunately, many smaller to mid-sized companies may not have the resources needed to set up an efficient and effective in-house HR department. If your HR needs exceed your internal HR capabilities, consider outsourcing some of your HR functions.
What HR Functions May Be Outsourced?
One of the main advantages of outsourcing your HR functions is that you can outsource all the different elements of HR rather than having to outsource some and keep others in house. While you may feel like you have the resources to keep some HR functions in house, it rarely makes sense to do so, and outsourcing all of it can save you the time and money you need to focus on growing your business. Here are some of the HR functions that outsourcing can help you remove from your plate:
Employee Relations & Compliance
HR is responsible for ensuring that your business is compliant with all labor laws. HR must also address any employee concerns as well as reports about issues they have witnessed or experienced in the workplace (such as discrimination), whether it be from co-workers or managers.
Payroll involves paying proper wages to all employees, correctly calculating the times of hourly workers, withdrawing the appropriate taxes from wages, and more. All of these payroll services are the responsibility of HR. Payroll also includes wage and hour laws and making sure you are compliant with the state and federal laws regarding paying your employees.
HR typically handles all of your company’s workers’ compensation claims. They are also responsible for making sure that injured or sick employees are receiving medical care and that they are being treated fairly by your company. In addition to handling claims, your HR department should be handling your renewals and audits to ensure your policy is up-to-date, you are getting the best rates possible and you are being charged correctly.
All employee benefits, from health insurance to 401(k) plans, are handled by HR. These tasks involve a serious amount of paperwork and expertise as HR has to handle open enrollment, renewals, offering and terminating benefits, and annual audits for all plans.
Staffing & Recruitment
HR recruits new employees for positions of need. This responsibility includes advertising the position, collecting and reading through resumes, scheduling interviews, and, finally, hiring new employees.
Employee Screening & Background Checks
In addition to recruitment, HR performs background checks on job candidates as well as screening them for the position that they are applying for. This also includes pre-employment screenings such as drug screens, physicals, and background checks that are performed after a job offer has been made.
Pre-Employment Skills Testing
Many companies require job candidates to take a pre-employment skill test to ensure that they are proficient in the skills necessary to do the job. HR is responsible for testing job candidates once they make it far enough along the interview process.
Sexual Harassment Training
To ensure that the workspace is a safe and comfortable environment for every single employee, all employees must undergo sexual harassment training. HR is responsible for providing that training. This is a new requirement in the state of California and applies to all employers with 5 or more employees. It also now includes all employees, not just managers and supervisors.
To Whom May You Outsource Your HR Functions?
If you do decide to outsource some of your HR functions, the question becomes, who do you outsource them to? Different types of organizations exist where you can outsource your HR functions:
Human Resources Organizations (HROs)
HROs are organizations specifically tailored to providing large businesses with HR functions. They can handle the needs of companies with over 1,000 employees. If a company outsources all of its HR functions to an HRO, then that HRO will take full responsibility for their HR management. If a company chooses to only outsource some HR functions, then the HRO and the company will develop a co-management or shared HR relationship. Although larger companies will typically keep strategic HR functions in-house, they will often outsource administrative and tactical HR roles to an HRO.
Professional Employer Organizations (PEOs)
Whereas HROs are better suited for handling the HR needs of larger companies, PEOs are a better fit for smaller to mid-sized companies with less than 200 employees. When a company that outsources their HR functions to a PEO, they will enter into a co-employment relationship. The PEO will become the employer of record, making them responsible for taxes, garnishments, payroll, and other duties, while the company will be the on-site employer. PEOs also provide other HR functions, including employee relations, compliance, policies, handbooks, performance management, and more.
Administrative Services Organizations (ASOs)
ASOs provide administrative HR services, such as processing payroll, filing payroll taxes, and performing direct deposits. An ASO is somewhat similar to that of an outsourced payroll service. However, unlike payroll companies, ASOs also assist with legal concerns, insurance access, compliance, benefits, and workers’ compensation. Because ASOs focus more on administrative HR functions, there is no co-employment relationship.
Staffing & recruiting agencies
These agencies will only focus on the staffing and recruiting side of HR; however, it can be very beneficial to outsource this particular HR function since it can be a very time-consuming, expensive and frustrating process. A staffing and recruiting agency can not only help you fill positions of need with highly qualified workers, but they can also do so for both short-term and long-term positions. Such agencies typically have a large pool of qualified candidates to choose from, which means it won’t take them long to find a qualified candidate that will meet your needs.
1. Cost Savings
The cost of HR management can get quite high, especially when you consider all of the responsibilities that the standard HR department has. The more employees you have, the more HR staff you need. This need can be an issue, especially since you don’t necessarily want your HR personnel to be responsible for more than one function. For example, forcing a single HR employee to focus on recruitment, compliance, and payroll will be a challenge. In California, HR is so complex that it requires a team with different areas of expertise to really make sure your company is covered. Hiring an entire team will mean not only paying the salaries for each of them but covering benefits, taxes, and workers’ comp as well as having a workspace large enough to accommodate them.
For a department that doesn’t generate revenue, maintaining an HR team in-house requires a significant amount of resources. At the end of the day, outsourcing many of your HR functions can end up saving you a substantial amount of money. Consider all the ways in which outsourcing HR can help to reduce costs:
Outsourcing your payroll needs is more cost-effective in the long run than maintaining an internal payroll service. Depending on how many employees you have, you may need HR staff that is solely dedicated to matters involving payroll. Requiring HR staff to handle payroll services while also dealing with employee conflicts and other HR matters is expecting way too much.
Payroll management involves much more than just cutting checks. It also involves maintaining records and payslips, providing accounting with analysis reports, and providing employees with tax and deduction advice, just to name a few other responsibilities. If you require your HR staff to handle multiple functions, they will be unable to focus on only one area, leading to more errors -- and payroll errors are not something that you will want to deal with.
Employment Acquisition Costs
Your HR staff shouldn’t have to juggle too many responsibilities, or it will affect their performance. Unfortunately, this means that you may have to hire more HR employees to handle the various HR functions required by your company. Hiring HR staff can be quite expensive when you factor in their salaries, their benefits, the equipment they need, the training they require, the cost of recruiting them, and more. Outsourcing can help to significantly reduce the cost of your company’s HR functions.
Salaries and Training Costs
As your business grows, you’ll likely need to hire more employees. The hiring process can be quite expensive when factoring in expenses such as salaries, health insurance premiums, worker’s compensation premiums, recruiting fees, and legal costs. If you expect to hire new employees regularly, then outsourcing your recruitment and hiring processes can be much more cost-effective in the long run. HR outsourcing services such as PEOs have the resources to provide you with more qualified employees that are a better fit for your company at a lower cost. Because employees will likely be a better fit, they will also help reduce your turnover rate. You’ll reduce the amount of money spent on replacing employees in the long run.
2. Time Savings
Considering all of the different functions that HR management is responsible for, it’s not difficult to imagine all of the paperwork and administrative responsibilities associated with maintaining those HR functions internally. These tasks can be incredibly time-consuming for your existing HR staff. If you outsource some of your HR functions, you free up valuable time that your internal HR staff can use for more important matters. Then your company can devote more of its time to grow your business operations -- and your bottom line.
3. Specialized HR Talent
Although you don’t want your internal HR staff to juggle too many responsibilities, this often cannot be avoided, especially if you don’t have the budget to maintain a large HR department. You may just have a small HR staff that’s responsible for all of your HR functions. When you outsource your HR, you ensure that each HR function is handled by highly capable HR experts who specialize in those particular functions. Essentially, outsourcing HR improves the quality of your HR.
Streamlined HR Processes
Organizations that focus solely on providing HR services will have much more advanced technology and processes in place to provide those services. Outsourcing your HR functions to such an organization can help to streamline your HR processes, resulting in more effective and efficient HR management and administration.
4. Risk Management
There are all kinds of federal and state regulations that businesses have to follow. For smaller companies, keeping up with these regulations to remain compliant can be a challenge, especially since existing regulations are constantly changing and new regulations are routinely being implemented. The inability to keep up can result in a lack of compliance, leading to serious financial consequences. A PEO can help ensure that your company stays on top of all relevant regulations by performing regular audits.
Compliance to Hiring, Insurance, and Benefits Regulations
By remaining compliant with federal and state regulations, you not only avoid potentially stiff financial penalties, but you also protect your employees. There are numerous hiring, insurance, and benefits regulations that you must abide by. You can rely on a PEO to ensure compliance and to help protect your workers.
5. Monitoring of Employees’ Performance
Although you can require that your managers monitor the performance and development of your employees, this task is also something that you can delegate to HR. An HR firm can report how your employees are performing and whether they are complying with your organization’s policies to your managers. This will help reduce the administrative workload of your managers, which allows them to focus on more important matters.
6. Better Employee Benefits
Working with a PEO can ultimately provide you with access to much better health benefits for your employees. It’s widely known that bigger companies with more employees often get access to more comprehensive coverage for better prices. A PEO can provide smaller businesses with the type of coverage options usually only available to larger corporations.
Focus on Your Business, Your Passion
HR plays an enormously important role in the success of your company. Considering all of the functions HR is responsible for, don’t cut corners with your HR management. However, establishing an HR department within your company and scaling it as your company grows can cause a significant strain on your resources. As most businesses grow, they will eventually begin to outsource some of their HR functions -- if not all of them. It is more cost-effective and will result in more efficient and effective HR management overall. By outsourcing many of the tasks that HR is responsible for, you can focus more of your time and resources on matters that directly relate to the growth of your business.
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This blog post is intended for informational purposes only and does not constitute legal advice. No attorney-client relationship is created between the author and reader of this blog post, and its content should not be relied upon as legal advice. Readers are urged to consult legal counsel when seeking legal advice.