What is Human Resources (HR) Outsourcing?

Human Resources (HR) Outsourcing refers to the practice of contracting a third-party organization to handle some or all of a business’s Human Resources tasks and functions.

Please note that the acronym HRO stands for either Human Resources Outsourcing or Human Resources Organization, depending on the context. Throughout this article, HRO will indicate Human Resources Organization, to which HR can be outsourced. This has been done because there are several entities that handle Human Resources Outsourcing (the other HRO).

Why Outsource HR?
Fact: Over half of all HR Professionals and Small Businesses have taken advantage of outsourced HR and Payroll.

Since over half of all HR professionals outsource HR (or at least a part of HR), it must be seen as a beneficial plan of action, but in what way? What is the value of outsourcing HR? A number of reasons account for why companies outsource HR. The top two (as reported by a study by The Society Of Human Resource Management) are the benefits of cost and time efficiencies. These efficiencies are really the opportunity costs of business owners and managers, who lose time and money focusing on HR tasks when these resources can be spent on what must be done to grow their business. That is, the time and money devoted to employee management is better spent by outsourcing HR so that businesses can be devoted to core business functions. Other noted reasons in this study on HR Outsourcing include improved compliance, a wider range of offered services, and more experience in the HR field.

Common services that Outsourcing HR provides include:

  • Background Screening
  • Payroll Services
  • Risk Management
  • Temporary Staffing
  • Employee Assistance/Counseling
  • Health Care Benefits
  • Retirement Planning
  • Performance Management
  • Drug Screening

Who Outsources Human Resources?

The three types of HR Outsourcing companies are Human Resources Organizations, Professional Employer Organizations, and Administrative Services Organizations. Each offers different individual options in Outsourced HR.

1. Human Resources Organization

Human Resources Organizations (HROs) provide either some or all tasks in HR. The majority of HROs allow large businesses (1000+ employees) to choose which HR services they would like outsourced. When only some functions are dealt with by the HRO, a co-management relationship or shared HR relationship is made between it and the business (this is typically the conservative approach to those first Outsourcing HR.) When all functions of HR are outsourced, the HR Outsourcing organization takes full responsibility. In large organizations, the Strategic HR role remains an internal position; however, most administrative and tactical roles are outsourced. This can also be achieved in smaller organizations (typically under 200 employees) using a PEO or Professional Employer Organization.

2. Professional Employer Organization (PEO)

A Professional Employer Organization, or PEO, handles all HR tasks and is usually more beneficial for small and mid-sized businesses (under 200 employees). When a business outsources HR to a Professional Employer Organization they enter a co-employment relationship in which the PEO becomes the employer of record. This practice has also been known in the past as employee leasing or staff leasing. From a government and legal standpoint, this type of HR outsourcing involves the PEO sharing responsibility for the employees.

Using a PEO for your HR Outsourcing has a number of added bonuses. First, because a Professional Employer Organization is an umbrella for a much larger group of employees, they may receive tax rates at a lower rate than does your individual business. Also, because the PEO is the employer of record, financial liability for the organization decreases due to the shared burden. Outside of outsourcing HR, PEOs will often provide worker’s compensation insurance, outsourced payroll, performance management, recruiting and background screening and other various employment administrative tasks depending on the needs of the business that hires them.

3. Administrative Services Organization (ASO)

The third HR Outsourcing Scenario is an ASO, or Administrative Services Organization. ASOs outsource HR differently than the first two types of organizations because they focus mostly on the administrative side of HR and there exists no co-employment relationship between an ASO and the business that hires them. This flavor of outsourcing is typically viewed as in between the 200-1000 employee range of PEO and HRO. Not surprisingly, the various functions that ASOs provide include:

• Safety Management
• Compliance
• Payroll Services
• Pension Administration
• Worker’s Compensation

Learn more about the differences between the ASO or PEO here.

Choosing a Human Resources Outsourcing Company

As stated above, there are three main types of HR Outsourcing scenarios, so the first decision when choosing an individual HR Outsourcing vendor is to choose which type of organization best fits the needs of the business (whether it is a small business or a very large company). The most pervasive organization for small companies is the Professional Employer Organization, mostly because of the added bonuses of completely outsourcing HR and sharing the burden of risk. While this is important for some businesses, others might find it more advantageous (simply due to the # of employees) to outsource only certain HR functions (ASO or HRO), and some might find it better to outsource only administrative HR (ASO).

Significant factors to consider when outsourcing HR to an individual vendor (according to the SHRM study) include the following: a proven track record of the organization, the cost of services, the guarantee of service levels, and flexible contracting options. These all need to be taken into consideration, and each vendor should be happy to answer questions on these individual topics.

Getting the HR Outsourcing Process Started

Finding the correct HR Outsourcing vendor can be time consuming, but luckily there are a few online tools to get the search started.

The PEO Services Matching Tool can help match a business owner with some of the top PEOs and HR Outsourcing companies that fit their unique business requirements. Moreover, most HR Outsourcing companies and PEOs offer all three types of services: HRO, PEO, and ASO. This means that by answering a few questions asked by the PEO Services Matching Tool, a company can expedite their search and begin reaping the benefits of outsourced HR.

For more information on the PEO, Wikipedia has more
information here.

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