What is Human Resources Outsourcing?

Human Resources outsourcing refers to the practice of contracting a third-party organization to handle some or all of a business’s HR tasks and functions. When small business owners or HR professionals consider outsourcing HR, they want to consider who else is outsourcing, what functions can be outsourced, and to whom they should outsource.

Why Outsource HR?

According to a study by The Society Of Human Resource Management (SHRM), over half of all HR professionals have taken advantage of outsourced HR. The top two reasons for outsourcing 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 reasons cited by SHRM include improved compliance, a wider range of offered services, and more experience in the HR field.

What HR Functions can be Outsourced?

If a company choses to partially outsource HR, the company shares responsibilities with the vendor, sharing information and control over the functions. If the company decides to completely outsource, the vendor takes on all HR responsibilities. The owner or HR manager in the original company takes on a new role, liaison with the vendor, focusing only on HR in order to manage the vendor-company relationship. Whether partially or completely outsourcing, companies frequently outsource the following HR functions:

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

To Whom Can You Outsource HR?

The three types of HR outsourcing companies are Human Resources Organizations, Professional Employer Organizations, and Administrative Services Organizations.

1. Human Resources Organization (HRO)

The majority of Human Resources Organizations (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 the HRO and the business (this is typically the conservative approach to those first outsourcing HR). When all functions of HR are outsourced, the HRO 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 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 and the company is the on-site employer. As the employer-of-record, the PEO will be responsible for taxes and workers’ compensation.  Financial liability for the small business decreases due to the shared burden.   Additionally, the PEO can obtain reduced rates on retirement packages and health benefits by combining employees from all of their customers.  They often offer outsourced payroll, performance management, recruiting, background screening and other various employment administrative tasks that depend on the needs of the business that hires them.

3. Administrative Services Organization (ASO)

The third HR outsourcing scenario is hiring an ASO, or Administrative Services Organization. As the name aptly implies, an ASO provides administrative services for your company. These include processing payroll, performing direct deposits, and filing payroll taxes. Like outsourced payroll, the filing is under your federal employer ID number (FEIN). However, unlike outsourced payroll, the ASO will provide assistance with questions concerning compliance and legal concerns, access to insurance, worker's comp, and medical/dental benefits. These offerings and costs are determined by your employee base and employment risks associated with retaining them. The ASO provides the small business employer "employment related" relief for businesses with 50 or more employees.

Thus, 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. While PEOs primarily serve small businesses with under 200 employees and HROs focus on large companies with over 1000 employees, ASOs offer a popular solution for those mid-size businesses in between.  Not surprisingly, the various functions that ASOs provide include:

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

Traditionally, the PEO contract states that all services are accomplished and performed by the PEO using their FEIN, a key difference from the ASO. Additionally, PEOs are generally employed by companies having 1 - 50 employees or for those groups that have many small pockets of employees across the United States. That being said, there are still many companies that have much larger employee counts that enjoy the benefits from a PEO (and small businesses who may seek out an ASO).

Choosing a Human Resources Outsourcing Company

As stated above, there are three main types of organizations to which HR can be outsourced. The most prevalent option 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 number of employees) to outsource only certain HR functions (ASO or HRO), and some might find it better to outsource only the administrative side of 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.