HR outsourcing is most often used to complement your in-house HR team, reducing their administrative burdens and allowing them to spend their time focused on your company's needs and growth.
For new startups, however, setting up an HR department may not be a priority. The cost of even a single full-time HR person can be prohibitive. This makes HR outsourcing even more important. Outsourcing can help bridge the gap between needing HR and being able to afford to hire employees dedicated to HR functions.
When there is no in-house HR, then HR functions have to be done on a DIY basis. This means that they are picked up on an as-needed basis by the owner and other employees, who have to take time from their regular duties to handle tasks such as payroll and benefits administration. This interruption creates an opportunity cost; employees are not spending the time on revenue-generating activities and also lose time from unnecessary task switching.
Furthermore, these employees don't have the specialist training and experience needed to do these tasks right. This increases compliance risks – mistakes are made, and poorly-trained employees are more likely to fail to notice when regulations change. Also, when the owner is the only person employees can go to with a problem, they are much less likely to speak up and deal with the issue.
Despite this, 70 percent of small businesses have HR tasks handled as a side job by either the owner (50%) or an employee with other primary responsibilities. They seek help only when something goes wrong, such as missing a deadline on payroll taxes or making a bad hiring decision. Outsourcing these routine tasks thus saves time and helps a business grow.
With HR outsourcing, the business owner can focus entirely on what really matters: Growing the business. This is especially true if you partner with a professional employer organization (PEO).
It is often tempting to just outsource payroll, but the fact is that that is often not cost-efficient. Partnering with a PEO allows you to outsource all HR functions. The PEO will take over payroll and benefits administration, workers comp administration, and general compliance issues. Not only will you not have to worry about these things, but they will be done better by experts.
Studies show that PEO clients grow faster than small businesses without a PEO. According to the National Association of Professional Employer Organizations, clients experience an employment growth that is 9 percent higher than other small businesses and 4 percent higher than the overall U.S. economy. Employment growth is a good stand-in for revenue growth; as your business grows, you both need more staff and can afford them.
Healthcare costs for small businesses are growing all the time. When you partner with a PEO, you gain access to their benefits master plan. These plans take advantage of economies of scale and expert negotiation to give you a much better deal than you can get on your own. Suddenly, your startup can offer competitive and comprehensive benefits right away, increasing your ability to compete for top talent. This also improves employee morale, increases retention, and reduces expensive turnover. You can move right away on making your company a great place to work without being creative with cheap perks that seldom fool employees into thinking they are getting a better deal.
On top of that, you also get access to the PEO's workers' compensation experience modifier (not all PEOs offer this service, so pay attention and make sure to make the right choice). The experience modifier is key to your workers' compensation premiums, and for new companies it is obviously poor. A single claim can make it worse. Even if your industry is low risk, using a PEO can help control workers' compensation costs both by providing you with their experience modifier, assisting you with safety training, and establishing a return-to-work program.
Finally, a good PEO will also have a 401(k) plan that your employees can sign up for, without you having to deal with complex administrative and compliance processes.
For startups, outsourcing HR is vital. It makes the difference between having a HR department and being stuck with jury-rigged DIY solutions that take time away from your company’s important work. As your business grows, your PEO can continue to support a developing in-house HR team.
To find out more about how outsourcing HR can help your startup, download "Which HR Functions Should Your Business Outsource?", our handy checklist to help you work out what you should be outsourcing for your specific business needs.