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Why Are Some HR Functions Outsourced?


HR outsourcing is not new, but it is growing and likely to continue to do so. For smaller companies, having a full in-house HR department may be prohibitive.HR outsourcing won’t replace HR personnel, but it can help them focus on their duties by handling administrative tasks in a more efficient and cost-effective manner.

There are some current trends in outsourcing, which include outsourcing payroll and benefits administration. Outsourcing takes several forms, which include payroll processing services, benefits administration services, or partnering with a professional employer organization (PEO), which can handle both of these things and more.

Reasons for HR Outsourcing

There are several reasons why companies outsource specific HR functions. The functions that are outsourced include:

Payroll Processing and Tax Remittance

The HR function outsourced most often is payroll processing. It takes several hours a payroll period to manually do payroll. With software, it can be faster, but there is also a learning curve, and many people don't use the software efficiently. This is time that your employees are not spending on core, revenue-generating functions. Furthermore, a mistake in payroll can be extremely costly.

Most payroll processors still leave you responsible for remitting taxes, although they or their software will tell you how much you need to send. A PEO can handle employee tax remittance as well as the payroll processing.

Regulatory Compliance

Even small employers have to abide by a lot of regulations and can face large fines if they violate them, even by mistake. Because of this, some companies choose to use an outsourced compliance expert who actually does this work full time and can help them navigate the regulations. This can be particularly valuable for companies that have remote workers in multiple states. 

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HR and Benefits Administration

HR often spends a lot of time on handling benefits, which also ties back into compliance. By outsourcing benefits administration you can get both the routine paperwork such as enrollment and the large task of answering complex employee questions off your plate, and often get access to expensive enterprise-scale administration software you wouldn't be able to afford on your own.

This frees up in-house HR staff to handle more strategic matters.

Employee Benefits

By partnering with a PEO, you can take benefits outsourcing one step further. The PEO can place your employees on their own master benefits plan, which is negotiated by experts and takes advantage of economies of scale.

This allows you to get better benefits for less money, improving your competitive advantage and saving money at the same time.

Risk Management

For many companies, outsourcing risk management is a good idea. An HR outsourcing partner can, for example, provide you with access to their expertise to design a return-to-work program. Return-to-work programs allow for key employees to get back on the job faster by providing flexible hours and other accommodations. This also reduces the cost of workers' compensation claims which helps keep premiums low.

An outsourcing partner can also use their expertise to help you design appropriate safety training. Proper safety training reduces the number and severity of accidents. They can also help you with OSHA compliance, which both helps avoid compliance penalties and generally improves safety.

Workers' Compensation Insurance

PEOs can also reduce the overall cost of workers' compensation insurance. Not all PEOs give you access to their workers' comp policy, but the best ones do. This allows you to get their experience modifier rate, which is the part of the premium based on the accident history. This rate can be high for new companies and will shoot up after a single claim.

While the above covers the reasons for outsourcing certain HR functions, it doesn’t necessarily explain the benefits of HR outsourcing. 

Benefits of HR Outsourcing

There are four essential benefits of outsourcing HR.

Focus on Core Business

Many HR tasks are routine, complex, and tedious. For small businesses, these tasks may end up being done by the office manager, receptionist, or even the owner. Outsourcing routine tasks frees up employees and the owner to focus on core, profit-creating tasks and strategic plans to help the company grow.

Reduce Costs

Outsourcing reduces costs by allowing you to benefit from economies of scale and by avoiding expanding HR just to get routine tasks done. A full time HR specialist costs an average of $51,688 a year in salary alone. By outsourcing, you pay only for the amount of the specialist's time you actually need.

It also reduces costs by allowing you to save significant amounts of money on benefits and workers' compensation as well as by reducing costs that come from compliance violations.

Strengthen Company Culture

HR outsourcing strengthens your company culture by allowing HR to focus on strategic plans such as careful hiring choices and training. This helps you strengthen your company culture, become an employer of choice, and increase productivity and engagement.

Expert Assistance

By partnering with a PEO, you gain access to their expertise and to professionals who  can use the experience of the PEO and their other clients to help you navigate your own problems. You don't have to have every kind of expertise in house, which is prohibitively expensive.

Some of these advantages and cost savings exist with any form of HR outsourcing, but many of the most significant only work when you partner with a PEO.

HR outsourcing is the perfect way to control costs and help you develop a HR department focused on the growth of the company and the needs of employees. The best way to do this is to partner with a PEO who can handle all of your routine HR tasks and free your HR team to support your company's growth and culture.

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