Why it makes business sense to let a third party handle HR functions

Small and midsize companies are increasingly looking to outsource HR functions in order to focus on core operations and growing the business. 

“Companies have been moving that 
way as HR has become more complex — it’s no longer an HR person sitting in an office planning parties. There are complicated employee and compliance issues to address,” says Liz Howe, Director of Business Development at Benefitdecisions, Inc. 

“There are so many different laws being 
passed at the state and federal level that it can be a challenge for any HR team to keep up,” Howe says.
Smart Business spoke with Howe about this trend and the benefits HR outsourcing provides.
What are the risks of not investing in HR?
It depends on the business, but risks include auditors finding issues with things like not filing I-9 employee eligibility verification forms correctly or not reporting Equal Employment Opportunity (EEO) information, which can lead to more audits and fines. If you have more than 100 employees, you have to file an EEO report every September. If you have union employees, there are many related rules and regulations to follow.

Also, classification of employees has become a growing concern in recent months. Not many small and midsize businesses have the expertise to handle all of these requirements, especially considering that compliance laws change so rapidly. That definitely leads to compliance issues — the federal government estimates that 92 percent of companies are out of compliance with COBRA. That’s particularly a problem among companies that handle it themselves. 

Is outsourcing HR cost-effective?

Medium-size companies may need an HR director, HR manager, a generalist and a recruiter. If you outsource HR, you can get all or some of that expertise for an equivalent cost of hiring one person. Small and midsize businesses don’t need four full-time people to handle HR functions. They might need someone with expertise in employee relations once a month. 

Outsourcing is an affordable way 
to get the specialized expertise that you don’t need on a daily basis. Maybe they can have someone on-site one or two days a week and, for more complex issues, have the ability to get answers from someone who is a certified Senior Professional in Human Resources. 

Why does outsourcing HR make sense for companies moving away from a professional employer organization (PEO)? 

It’s a nice next step for companies that had been in a co-employer relationship with a third-party administrator. The PEO environment is popular with small businesses and startup companies that don’t have any claims history, so they would have expensive insurance and benefits. A third party shares the employees, pays them and manages benefit administration. Usually at around the five-year mark or 100 employees it’s good to move away from the PEO environment.

Outsourcing HR can be a good transition in that you don’t have to go out and hire a full HR team. You can take back control of your employees, but you’re still outsourcing the day-to-day, transactional HR functions. 

What else can outsourcing provide that companies might not be able to handle in-house?

While you can always hire someone with expertise in any certain area, outsourcing can take care of day-to-day functions like building processes and procedures, writing policies and handbooks, benefits administration, compliance and reporting. 

Additionally, you can get assistance with strategy — succession planning, compensation analysis, performance reviews and HR technology evaluations. All of these strategic areas are very specialized and you would potentially need one person to focus on each of them. Many smaller companies don’t want to invest that much into HR. It’s a cost that doesn’t provide quantitative value to the organization. They would rather focus on growing their business and selling their products or services.  
Liz Howe is the director of Business Development at Benefitdecisions, Inc. Reach her at (312) 376-0452 or [email protected]
Insights Employee Benefits is brought to you by Benefitdecisions, Inc.