HR Outsourcing – The Whole Story

DELICIOUS
EMAIL A FRIEND

X

Email to a Friend

Please fill out the following information and click submit

Friend's Name

Friend's Email

Your Name

Your Email

Comments

 

Submit

Sending Email...

Thank You! Your email has been sent.

Layne Davlin

November 13, 2008

W hen a small business launches, there's little need for a full-scale human resources department. But as employees are added, the workload mounts for C-level officers. They find it hard to stay on top of orientation and training; keep track of hours worked, vacations and sick days; procure and manage health insurance programs and other benefits programs; terminate employees; and keep up with additional business responsibilities.
 
An increasing number of employers have turned to Human Resources Outsourcing (HRO) to help them navigate HR. HROs are a third party administrator of human resource functions.
HROs come in three forms:
•    PEOs -- A professional employer organization (PEO) typically provides payroll, workers' compensation, and human resources outsourcing as well as employee benefit administration. PEOs hire, or co-employ, a client company's employees and act as their employer of record. PEOs then lease the employees back to the original employer. This practice allows employers to transfer certain risks and liabilities to the PEO.

•    ASOs -- Administrative Services Organizations (ASO) provides payroll, workers' compensation, human resources, and employee benefit administration without a co-employment or employee leasing arrangement. ASOs do not assume compliance or labor law risks, as PEOs do.

•    Payroll Processors -- Payroll processing companies handle items that apply to payroll: issuing pay checks, W-2's, 1099s and calculating employment taxes.
Associated Costs

Typically, the cost of outsourcing your HR needs is calculated as a percentage of total payroll. For example, a payroll processing company typically charges between one and a half to four percent of total payroll costs. An HRO handling the whole gamut of HR responsibilities and regulatory compliance will charge five to eight percent of payroll. This cost is generally somewhat less than the equivalent of hiring, training, and providing benefits to an internal HR staff. Many HROs offer a la carte services, allowing businesses to piece together the plan that best fits the company.

Benefits and Drawbacks
The main benefit of the HR outsourcing relationship is that the solutions provider assumes responsibility for numerous administrative and compliance activities. With the stress of these complexities removed, business owners are free to focus on day-to-day operations and overall profitability. The time saved on non-revenue-producing activities contributes directly to the company's bottom line.

A provider also serves as a legal counselor to an employer as it relates to employee issues. HROs employ experts who specialize in subjects such as sexual harassment, the proper way to fire an employee, etc. HROs also offer training on these and other practices that frequently come up in the workplace-issues that can be costly to an employer that does not receive the appropriate advice.

For all of their benefits, HROs do have some drawbacks. They require businesses to adhere to a strict payroll schedule, which a smaller business sometimes find difficult to comply with, especially in formative days. Also there is no lag time for the payment of liability taxes when payroll is submitted. A business' payroll tax liability consists of not only the taxes required to be withheld from employees' wages (Social Security tax, Medicare tax and federal income tax) but also the employer's matching share of Social Security and Medicare taxes. In an HRO relationship, all of these fees must be paid simultaneously. Another drawback is not having an on-site HR department to deal with employee issues. Someone on your staff must serve as the HR liaison to your employees. This person does not need specific skills, as the HRO can train them, but they need to be someone that the employees trust to act in their best interests.

Finding the Right Solution
If you're thinking of using an HRO, it's best to perform due diligence. Here is a quick list of considerations when choosing a provider:

Ask the HRO for references from current clients and check them thoroughly.
A reputable provider will be happy to give you the information needed to research their company thoroughly. A provider that isn't forthcoming could be hiding something.

Ask for some demonstration that payroll taxes and insurance premiums are paid properly and on time.
A reputable vendor can show proof that the HR responsibilities they are managing are being properly handled.

Ask for proof that any past clients´ legal issues have been correctly and efficiently handled.

Compare providers based on quality and track record of service.
Responsible providers don't tout cost cutting as their main function. You may save some money by partnering with one, but be suspicious of savings greater than a small percentage.
HRO providers can offer small and mid-sized companies some relief in their struggles with human resources. Thoroughly evaluating your company's needs will help you determine what help, if any, these providers can offer. If you are in need of human resources help, carefully research each provider you are considering and be sure that you have the internal resources to properly manage the vendor relationship. A provider, when used correctly, can help you focus less time on HR and more time on revenue-generating activities.

Related Articles:

• Success Breeds Success
  What are the ways to build a success culture?
• Health Scare
  How local small business owners are combating rising health care costs
• Combating Chronic Employee Absenteeism
  Is your business suffering from sick leave abuse?
• How To Terminate Employees In An At-Will State
  While it may be tedious and frustrating, you must document problems with employees to avoid a lawsuit.