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Why Small Businesses Should Consider Outsourcing Human Resources

Employees viewing hr services portal on a tablet

Small companies with limited personnel may find themselves overwhelmed by HR demands. If you feel stretched thin managing critical areas of the business, you might consider getting help. Many HR outsourcing services for small businesses are designed specifically to streamline business functions, reduce expenses, and help companies meet their goals.

What Is HR Outsourcing for Small Businesses?

When you choose HR outsourcing, a third-party provider assists with certain HR functions on behalf of the business. These can include solutions that help your business attract and develop talent, maintain legislative and regulatory compliance, and administer functions such as benefits and payroll. This relationship can also bring with it access to a scalable HR technology platform, as well as guidance and support from a knowledgeable HR professional.

Another option for HR outsourcing for small businesses is a professional employer organization (PEO), comprehensive HR services for businesses that help them manage day-to-day business, which may provide access to employee benefits and HR expertise that the organization might not be able to afford otherwise.

PEOs have continued to gain popularity among small businesses over the years. The National Association of Professional Employer Organizations (NAPEO) estimates that PEOs in the United States provide services to nearly 175,000 businesses employing approximately 4 million people. There are 487 PEOs in the United States, with industry revenue estimated at $254 billion.

By shifting your team's focus from administrative tasks to strategic efforts tied to the company's mission, your team could make broader, more lasting contributions with the help of HR outsourcing services.

Why Do Small Businesses Outsource HR?

With ever-mounting challenges and in light of today's economy, small businesses should consider all that they can gain if they choose to outsource human resources. Benefits of HR outsourcing can include the following.

The Ability To Focus on Business Productivity

Instead of spending time handling routine administrative tasks, employers and their HR teams can focus on more strategic functions of the business that offer greater potential rates of return.

Access to an Enterprise-Class Solution

Small businesses may be able to enjoy enterprise-class benefits from PEOs, which can help them save costs and compete more effectively with other small businesses and their larger counterparts.

Help With Compliance

Many small businesses struggle to keep up with changing laws and regulations pertaining to the COVID-19 pandemic, labor and employment, insurance claims management, and much more. Failure to comply with laws and regulations can lead to serious financial consequences. Outsourcing HR functions to a trusted provider may help business owners understand and comply with these laws and regulations.

More Effective Recruitment Efforts

In conjunction with hiring managers and human resources, outsourcing aspects of recruitment may contribute to making HR professionals more efficient. HR leaders polled in the 2021 Paychex Pulse of HR Survey said finding top hires in today’s competitive labor market is a priority and that HR technology plays an important role when it comes to current recruiting.

Reduced Costs

HR outsourcing, and PEOs in particular, could help small businesses with tight budgets. NAPEO reported in 2019 that small businesses that work with an HR outsourcing provider could expect to receive annual savings of $1,775 per employee for HR-related costs.

Free Up Time and Resources

The same study cited above identified that HR outsourcing can help businesses have lower health costs, reduced HR expenses, fewer workers' compensation claims, reduced turnover, higher revenue growth, and generally fewer concerns about hiring, retaining, and motivating employees.

Gain Access to Expert Guidance

Today’s leading HR outsourcing providers also offer dedicated guidance from an HR professional. This is an expert who can educate and guide you through the turbulent waters of laws, regulations, and employee-related matters. With the experience and expertise that an HR professional can deliver, a business may:

  • Elevate customer service relationships both internally and externally;
  • Potentially minimize costs associated with turnover and poor employee morale; and
  • Pursue more active forward-thinking in their business.

All this can be accomplished without the expense of additional headcount, while still providing the knowledge and partnership necessary to be successful.

Functions Supported by HR Outsourcing

An HR outsourcing provider can work with you and your team to provide support throughout the employment life cycle. Depending on the services you’re looking for, an HR outsourcing provider could provide support in the following areas.

HR Administration

The time and resources needed to tend to HR administration can be challenging for any business. With this in mind, outsourcing HR administration can help you regain precious time that can be better used to focus on your business and your customers. At the same time, experienced HR support can bring many benefits for businesses, including:

  • Expert guidance: An experienced HR professional can offer support and recommendations to help establish your HR operations, develop a customized employee handbook specific to your business, and provide personalized HR guidance to help you mitigate risk, manage employee relations, and potentially avoid costly compliance mistakes.
  • Support to help comply with ever-changing laws and regulations: Outsourcing HR means having access to guidance related to federal, state, and local employment laws that impact your business.
  • Personalized policies and procedures to guide employees in knowing what’s expected of them each day: Outsourcing HR services may help you better communicate with employees, for example by developing an employee handbook designed to let your team know about specific company policies, procedures, benefits, and training.

Payroll Processing

Outsourcing HR is an effective way to help streamline essential payroll processing tasks. Business owners who do so can:

  • Process payroll efficiently and seamlessly every pay period.
  • Help maintain compliance with payroll tax laws and regulations.
  • Reduce time spent on payroll administration, including tax filing, tax credits, and workers’ compensation claims.
  • Generate custom reporting (employee data, expense management, timekeeping, labor management and forecasting) to help them make more informed decisions.

Employee Benefits

In today’s quest for top talent, businesses may want to leverage the power of offering competitive employee benefits, including health insurance, 401(k) retirement plans, and health savings accounts.

Outsourcing employee benefits could help you:

  • Recruit and retain quality talent: Third-party providers often have stronger buying power that you could take advantage of by offering employees more variety and more affordable benefit options.
  • Compete for talent against much larger firms: Get help to offer benefits that can rival Fortune 500 companies and still meet your financial and business objectives.
  • Seamlessly conduct open enrollment: An HR provider will typically manage open enrollment administration, saving you time and resources. Plus, integrated employee benefits administration means you could save time on data entry and help ensure accuracy.

Recruiting and Hiring

If your business is struggling to find and keep a quality workforce, you may want to consider HR outsourcing. Some of the recruiting and hiring services that a third-party provider may offer include:

  • Reviewing your talent acquisition strategy
  • Streamlined and integrated applicant tracking system
  • Assistance in the development of targeted job descriptions
  • Development of engaging new-hire onboarding experiences

These services are designed to help you make the right hiring decisions faster and keep your employees longer.

HR Compliance

Handling HR compliance on your own or without help from an expert well-versed in business compliance matters can be risky to the business. That’s why HR outsourcing options include assistance to help you understand and stay on top of applicable regulatory and legislative developments that may impact your business.

More specifically, an HR professional can consult on applicable compliance requirements so you can make sure your employment and safety practices adhere to federal, state, and local laws, as well as the regulatory requirements of numerous agencies — including, but not limited to, the Equal Employment Opportunity Commission and the Department of Labor.

Employee Performance Management

Keep your employees on track and help them know what's expected of them with customized performance management tools and training for position-specific performance objectives. These can help you:

  • Align employee performance and development with your business strategy;
  • Develop employees with thoughtful intention to ensure resources are used effectively to build employee career plans that are personalized and aligned with your business priorities;
  • Implement performance improvement plans, disciplinary action, and restructuring plans; and
  • Create targeted retention strategies with input from employee opinion and satisfaction surveys.

Company Culture

Culture is a big part of employee engagement, employee well-being, and the driver behind employees wanting to show up each day for work and deliver the best version of themselves. Your company culture makes your business unique, and it will be a core component of why employees stay or leave your business. HR outsourcing can help you to be intentional about your culture and create guardrails for decision-making in a way that supports your desired culture.

Factor in that remote and hybrid work setups are now a mainstay for many due to the pandemic, which may require different skills to effectively lead people working remotely than the skills needed for in-office management. Professional HR outsourcing guidance can help you clarify expectations, roles, and performance outcomes so that employees align with your business priorities — whether they are working remotely or at your place of business.

How Can Outsourced HR Solutions Help Small Companies?

Human resources management continues to evolve and is becoming increasingly more complex. The growing list of responsibilities, only some of which we highlighted above, may be too much for HR teams already stretched thin and who are unable to re-prioritize their workloads. HR professionals surveyed in the Paychex Pulse of HR Survey echoed these sentiments, citing the toughest HR challenges for them were:

  1. Attracting talent: 61%
  2. Planning/managing diversity, equity, and inclusion (DE&I): 57%
  3. Offering competitive benefits: 57%
  4. Keeping current on HR technology/solutions: 57%
  5. Keeping up and complying with regulations: 56%

Add to this list the ongoing challenges of COVID-19 — identified by survey participants as ensuring workforce health and safety, employees’ mental health and emotional well-being, and finding technology that keeps the entire workforce connected — and HR professionals have their hands full now more than ever.

An outsourced HR solution can be designed to address these exact challenges for small businesses. Specifically, outsourcing HR services to a third-party provider could assist with:

  • Background checks;
  • Employee assistance and counseling services;
  • Flexible spending account administration;
  • COBRA administration;
  • Workers' compensation;
  • Health care benefits administration;
  • Retirement benefits administration; and
  • Payroll processing.

When you have a third party assist with administrative tasks, your HR team can be better positioned to make broader, more lasting contributions to the business moving forward.

When Should You Consider HR Support for Your Small Business?

While leveraging outsourced HR services at any point can be beneficial, how do you know when it's time to get HR support for your small business? These are some tell-tale signs:

  • Your HR team's entire focus is administrative: When HR staff spends most of their time on data input or forms processing, this may be a signal it's time to look at outsourcing or upgrading to more robust HR systems. Limiting your team to predominately administrative work takes members' focus off strategic contributions.
  • Employees lack access to self-service: HR managers no longer need to conduct every aspect of benefits enrollment, updating employee information, retirement plan information, or employee training. Leading HR technologies provide employees with self-service portals that help them complete many basic tasks themselves, such as updating their mailing address or adjusting retirement plan contribution amounts. A self-service portal can free up HR staff time, and many employees find the process more convenient since they can often access the portal anytime and anywhere.
  • Your HR system doesn't support mobility: With many businesses now employing remote workforces, mobility for key HR services such as employee time and attendance reporting and reporting for new-hires is essential. Cloud-based solutions that support off-site access to the company are becoming the norm. If your employees can't complete essential functions from their smartphones or tablets, your HR technology may need an update.
  • HR is becoming a cost center: Ideally, your HR team should function as a key strategic asset, not a liability. It may be time to ask yourself how external expertise or better technology can help.
  • You struggle to keep up with statutory and regulatory requirements: Your HR team needs to understand any current federal, state, and local laws and regulations that may affect your business. Companies lacking in-house support in this area may want to outsource.

How Much Do Outsourced HR and Payroll Services for Small Businesses Cost?

Cost is usually a main factor for small businesses considering an outsourced HR solution. There's a common misconception that outsourced HR services are synonymous with unaffordability. First, consider what the costs may look like: depending on the service you're interested in, you can expect to pay either a percentage cost or a fixed fee. You may also consider narrowing your choices to providers that can tailor its services and products to your organization's needs.

When considering cost, remember that HR matters are unavoidable parts of doing business: you must comply with applicable laws and regulations, you must pay employees in accordance with applicable laws and regulations, time and attendance tracking must be accurate, and so on. Whether you take on the work yourself, hire an employee, or use a third party to help, costs are inevitable. A DIY approach can be time-consuming, quickly lead to your other work falling by the wayside and leave your business vulnerable to non-compliance. Bringing on someone in-house to handle administrative HR matters means absorbing the ongoing costs associated with additional headcount (salary, benefits, training and ramp-up time, etc.). They may also become overwhelmed with the volume of responsibilities that often comes with the job. An investment in expert HR and payroll services and technology, on the other hand, can mean having dedicated resources that can streamline business functions for your staff, and may allow you and your team to focus on more impactful areas of the business.

Benefits of Outsourcing HR Services for Small Businesses

In addition to potential cost savings, outsourcing human resources may reap many potential benefits, depending on the extent of support you choose. They may include:

  • Direct link to a dedicated HR professional who knows you and your business.
  • Help when HR issues or situations arise.
  • Ongoing updates of local, state, and federal laws and regulatory changes.
  • Experience in many key areas of HR and safety.
  • Cost-saving programs that address high turnover and low employee morale (i.e., training, proper hiring techniques, employee assistance programs, etc.).
  • Expanded product knowledge of HR-related products and services (i.e., 401(k), health and benefits, FSA, and more).

Another benefit that small businesses may not realize about HR outsourcing is that it enables companies with minimal resources to use cutting-edge technology that could otherwise be costly to maintain on their own. With outside support running some of the functions, businesses can enjoy the rewards of newer and more innovative HR systems without having to purchase this technology on their own.

Find HR Support That Keeps Pace With Your Business

Running a business today means managing mounting labor and employment laws and regulations, demands from staff, and team members who are stretched thin. That's why HR outsourcing may be a great investment for your business this year. Help your business meet larger and more pressing long-term goals with access to scalable and cost-effective HR services and support.

Professional employer organization (PEO) services provided by Paychex Business Solutions, LLC (Florida employee leasing license GL7), Oasis Outsourcing, LLC (Florida employee leasing license GL42), and their affiliates, which are licensed or registered to provide PEO services where required by law.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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