Outsourcing HR: What Are the Benefits?

HR demands can be overwhelming for small, mid-sized, and large businesses, especially those with limited (or non-existent) HR staff. Administrative paperwork, benefits, payroll, compliance issues, taxes, and other HR responsibilities can quickly eat up hours of valuable time each week. If your team has been stretched thin with HR management responsibilities, outsourcing HR may be the solution.

What Is HR Outsourcing?

Human resource outsourcing, also known as HRO, means using an experienced third-party provider to assist a business with specific HR functions. Outsourced HR services are designed to streamline business functions, reduce expenses, and help companies meet their operational goals by:

• Managing benefits and payroll administration
• Attracting and developing talent
• Staying compliant with legislative and regulatory requirements

In many cases, working with a third-party provider includes gaining access to a scalable HR technology platform and receiving guidance and support from a knowledgeable HR professional.

With the help of HR outsourcing services, your team can shift their focus from administrative tasks to strategic efforts, empowering them to make comprehensive and lasting contributions to your business's success.

How Does HR Outsourcing Work?

HR outsourcing includes several types of partnerships depending on the level of involvement and services you need. One option for outsourcing HR is working with a professional employer organization (PEO). PEOs offer HR services that help businesses manage day-to-day operations and provide expertise in many HR areas. Their distinguishing factor is that they follow a co-employment model, which means the PEO shares such as payroll, and taxes.

The HR services offered by a PEO make this model a popular choice for small and mid-sized businesses. According to the National Association of Professional Employer Organizations (NAPEO), there are 523 PEOs in the U.S., and they provide services to more than 200,000 businesses employing approximately 4.5 million people. These worksite employees receive roughly $305 billion in wages.

Businesses can also choose an administrative services only (ASO) offering to outsource human resources. An ASO can help manage your business's payroll and tax filings, but taxes are filed under your company's federal employer identification number. An ASO can also help you manage your company's human resources functions. However, it doesn't sponsor employee benefit programs or workers' compensation coverage, like a PEO can.

When Should You Consider Outsourcing HR?

According to the Paychex 2025 Business Leader Priorities survey, companies spend hours each week and hundreds of thousands of dollars each year to meet the ever-mounting challenges of workforce administration in today's economy. One-third of respondents spend at least 11 hours a week (570 hours annually) on HR administration — more than 25% of the average workweek. Larger companies tend to spend more time, with 65% of companies with between 100 and 500 employees spending over 570 hours on HR annually. Spending this much time on HR costs companies as much as $413,000 annually.

Using outsourced HR services at any point can be beneficial, but how do you know when it's the best time to get additional support for your business? Here are some indications that outsourcing HR may be the right choice:

• You're spending too much time on HR administration: When you can't focus on more strategic tasks because you are filling out forms and processing payroll, it might be time to look at outsourcing or upgrading to more robust HR systems.
• Employees don't have self-service access: HR managers no longer need to handle every aspect of benefits enrollment. Updating employee information, retirement plan information, and training completions can all be managed in a self-service portal that employees can use to complete many basic tasks. A self-service portal makes updating employee records easier and less time-consuming, and many employees find the process more convenient.
• Your HR system doesn't support mobile access: Mobile access for critical HR services is essential in today's remote work environment. Cloud-based HR technology solutions allow employees to complete essential functions from their smartphones or tablets.
• HR is a cost center: Ideally, HR should function as a strategic asset, not a liability. If HR is eating up resources and providing little value, it may be time to explore how external expertise or better technology can help.
• You struggle to keep up with regulatory requirements: You must understand and follow current federal, state, and local laws and regulations that affect your business. Companies lacking in-house specialists may want to get external compliance support.

10 Benefits of Outsourcing HR

Small businesses can benefit from choosing to outsource HR in several ways. The number-one expected benefit for leaders who outsourced HR administration, according to the Business Leader Priorities study, was ensuring fewer mistakes. Fifty-one percent of respondents said this was their top concern. Other expected benefits include increased productivity (43%), reduced costs (34%), better analytics and reporting (34%), and improved regulatory compliance (32%).

The benefits of outsourcing human resources may help you:

1. Increase Productivity

More than 2 in 5 leaders shared that they outsource to increase productivity. Instead of spending so much time on administrative tasks, business owners can focus on more strategic business functions that offer greater potential rates of return.

2. Access Enterprise-Class Benefits

Small businesses often gain access to Fortune 500-level benefits when they work with a PEO. In many cases, businesses may also receive better insurance rates through a PEO, which can help them save on costs and compete more effectively for great talent. More than 1/3 of leaders said they receive better analytics and reporting from outsourcing HR.

3. Get Help With Compliance Issues

Many small businesses need help to keep up with changing employment laws and regulations. Failure to comply with laws and regulations can lead to serious financial consequences. Outsourcing HR to a trusted provider may help business owners understand and comply with these laws and regulations. Nearly 1 in 3 business leaders said they improved their ability to maintain regulatory compliance by outsourcing HR administration tasks and duties.

4. Identify and Reduce Risks

Outsourcing HR to a PEO can help small businesses identify and mitigate risks like safety hazards, compliance issues, and legal liabilities. Experienced HR professionals can provide guidance in key areas like employment laws, workers' compensation, and employee training to minimize risk and avoid penalties.

5. Streamline Recruiting Efforts

More than half of business leaders (57%) said attracting and recruiting talent is their top HR challenge. Outsourcing recruitment efforts to third-party providers offers a practical and cost-efficient method of improving a business's recruitment strategies. A PEO or ASO may be able to help with job descriptions, candidate sourcing, screening, interviews, and more to create a more effective recruitment process.

6. Enhance Employee Wellbeing

Another top challenge employers anticipate for 2025 is employee mental health and wellbeing, with 52% identifying this area as a key focus in the coming year. Human resources outsourcing through a PEO can help cultivate a culture of wellbeing by providing better health benefits and services to support employees in these areas.

7. Improve Talent Management

The third most pressing challenge, cited by 48% of business leaders, is talent management. This includes performance management, talent strategy, onboarding, workforce planning, and other employee-centered focus areas. Outsourced HR can give you support in these areas by providing tools and expertise to streamline and standardize talent management responsibilities.

8. Reduce Costs

HR administration can cost nearly $350,000 annually for a company with 50 to 99 employees. That number can jump to over $400,000 annually for larger employers with 100-499 employees. HR outsourcing, particularly with a PEO, could help small businesses with tight budgets reduce their expenditures in this area.

9. Free Up Time and Resources

According to business leaders, the HR tasks that take up the most time are payroll processing, people management, and tracking employee hours. Human resource outsourcing can help with these areas, giving business owners more time to focus on strategic business needs. Outsourcing may also help businesses lower health insurance costs, reduce HR expenses, have fewer workers' compensation claims, reduce turnover, and generate higher revenue growth.

10. Gain Access to Expert Guidance

Leading HR outsourcing providers offer dedicated guidance from an HR professional who can educate and guide you through complex laws, regulations, and employee-related matters. This experience and expertise may help your business:

• Elevate customer service relationships both internally and externally
• Minimize costs associated with turnover and poor employee morale
• Focus more on strategic planning for future growth

With HR outsourcing, businesses can reap these benefits without the expense of additional staff while still accessing the experience and expertise they need to succeed.

Potential Disadvantages of HR Outsourcing

While working with a third-party provider usually provides significant benefits for business owners, there may be some cases where employers experience disadvantages of HR outsourcing, such as:

• Errors: If errors occur in outsourced duties, a third-party provider may need extended time to correct them because they are not on site.
• Recruiting Misses: An HR outsourcing provider may experience some initial recruitment shortcomings or ineffective hires if they don't sufficiently understand the company culture.
• Cultural Changes: A PEO or other outsourced HR provider may introduce changes to specific processes such as timekeeping, performance management, or recruitment. These changes can be unsettling to employees if they aren't adequately prepared.
• Cost Increases: In most cases, outsourcing HR will provide cost savings. However, there may be some scenarios where insurance rates and other costs may be higher with a PEO. Ask for an itemized, unbundled quote to see the specific charge for each service.
• Security Concerns: With the risk of cyber attacks increasing daily, businesses must carefully consider the security measures of any third-party provider. If an HR services provider doesn't have adequate security in place, including access controls, password management, multi-factor, authentication, and other standard protocols, they may not be a good fit.
• Communication Challenges: Communication is essential for any successful working relationship. If the provider doesn't respond to questions quickly or it isn't easy to access your consultant, you may not see as much benefit.

Business owners can offset these potential disadvantages by exploring the unique capabilities and expertise offered by each PEO under consideration. In addition, spend some time evaluating the PEO's track record, ask for references, and carefully review the quote, including any add-on administrative fees.

Which HR Functions Can Be Outsourced?

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, they may offer support in the following areas:

HR Administration

The time and resources needed to handle HR administration can be challenging for any business. Outsourcing HR may help you regain the precious time required to focus on your business and customers. Experienced HR support can also deliver:

• Expert guidance: An experienced HR professional can offer support and recommendations to help you establish your HR operations. They can also provide personalized HR guidance to help you mitigate risk, manage employee relations, and avoid costly compliance mistakes.
• Compliance support: Outsourcing HR may provide access to guidance around federal, state, and local employment laws and other regulatory issues that impact your business.
• Policy development: Outsourcing HR to an experienced HR professional can help you develop personalized policies and procedures and improve communication, so employees understand workplace expectations. For example, a PEO can help you create an employee handbook that documents specific company policies, procedures, benefits, and training requirements.

Payroll Processing

Outsourcing helps streamline essential payroll processing tasks. Business owners who do so can:

• Process payroll efficiently and seamlessly every pay period
• 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 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:

• Access better insurance rates: Many small businesses can get better insurance rates through a PEO's group plan than they could on their own.
• Recruit and retain quality talent: Due to economies of scale, third-party HR outsourcing providers often have access to better and more affordable benefit options. This can help you compete for talent with much larger firms by offering benefits that rival those available at Fortune 500 companies.
• Seamlessly manage open enrollment: An HR provider typically manages open enrollment administration on your behalf, saving you time and resources. Integrated employee benefits administration also means you can save time on data entry and help ensure accuracy.

Recruiting and Hiring

If your business struggles to find and keep great employees, HR outsourcing can help you source, screen, and hire top talent. Recruiting and hiring services may include:

• Reviewing your talent acquisition strategy
• Developing targeted job descriptions
• Improving candidate tracking and resume screening with an integrated applicant tracking system (ATS)
• Streamlining the candidate experience
• Improving new-hire onboarding experiences

These services help you recruit the best candidates, make faster hiring decisions, and retain your employees longer.

HR Compliance

HR compliance is a complex and time-consuming undertaking as guidelines change, new laws are introduced, and rules are updated. To help you navigate these issues, many HR outsourcing providers offer assistance in understanding and staying current with applicable regulatory and legislative developments that may affect your business. They may also consult on applicable compliance requirements to help you make sure your employment and safety practices adhere to federal, state, and local laws.

Employee Performance Management

Keep your employees on track and help them meet their professional goals with customized performance management tools and training for position-specific performance objectives. Outsourcing aspects of performance management can help you:

• Align employee performance and development with your business strategy
• Build personalized employee career plans that align with your business priorities
• Implement performance improvement plans, disciplinary action, and restructuring plans
• Create targeted retention strategies with input from employee opinion and satisfaction surveys

Workplace Safety and Risk Management

Onsite safety programs can help keep your staff safe and your business compliant with OSHA guidelines and other safety regulations. By designing and implementing a safety program, you can manage and reduce risks that may affect workers' compensation premiums and additional costs. Safety and risk management outsourcing may include:

• Auditing your business for safety risks
• Ensuring you have the right insurance policies in place
• Developing OSHA training and manuals
• Following workplace safety posting requirements

Compliance mistakes can result in significant fines and penalties for your business. The right HR partner can help you identify areas of concern within your business and take the steps needed to stay on track.

How Much Does HR Outsourcing Cost?

There's a common misconception that HR services are expensive. The truth is that the benefits usually far outweigh the costs, and you will often save more money than you spend. Here's what you need to know about HR outsourcing costs:

• HR costs are unavoidable: HR tasks are inevitable parts of doing business. You must comply with regulatory guidelines, recruit, hire, and pay employees, and manage your workforce. Whether you take on the work yourself, hire an employee, or use a third party to help, costs are inevitable.
• HR costs aren't fixed: If you take a DIY approach to HR, you will often pay much more in terms of lost opportunities, missed compliance deadlines, potential penalties for errors, and lost time than it would cost to outsource.
• Internal hires are expensive: Hiring someone in-house to handle administrative HR matters means absorbing the ongoing costs associated with a full-time employee (salary, benefits, training, ramp-up time, etc.). A new hire may also become overwhelmed with the volume of responsibilities that come with the job.

When considering cost, remember that investing in outsourced HR services and technology means streamlining business functions for your staff, reducing the burden of HR administration for you as the business owner, and focusing your resources where they are most effective.

Depending on the services you need from an outsourced HR provider, you can expect to pay either a percentage cost or a fixed fee per employee. Researching providers that can tailor their services and products to your organization's requirements may help you save money by paying only for the services you need.

Find HR Support That Keeps Pace With Your Business

Running a business today means staying up to date on evolving employment laws and regulations, meeting the needs of your staff, and managing team members who are often stretched thin.HR outsourcing can be an excellent investment to help your business meet its long-term goals with HR services and support.