HR outsourcing is a trend that continues to grow among businesses of all sizes. According to a survey conducted by Deloitte, almost half of all businesses were already outsourcing HR in 2016. Nearly one-third of those surveyed indicated that they plan to increase their use of HR outsourcing in the future. However, if you have never outsourced HR before, you likely have lots of questions. Below are some of the most frequently asked questions about HR outsourcing, along with some clear and unbiased answers to help you understand how it works. Armed with this information, it’s our goal you’ll be empowered to make the best decision for your business.
1. What exactly is HR outsourcing?
In the broadest sense, HR outsourcing is when a business decides to hire another company to handle some or all of their HR activities. HR outsourcing usually involves some combination of technology and people.
Some organizations decide to keep the majority of their HR functions in-house while outsourcing only select tasks, such as payroll processing or benefits administration. Other companies may opt for a more complete outsourcing solution that encompasses all of their HR functions. One innovative HR outsourcing solution involves the use of a Professional Employer Organization, or PEO. A PEO is an outsourced firm which provides comprehensive HR services to businesses. These services include some combination of payroll administration, employee benefits, HR technologies, workers’ compensation and safety consulting, and access to a team of HR experts. PEOs offer a scalable, customizable solution to businesses of all sizes, and work with clients to ensure the right fit for each organization’s unique business needs. It’s quite often that “outsourced HR” and “PEO” are used interchangeably.
2. How will outsourcing my HR save me money?
Outsourcing can save companies money in several different ways. When a company outsources their HR, they report that they save time and resources previously spent on tedious, yet critical, administrative tasks. The company is then able to devote this time and resource to focus more on business growth activities. Outsourcing also prevents companies from needing to pay full salaries and benefits for in-house HR employees. In addition, outsourcing HR to a dedicated firm with larger-scale can give a company access to better offerings for less money—much like a Costco membership allows customers to purchase top-shelf merchandise at a lower, wholesale price by being part of a larger network of buyers.
3. How do I make sure I’m choosing the right PEO for my business?
With so many options available, choosing the right PEO can be a challenge. When selecting a PEO or HR outsourcing firm, make sure the company you choose has been designated as a Certified PEO by the IRS. Only a small fraction of the 900 PEOs have attained Certified PEO status, so verify the certification before signing a contract. Just like you wouldn't put your money in a bank that is not FDIC-insured, you should not trust a PEO with your money if they cannot show proof of certification.
CPEO certification provides regulatory and cost certainty for current and potential clients. Specifically:
- Some wage base tax restarts are eliminated. A CPEO has successor employer status for federal payroll taxes, which means that a business that contracts with a CPEO during the year will not face double taxation on FICA and FUTA.
- Tax liability is clarified. A CPEO is solely liable for the federal employment taxes paid to worksite employees. Once the CPEO invoice that includes these taxes is paid by the client, the IRS can only collect these taxes from the CPEO.
- Tax credit eligibility is continued. A client that uses the services of a CPEO remains eligible for certain specified federal tax credits.
A CPEO designation removes obstacles to becoming a client and provides lasting peace of mind.
The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to www.irs.gov.
While CPEO status is a minimum requirement, it’s also important to make sure you understand each PEO’s service delivery model and business practices. When there is a challenge in the workplace, do you have access to a dedicated team that knows your business….or are you forced to contact a call center? Is pricing handled transparently, or bundled in a way that makes it hard to determine your costs? During the evaluation and proposal process, are service team members made available for discussion, or is contact only through a salesperson? Does the PEO have specific expertise around the issues of greatest importance to you?
Selecting an outsourced HR provider is a big decision, and it’s important to make sure the way that services are provided will align with your expectations and the way you do business.
4. Is it difficult to leave an outsourced HR relationship?
As with most business relationships, partnering with a PEO usually involves a legal agreement. Well-structured PEO Client Service Agreements (CSAs) should specify that:
- Any data collected during the relationship will be transferred to you when the relationship ends.
- You can end the relationship with reasonable notice without owing any exit fees. Reputable PEO providers will typically require no more than 60 days' notice under normal circumstances.
In addition to the CSA language itself, it’s important to ask how the service provider handles terminations and exits. The best PEOs have processes and resources that ensure a smooth transition out of the relationship, so that clients are happy through their very last day of service. It’s actually in the PEO’s interest to do so - satisfied former clients sometimes return to the PEO, and often refer others….when they are treated well upon exit.
5. Will I have to fire employees if I decide to outsource my HR?
Generally, working with a PEO will help all of your internal staff, including HR staff, to become more productive. Thus, you don't have to fire employees if downsizing is not one of your specific goals. In fact, NAPEO reports that small businesses working with a PEO grow as much as 7 to 9 percent faster than those that aren't working with a PEO, which creates more opportunities throughout the organization.
6. I am a small business. Why do I need outsourced HR?
As a small business leader, you are often pulled in many different directions, which can lead to a lack of time, expertise, or interest to handle the huge responsibilities that come with in-house HR responsibility. Outsourcing some HR functions is much more beneficial and usually less expensive than trying to hire internal employees or looking for contractors to take on these tasks, regardless of the company's size.
Outsourcing HR also frees up your time and provides you with access to skilled professionals and the best technologies. In addition, the unique offerings of a PEO can allow your smaller organization to better attract and retain top talent so that you can more effectively compete with larger employers. Furthermore, having access to a team of certified HR professionals will keep you in-the-know so you can be confident about compliance and best practices. The best HR providers don’t just handle details - they provide expert teams that support you as trusted advisors through the challenges and opportunities that you face. This gives you more capability, and thus more confidence, to focus on the things you and your business do best.
7. Are we too big of a company to outsource our HR?
Some organizations with thousands of employees outsource their HR, and some small businesses are comfortable doing everything in-house. The right HR provider should have enough flexibility to offer a solution that’s aligned well with your goals, capabilities, and sensibilities.
If your business is already a large and established company, you’re probably always looking for ways to improve processes and minimize costs. Partnering with an HR outsourcing firm will enable you to reallocate the precious resources you were spending on tedious administrative tasks to focus instead on strategic functions that are directly tied to your bottom line. Besides, the more employees you have, the more at-risk your business becomes for potential compliance issues, unemployment claims, and even lawsuits or governmental actions.
8. Will my data be at risk if I outsource my HR?
When you work with an outsourced HR provider, you must allow the company access to sensitive data. For this reason, it is important to find a company that is just as concerned about protecting your customers' private information as you are. Make sure the partner you choose has established procedures in place for handling data securely. The best companies will offer at least three layers of security and has invested heavily in information security. PEOs like Questco use technology that handles the sensitive personal data of millions of employees, with dedicated teams to handle this information. With the right outsourced HR provider, your data is more secure than it might be otherwise.
9. Will my company culture be disrupted if I bring in outsourced HR? How will my employees feel about this?
The culture of your company belongs to you, not to any outsourced provider. The best outsourced HR firms understand and embrace this, and they will build their solutions to support your vision for your company culture. They will also invest in resources that support your team through the initial transition and onboarding. The burden of many administrative tasks is reduced when you outsource HR, which allows more time and energy to be devoted to enhancing this culture. Additionally, some HR outsourcing companies, like Questco, can even offer your employees access to great employee benefits and technologies that will improve your team’s day-to-day experience at the company. Although any type of change can be a challenge for employees, having the right partner can make the transition much easier. In most cases, as long as employees are kept informed about the process of outsourcing HR, as well as the benefits that come with it, they will react positively to the change. At Questco we take special attention to this part of the process because we know how important transparency and communication is to the success of any company.
10. Is this going to end up being more work for me and my team?
To prevent a loss of productivity in the early stages of an outsourcing relationship, companies need to select an outsourced HR provider who is willing to invest heavily from the beginning. The best HR providers will offer a thoughtful, well-organized, and detailed plan so that all employees can stay productive throughout, with efficiency gains emerging quickly.
When you work with the RIGHT partner, your processes and systems will become more efficient, and your workload will be much lighter….which leads to higher profitability. This is a primary benefit reported by those outsourcing their HR.
11. How much work will it be to get started? What will the transition and onboarding look like?
The first step in getting started with HR outsourcing involves having a detailed conversation with the HR outsourcer so that you can determine the type of support that’s right for you, and so that you will understand the information required to produce a fully costed, detailed proposal with all costs and fees clearly identified. The best HR outsourcing providers will guide you through an easy-to-understand process that enables you to make an informed decision. Making this decision requires the creation of both financial and non-financial business cases in a timeframe that’s comfortable for you.
As a part of a detailed proposal, the outsourced HR provider should detail the transition and onboarding process, with some recommended timelines and milestones. Ideally, the transition and onboarding process should be fast-moving, efficient, and not rushed, and should emphasize both the details that must be right, and a communication plan to minimize the distraction to your team. While an onboarding timeline typically spans several weeks to ensure accuracy and completeness, the specific timeline will depend on your goals and the services you are using. It’s important that the provider guide you through the decisions you face, and emphasizes a great experience for your employees throughout.
12. How does outsourcing my HR actually help me get better benefits for my employees?
Simply put, PEOs can provide you with options for your health and benefits plans that you couldn’t get on your own, and often save you significant money even as your choices are better.. As a PEO, we can leverage the scale of thousands of employees across all of our client organizations in order to get the high-quality benefits that are otherwise available only to very large organizations. Some PEOs also enjoy close relationships directly with the large national carriers and work collaboratively with these carriers to enhance service and contain costs over time.
13. Will I lose control of my business or employees by deciding to outsource my HR?
Absolutely not! You will stay in control of your business after outsourcing HR to a PEO, and you retain the ability to make employment-related decisions. The PEO exists to support your decisions, not to interfere with them. For example, if you want to hire or fire an employee, you can. The PEO can be a resource to guide you through the best practices and through legal requirements. When you decide to outsource your HR, you are partnering with experts who will help you and guide you while you focus on growing your business, and support you in the areas that matter most to you.
14. I like my insurance broker/policy - do I have to change that when I come on with a PEO?
This depends on the philosophy and business practices of the PEO. Some providers require all insurances to be obtained through them. Others (like Questco) are more flexible and work well with existing plans and broker relationships if you prefer, while offering their own large group policies if this is a need for your organization.
Implementing something new for your company can be intimidating, and it is normal to feel a bit hesitant at first. Hopefully, the information here has alleviated some of your concerns, given you a clearer understanding of the value that comes with an outsourced HR solution, and helped you to feel better prepared to answer the question "Should I outsource my HR?"