As we’ve seen in this series
on HR for small business, there are some very important human resources
requirements for small business. You need to hire the right people, offer
competitive pay and benefits, provide effective training, and much more.
Yet in most small businesses, resources are
quite limited. With few reserves to draw on and a lot of competing priorities,
it can be hard to justify the cost of hiring a dedicated HR team. So HR
functions can become a part-time responsibility for the owner or another
manager, with the result that they don’t always get the attention they deserve.
In this scenario, outsourcing some or all
of your HR functions to an external provider can make a lot of sense. It’s a
solution that’s growing in popularity—HR reported 27% growth in 2016, according
to a PrismHR
report. And the most popular category of target customers for these firms
was small businesses with 16 to 50 worksite employees.
So in this tutorial, you’ll learn all about
HR outsourcing for small businesses. You’ll learn how it works and why you
should consider it, and then you’ll get details of some of the top HR service
providers. You’ll also get guidance on how to make the decision and when
it makes sense to outsource HR vs. keeping it in-house.
1. How HR Outsourcing Works
You’re probably already familiar with how
outsourcing works in general. You take some functions that used to be performed
by staff in your own company, and pay an external company to do that work
With HR, it works the same way. Pretty much
any of the activities we’ve looked at in this series can be outsourced, from
hiring and firing to managing payroll and employee benefits.
It doesn’t have to be all or nothing,
either. Although you can outsource everything to an HR service provider, you
can also choose from a menu of options, outsourcing some functions while
keeping others in-house.
Here are some examples of the different
Professional Employer Organization (PEO)
With this model, you enter into a kind of
partnership, in which the outsourcing provider becomes a co-employer of your
staff members. You still keep managerial control over the work your people do,
but the other company is responsible for paying their salaries and benefits as
well as other HR functions.
Business Process Outsourcing (BPO)
Whereas PEO is generally quite a
comprehensive solution, some firms just want to outsource a particular function
or process. That’s where BPO comes in. You could choose to do most of your HR
work yourself, and just hire a firm to handle a particular task, such as
benefits administration, to a third party.
Software as a Service (SaaS)
The first two options have involved working
with companies that provide personalized assistance with HR tasks. This model is somewhat simpler in that it just involves using software applications
that are hosted remotely by the service provider and made available to your
employees via the internet.
You could use a SaaS solution for training,
for example—your employees would log on to an external site to devise training
plans, complete the training they need, and track their progress.
2. Why Outsource Your HR?
So now that you know what HR outsourcing is
and some of the forms it can take, let’s talk about why you might want to do it. What are the benefits?
According to research
by ADP, the top reasons are to stabilize costs, reduce risk, and increase
These three are quite understandable. Let’s
look at them in detail.
When you contract with an outsourcing
provider, you should be given a clear idea of the costs, so it will be much easier
to plan and budget. Your costs may increase if you hire more staff or require
more services, but generally you’ll be able to control costs more easily than
you would if you did everything yourself.
As we saw in our tutorial on HR
requirements for small business, you have a lot of important
responsibilities as an employer. You have to keep your employees safe, comply
with all the relevant employment laws and regulations, keep the appropriate
records, and much more. The rules are changing all the time, and you have to
keep on top of it all. Outsourcing your HR work to a specialist provider can reduce
the risk of dropping the ball on any of these important requirements.
Increase Employee Productivity
By outsourcing HR to an external provider,
you can often provide a more effective service to your employees. The company
you work with specializes in doing HR, after all, so they can probably provide
more effective training, more efficient pay and benefits administration, more helpful
HR software, and so on.
That can make your employees more productive by saving
them time and giving them access to better resources. And on top of that, if
you currently have some of your managers performing HR functions, you’ll free
up their time to focus on the core functions of your business.
There are other, related advantages to
outsourcing HR. ADP also did research focusing particularly on benefits administration,
and it gives more detail on some of the additional perks of outsourcing.
3. Top HR Service Providers and What They Offer
So who should you choose? Here are five
popular options to get you started, with some details of their services.
Keep in mind that there are lots of other providers
out there, and I encourage you to do your own research to find one that’s right
for you. These are US-based providers, so if your business is based elsewhere,
you should see what firms are available in your country.
Despite the name, Paychex
offers a lot more than just processing paychecks. It offers a range of
solutions for different businesses, including a simple product for small
businesses of just 1 to 9 employees that includes:
- recruiting and applicant tracking
- time and attendance tracking
- health insurance
- payroll services
- benefits administration
- and more
For slightly larger businesses of 10 to 49
employees, the Paychex Flex service offers a similar range of solutions with
the option to have a dedicated HR professional working with your company. There
are options for larger companies too.
offers a full-service HR package using the PEO model we talked about earlier.
Its services aimed at companies with 5 to 149 employees include a wide range of
services, such as:
- benefits management
- payroll processing
- retirement services
- performance management
- government compliance reporting
- training and development
- and more
You can also cherry-pick individual
solutions if you don’t need the full package.
The good thing about Jumpstart is its flexibility. You can
continue to do HR in-house if you want, and just get important questions
answered by signing up for a certain number of monthly phone calls or hours of
support. Or you can hire the company to complete particular HR projects like creating
an employee handbook or writing job descriptions. Or you can pass over a large
proportion of your regular HR work with the “HR Strategic Partner” package.
with large businesses of up to 1,500 employees, but it also has offerings for
small to mid-sized firms of 1 to 250 employees. You can opt for a bundled PEO
product or individual services such as:
- payroll services
- HR administration (including compliance
with labor laws)
- benefits administration
- talent acquisition
- risk management
- HR audits and consulting
There’s also a useful “Resources” section
on the website where you can get guidance on everything from overtime rules to
employee engagement strategies.
ADP is a massive company that often provides
HR solutions for large corporations, but it also has a dedicated small
business offering aimed at firms with 1 to 49 employees. So you get the
benefit of sophisticated systems and a wealth of experience, but with solutions
aimed at small businesses.
You can get a combined package of payroll
and tax filing services bundled with hiring and HR management services, which
- job posting and applicant tracking
- background checks
- employee handbook wizard
- HR forms and documents
- HR training and toolkits
- and more
As with the other providers, pricing is
customized for each client and is not quoted publicly, but you can currently
get two free months of payroll services when you sign up.
4. Insourcing or Outsourcing?
As we’ve seen in this article, HR
outsourcing can make a lot of sense and provides some benefits for small
businesses. And there’s quite a range of different options available. But it’s
not right in all situations. In this section, we’ll look at how can you make
the decision about whether to outsource or not.
First of all, you need to get a clear idea
of what you’re doing currently and who’s doing it. Small businesses often do
things informally, so take some time to make sure you’ve fully accounted for
everything. Look at all the different HR functions within your business (you
can use the articles in our
HR series for reference, to check that you’ve covered all the areas).
Then make an estimate of how much time each
person spends on those functions, and what that time is worth. For example, if
your office manager spends five hours a month on payroll processing, and that
person is paid $30 an hour, then the cost of doing payroll in-house is $150 a
That’s important because it helps you to
assess the value of the outsourcing services you’re investigating. In the
simplified example I just mentioned, if you can find a provider who offers
payroll processing for less than $150 a month, it would be worthwhile to make
Also consider the size of your business and
how much you expect to grow. For small businesses with just a few dozen
employees or fewer, outsourcing can make a lot of sense because it’s hard to
justify the cost of having a full-time HR professional on staff. For very small
firms with just a few employees, an online software solution is probably
But if you have more employees, or if you
plan to grow quickly, keeping HR in-house can make a lot of sense. The size of
your company can easily keep an HR professional busy, and you can gradually
build a whole department as you continue to grow.
Employees may value having a friendly face
within the organization as a regular point of contact—it’s more personal than a
software solution or a distant HR company accessible only online or by phone.
That person can help with things like resolving employee disputes and arranging
morale-boosting events, really helping to bring everything together.
If you do decide to outsource, remember to
research lots of different options to help you find the right arrangement for
your business, with the appropriate levels of cost and service.
And when you’ve decided on a provider, make
sure you have a clear understanding of the level of service that will be
provided, what will happen if the provider falls short, and how you can
terminate the arrangement if you need to.
In this tutorial, you’ve learned all about
HR outsourcing for small businesses. You’ve seen what it is, how it works, and what
the benefits are. You’ve learned about some popular providers and what they offer,
and you’ve seen how to make the decision on whether outsourcing is right for
your business or not.
There’s still more to come in this comprehensive
on HR for small business, so stay tuned to find out about small business HR
software solutions and more!