HR Outsourcing. Types of HR Services. An Overview of Positives and Risks

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1 Outsourcing can be a viable management strategy for many companies. Increasingly, both small and large businesses are choosing to outsource some or all of their human resources (HR) functions to payroll providers, third party benefits administrators, staffing companies and Professional Employer Organizations (PEOs). A PEO provides the management and administration of a company's HR functions through the practice of co-employment, which means the PEO contractually assumes substantial employer rights, responsibilities and risks by establishing long-term relationships with the company's employees. The other outsource service providers each deliver one or more specific services. The outside company can handle such functions as payroll processing and administration of insurance benefits, and can also manage recruiting new employees, providing employee orientation and other services such as: Handling payroll and employment taxes Serving as your recruiting department (Recruiting Process Outsource or RPO) Managing workers compensation Providing and managing employee benefits and retirement programs, or administering these programs Administering leaves (e.g., Family Medical Leave Act) and COBRA (medical) Overseeing workplace safety and risk management Ensuring compliance with employment-related laws Types of HR Services Payroll providers, third party administrators, staffing companies and PEO service providers have the capacity to perform nearly every aspect of the duties typically assigned to your company's in-house human resources department. This includes such functions as: Employee Assistance Programs (EAPs) Many companies who would like to provide access to qualified counselors for employees and their families simply lack the budget to hire and inhouse counselor. Therefore, this is one of the most commonly outsourced HR service. All EAP

2 counseling sessions are private and confidential, making it easier for employees to receive the help they need to cope with family issues or other challenges they may face. Drug Testing and Background Checks Drug testing is another function that is commonly outsourced. In fact, some states require that such testing be performed by an outside testing facility. Many employers also want all employees to undergo a background check and credit check as part of the hiring process. Payroll Payroll outsourcing takes a significant administrative task off your plate and will likely assure greater compliance with changing tax requirements. Some providers also can provide you with automation and self-service tools that make your life and your employees lives easier. You may choose to transfer payroll functions to an outsourced payroll provider or a PEO. Benefits Administration Benefits such as medical, dental, health and life insurance, as well as 401k and other retirement plans, can all be effectively handled by a third party administrator or a PEO. A PEO may have additional capabilities by being the employer of record and enrolling your leased employees into the benefit plans offered by the PEO. Benefits brokers, third party administrators and PEOs also can provide you with automation and self-service tools that make benefits selection, administration and enrollment easier. Recruiting Recruiting also lends itself easily to outsourcing. A variety of firms offer services ranging from providing a temporary workforce, to screening and recruiting for upper-level executive and managerial positions, to handling of your recruiting needs as your full-function recruiting department (an RPO can act seamlessly as an extension of your company while being totally outsourced). Compensation Consulting Some in-house HR personnel lack the expertise to create compensation programs for sales and executive staff. Outside consultants with expertise in total compensation can design custom plans that can motivate sales team members, other employees as well as executives to achieve optimum performance. HR Consulting Internal HR or recruiting teams may have limitations in their knowledge and skills simply due to lack of experience or training. Often, they may not have the ability to serve you as the strategic business partner you need help you accomplish your business goals. An effective HR Consultant can fill the gap by providing strategic guidance and by coaching/ mentoring your internal staff and transferring knowledge. An experienced HR Consultant can also work with you to make smart choices about outsourcing. Page 2

3 Benefits of HR Outsourcing Cost Savings HR tasks can be complex and time consuming. Outsourcing HR duties will save your company considerable time by eliminating the need to hire and train HR employees to perform duties such as benefits administration and payroll. Instead, your PEO provider's HR staff undertakes to handle these duties. Note: This same benefit can be obtained by outsourcing payroll and benefits administration. Time Savings Outsourcing your HR functions provides relief from the administrative tasks involved in employee-related responsibilities, allowing you time to focus on developing strategies that create growth and enhance your competitive edge. Note: You still retain employee supervision and coaching to assure the level of performance and quality you need for success in your business. Reduces risks There are some liabilities and risks associated with certain internal HR duties, such as administering health and retirement benefits. HR outsourcing companies often have greater knowledge of HR laws and regulations, which can help you avoid exposure to liability claims. According to outsourcing expert Frank J. Casale, outsourcing is the great equalizer for small- to medium-sized firms. Growth-oriented entrepreneurs can benefit tremendously. Not only do employees frequently gain access to better benefits, the owner gains the freedom to focus. Strong Human Resources Practices Improve Your Bottom Line Strong human resources practices can increase your company s profitability and productivity. Ernst & Young s 2009 Global Workforce Survey shows a clear ROI on strong talent management process, with 23%-38% greater return-on-equity than their peers who do not. Companies that have talent management aligned with their mission, values and business objectives get part of the overall benefit. When companies fully integrate talent management programs to additionally include thoughtful workforce planning, succession planning, training, and strong leadership development, substantially greater benefit can be achieved. Page 3

4 Note: You don t achieve these results solely through outsourcing. Outsourcing makes you more efficient allowing you to replace those internal resources with an investment in the talent development of your workforce that will makes an even bigger positive improvement in your bottom line. Some Drawbacks to Outsourcing The initial transition to outsourcing can carry additional expenses, and it can take some time before you begin to see substantial savings Outsourcing can have an effect on a company's culture. If the transition is not managed effectively, with open communication throughout the process, it can negatively affect relationships between the company s management and the company's employees. You may outsource some of the staffing functions, such as resume screening, background checks and employment verifications, without impacting the company's culture. However, outsourcing more interpersonal functions, such as employee orientation and training, can affect the company's vision considerably. Some employees may have difficulty adjusting to a perceived loss of the human element involved in many HR functions; instead of speaking to a familiar HR staff member about their benefits, they now have to call a toll-free phone number for help. Choice of outsourced provider is critical. Do your due diligence: Competence, Quality, Reliability, Redundancy. Consider engaging someone to assist you in looking at your options. A Starting Point to Explore Outsourcing You can begin by outsourcing payroll for the greatest immediate bang-for-your-buck. Or, to reduce risk and try out how outsourcing can help your business, choose a simple function such as COBRA compliance. Maintaining compliance with COBRA regulations is vital, and violations can be costly. Flexible Spending Accounts is another function that can be easily outsourced, relieving you of the administrative burden. How to Choose a Professional Employer Organization (PEO) Look for a provider that offers a wide variety of HR services, from payroll, benefits administration and regulatory compliance to value-added employee services such as college Page 4

5 tuition assistance programs and discounts on transportation, shopping, fitness club memberships and flu shots. Consider the credentials of the firm's consulting staff. Have their HR professionals earned credentials such as the PHR, awarded by the Human Resources Certification Institute, an affiliate of the Society for Human Resources Management ( Seek out a provider that maintains strong relationships with other reputable professionals who are involved in the HR industry, such as CPAs, attorneys and insurance providers. Be sure the company you choose follows the insurance industry's best practices in cost containment, workers' compensation and risk management. Select a provider who guarantees on-time, accurate submissions of tax payments. Choose a company that places strong emphasis on risk management and will fully adhere to all federal, state and local regulations. This compliance should be manifest in the provider's risk management programs and safety assessments, which should be conducted by certified risk managers. The company should also provide training programs to ensure its employees' adherence to various regulations and standards, such as the Fair Labor Standards Act, COBRA, Title VII, Wage and Hour Laws, Americans with Disabilities Act, Family Medical Leave Act and OSHA. Checklist: Check the PEO's certificate of insurance. Is it licensed in VA? Find out what services the PEO will offer and at what cost. Check the company's references. Meet the people who provide the services. Are they paying payroll taxes? Member of the National Association of Professional Employer Organizations? How does the PEO cover employee benefits? Self-funded? Review liability for the service agreement. Look at the cancellation process. Page 5