The 5 Most Common Outsourced HR Options
Growing businesses eventually reach a point where help is needed to navigate the dizzying array of HR challenges they face on a daily basis—employee onboarding, payroll, performance management, and the alphabet soup of FMLA, HRIS, and DOL—to name a few.
The problems: Often these companies are not yet at a place where they can justify a full-time HR employee and they definitely cannot justify both an HR strategist (big picture) and an HR implementor (administering the day-to-day).
Instead, someone is given the, ahem, privilege of wearing the HR hat in addition to all the other hats they have to wear. This might be a head of ops or finance, an office manager, or even the CEO.
Typically this is untenable and the business will seek out some version of “outsourced HR”, a catch-all term for any arrangement that aims to deliver all the benefits of a full-time HR employee at a fraction of such an investment.
The solutions: Here are the top five options for outsourced HR for small businesses, listed below with pros and cons for each.
1. PEOs
A PEO is a professional employer organization. PEOs operate through something called co-employment, which means that the PEO technically becomes the employer of record, leasing the employees from the company.
Practically speaking, this means that your employees would receive paychecks from the PEO and would sign the PEO’s employer handbook, and your company’s wages would be reported under the PEO’s federal employee identification number.
Pros of PEOs:
When working with a PEO, your company’s employees would be combined with the employees of other companies served by the PEO. This creates economies of scale. In turn, you would benefit from reasonable rates and PEOs take on the employment liability of the company.
Cons of PEOs:
As stated by SHRM, a lack of control—of processes, culture, security of paperwork, etc—is the most common downside to a PEO. High renewals are often stated as a downside.
There is an institutional knowledge gap over time, which combined with the contract terms, often makes it difficult to “come off of a PEO”.
While the economy of scale grouping of employees is often a pro, it can become a downside if there is a large claimant within that group, causing the entire group to move into a more expensive tier.
2. In-House HR Managers
Some companies choose to give the HR title to an employee who is already in-house, such as an office manager or administrative professional.
Pros of In-House HR:
This person already understands company culture, norms, and processes.
This can be a quick solution to fill a gap until a long-term solution is in place.
Cons of In-House HR:
Without a Senior HR leader on staff, the work tends to be more reactive than proactive; such an arrangement doesn’t eliminate the feeling of “I don’t know what I don’t know” about HR that is prevalent within a growing business.
Promoting someone on work ethic and culture fit alone can leave the business exposed to costly compliance issues as the employee gets up to speed on HR laws and best practices.
As with any full-time employee, the cost of training and development as well as the cost of payroll taxes (generally 7.5% on top of their salary), benefits, and paid time off adds up.
3. Employment Lawyers
It’s common for small businesses without an HR department to turn to an employment lawyer for help. We asked employment lawyer Greg Hare of Ogletree Deakins when a company should engage a lawyer:
Hiring an executive or sales leader who signed a non-competition or non-solicitation agreement when working for a predecessor company.
The new company will want to know the parameters of permissible job assignments and actions at the time of hire in order to avoid stepping into legal exposures unwittingly. Non-compete law varies from state to state, so a prudent employer should always check the applicable law before hiring.
Separating an employee under circumstances that might create legal risks, for instance, if the person has made a prior complaint about pay or discrimination.
It is often wise to obtain closure by having the person sign a separation agreement that releases the company from liability, in exchange for a separation payment (however modest).
Whenever an employee complains of a hostile working environment.
It is imperative to follow the appropriate steps in responding promptly and effectively, in order to minimize legal exposures.
Whenever managing a complicated LOA (leave of absence) situation, where complying with the Americans with Disabilities Act, Family & Medical Leave Act, pregnancy, or military leave, can be challenging.
Pros of Employment Lawyers:
An employment lawyer helps a company mitigate HR-related legal exposures. Obtaining a little bit of advice on the front end can save a company many headaches and dollars on the back end.
Cons of Employment Lawyers:
Lawyers can be expensive when used for tasks that can be accomplished by non-lawyers (such as drafting policies and procedures for an employee handbook).
Lawyers won’t tackle administrative needs like onboarding, running payroll, or overseeing performance reviews. They are a part of the HR function but are not nearly the entirety of the HR function.
4. HR Consultants
HR consultants, like employment lawyers, can offer HR advice for small businesses. They can help with HR strategy and specific employee circumstances. Many HR tech platforms have started adding HR consulting to their services, like payroll platform Gusto and HR storage provider Bambee.
Pros of HR Consultants:
Price is definitely the most enticing advantage, as this is generally charged as needed or as a nominal recurring fee.
Because they work with multiple clients, HR consultants can draw from a breadth of experience.
Cons of HR Consultants:
Even when offered as a “dedicated” manager, these consultants can serve hundreds of clients at a time, limiting their availability and their institutional knowledge.
They generally work with one particular leader at the company as opposed to serving employees directly.
Like a lawyer, consultants generally tackle higher-level strategy rather than day-to-day administration.
5. Fractional HR
Fractional HR is when you hire a part-time People Partner to manage your business’ HR needs. This way, you get strategic advice and engagement with your team for a fraction of the cost of a full-time employee.
They can also use the operating systems already in place (the payroll provider, for instance) or suggest new resources, systems, and processes. They can suggest or work with employment lawyers, benefits brokers, and even PEOs if already in place (although they can also serve as an alternative to a PEO).
Pros of Fractional HR:
This service is less expensive than a full-time hire, without the headaches of turnover, paid time off, benefits, payroll tax, or development.
A fractional HR option provides a non-emotional safe place for employees to turn to while still feeling connected to the company.
They offer administrative duties like onboarding, processing payroll, managing benefits, and maintaining compliance, but they can also tap into their HR consultants and proven processes to offer more strategic guidance and support—like creating policies and procedures, developing a performance review plan, and overseeing employee engagement.
Cons of Fractional HR:
They are generally virtual, so consistent in-person meetings can be tricky.
They don’t provide bulk discounts on benefits, but their experience with multiple companies means they will have trusted referrals for benefits brokers, payroll providers, employment lawyers, etc.
Same Page HR offers fractional HR services where we provide a dedicated, fractional HR coordinator who is supported by HR consultants and proven HR processes.
These roles are employee-facing, which means they operate in a company’s Slack, email, or project management services and are culture-fits who feel like members of the team.
Same Page is happy to talk through which option might be best for your team; if Same Page is not the right fit for your size or needs, we can refer you to reputable service providers in each of the options listed above. Book a time to talk here!
