Everything You Need to Know About Human Resource Outsourcing

Human resources (HR) is an essential division of any growing enterprise, as it’s responsible for payroll, safety compliance, training and development. These functions are so integral to the success of a business that the number of human resource manager positions in the United States is set to grow 7 percent from 2021 to 2031— a number that’s largely driven by a need to adapt to a hybrid working culture, establish purpose-driven organizations, and combat quiet quitting.

These companies see the value of HR professionals, who bring laser-focused insights and deep, relevant experience to the table, and make it possible to affect long lasting positive change within an organization’s employee satisfaction. 

But is the traditional approach to investing in human resources the only approach? Are there other options available to businesses in Hawaii and across the U.S. that can be just as effective? What can be done to improve employee experiences while protecting the future agility of a company?

Countless executive level leaders are asking themselves these questions, and there’s one common answer: human resource outsourcing (HRO). Why? Well, because it works. But we wouldn’t expect you to simply take our word for it, so let’s discuss what HRO is, how it’s done, and why it’s worth considering.

What is HR Outsourcing?

Now that we’ve answered the question “What does HRO stand for?”, let’s define what it actually means. The term refers to an arrangement between any third party HR service provider and an employer, whereby the provider functions as an external division of the employer’s business. The provider completes many (or all, in some cases) of the same duties an internal HR department would complete, which may include recruiting, hiring, onboarding new employees, handling payroll and payroll taxes, overseeing benefits and compensation packages, and providing safety and management training opportunities.

What Services Does an HRO Company Offer?

Human resource outsourcing providers are often mistaken for hiring agencies, headhunters, or placement agencies — but HRO companies are so much more than that. 

While some HRO companies do offer recruiting services, it’s just one of the many responsibilities they can take off your plate. So, what is a HRO provider and what benefits can these companies offer? Here are the top 5 most common services offered:

1. Payroll & Taxes

Let’s face it — payroll is a pain. From ensuring accuracy to filing taxes to navigating compliance, the list of headaches goes on. When you partner with an HRO company, you can transfer all the responsibility off your plate and onto theirs. An HRO company will ensure that your taxes are filed and your teams are paid accurately, on time, and in accordance with state and federal laws. 

However, the benefits of outsourcing payroll and taxes to an HRO company extend beyond giving you back more time in your day. HRO companies are staffed with payroll, tax and compliance experts, deeply versed in the latest policies and laws. This helps reduce filing mistakes, mitigates payroll errors and improves security, providing you and your employees peace of mind.

HRO companies will also generate and file important tax documents (such as W-2s and 1099s), manage FLSA overtime pay regulations, and more. In addition to taking major administrative burdens off your shoulders, many HROs will calculate and pay taxes for you too. 

Outsourcing this time-consuming administrative task gives you the ability to focus on what matters most — running your business.  

2. Benefits 

Did you know that a whopping 66% of workers consider benefits the most important factor when choosing a new job? And in today’s challenging job market, benefits are one of the most important aspects of your recruitment and retention strategy. However, not only do you need to offer excellent benefits to your employees, you need to manage them effectively as well.

An HRO company can help you determine which benefits to offer, manage and monitor employees’ healthcare status, and keep everything in compliance with state and federal laws. From securing health insurance, retirement plans, life insurance, flexible spending accounts, and more, an HRO company can help you stand out as a top employer. 

Your employees aren’t overlooking their benefits package, so you shouldn’t either. Partnering with an HRO company ensures your employees stay happy and healthy. 

3. Compliance & Risk 

Did you know that approximately one-third of small business owners spend over 80 hours on compliance each year? Not only is it time-consuming, but compliance can be confusing — even for the most seasoned business owner. Laws and regulations are constantly changing, making it difficult to run a business and stay on top of the latest updates. 

In addition to its complexity, there are serious consequences for those that don’t remain compliant. Outsourcing to experienced experts at an HRO company, you can reduce risk of human error and avoid costly compliance fees. 

These experts perform every function required for your business to remain compliant. From hiring and termination guidance, to liability insurance and conflict resolution, to drug testing and background checks, an HRO company checks off all the compliance boxes. 

Common examples of HRO services include compliance training, meeting important deadlines, collecting tax information during onboarding (I-9 forms, etc.), providing mandatory offboarding notices (COBRA), filing 1095-C forms, and e-filing with the IRS.

Ultimately, outsourcing human resources to a team of experts can keep you compliant, save you time, and save you money.  

4. Talent Acquisition

Some HROs will provide talent acquisition services. Finding qualified and experienced professionals who match your workplace culture, have a can-do attitude, and are driven to succeed is no easy feat. In fact, 75 percent of businesses worldwide are struggling to recruit effectively.  

Partnering with an HRO provider that provides recruiting services can minimize the time it takes to fill vacant positions. These providers employ professions who dedicate 100 percent of their time to finding, qualifying, and placing job-seeking professionals — ensuring both the employee and the employer are completely satisfied with the final result. 

Under this umbrella, an HRO that provides recruiting will likely complete tasks like developing a personalized recruitment strategy for your business, screening applications, coordinating and conducting interviews, checking a candidate’s references, and acting as a liaison for your company.

However, keep in mind that there can sometimes be a disconnect between what you want and what your HRO thinks you want. So if you choose to outsource your recruiting efforts, make sure that you’re communicating clearly about what you’re looking for. 

5. HR Policies and Procedures

Some of the most consequential documents an enterprise has are those related to human resources. These crucial policies and procedures dictate a broad spectrum of disciplinary decision-making processes, from employee punctuality and attendance, to team member social media usage, dress code violations, and workplace misconduct or harassment.

Many companies seeking HRO resources want one that’s capable of protecting their business from legal issues, internal conflicts, and other unwanted outcomes — all of which have the potential to devastate a company.

Human resource outsourcing allows businesses to connect with highly-trained professionals who understand how to develop and implement policies that protect the best interests of employers. HRO providers hire these specialized experts and offer individualized service options so employers can avail of them without having to commit to hiring a full-time policy analyst.

6. Retention Programs

Did you know 45 percent of surveyed US employees are currently looking for a better position? Or that each year, employee turnover costs companies an average of $22,279 in recruiting costs and lost productivity? 

Retention is a sore point for companies of all sizes, across all industries, with 61 percent saying they struggle to retain workers — and yet it’s estimated that nearly half of all businesses are operating without a formal retention strategy in place. The reason? It takes a significant amount of time to develop, refine, and implement an employee retention strategy (and even more to evaluate it and improve it over time). 

Executive teams are often surprised to learn there’s an alternative to developing employee retention programs in-house. In most cases, they’ve long struggled to come up with solutions that effectively produce their desired outcomes and they’re facing the severe consequences of operating with a disengaged workforce.

HRO providers step in and provide proven, customizable employee retention solutions that can be rolled out quickly, helping companies re-energize and reunite their teams.

7. Employee Onboarding

It’s nearly impossible to scale a business without a structured and methodized onboarding process. Remember, 77 percent of employees who go through a formal onboarding process meet their first performance goals, and completing a structured onboarding program makes new team members more likely to stay with the company for longer. 

Yet despite the proven advantages of a formal onboarding process, only 12 percent of employees strongly feel that their company does an excellent job of onboarding.

Human resource outsourcing is one of the best ways to address employee onboarding issues. An HRO company can identify learning gaps and weak points in your process and reconfigure it to better meet the needs of new hires. Whether it’s setting up new employee email accounts, scheduling IT appointments, creating a workplace culture training program, or defining follow-up protocols — it’s all possible by outsourcing human resources.

8. Termination and Offboarding

This is an aspect of running a business that many managers, leaders, and entrepreneurs struggle with. The decision to terminate an employee is rarely simple, straightforward, or easy — it requires a great deal of thought and consideration. For this reason, many employers appreciate being able to tap into HRO resources at this critical time.

HRO companies can ensure the proper documentation is in place and that applicable laws are being followed throughout the termination process. They can also minimize the likelihood of negative outcomes by facilitating communication between employers and employees, ensuring rules are enforced in an impartial manner, and providing adequate notice to employees regarding performance issues.

Since only 29 percent of employers have a formal offboarding procedure in place, partnering with an HRO company can also competitively position your business, putting you ahead of other companies that have yet to streamline this aspect of their operations.

The Pros & Cons of HROs

We’ve discussed the various services offered by HRO providers. Now let’s dive into the advantages and challenges that come with outsourcing HR.

The Pros

1. Specialized Knowledge

So what is HRO’s main benefit? As we mentioned above, HRO providers go to great lengths to find highly qualified individuals who are capable of providing the specific services their clients require. This includes (but isn’t limited to) recruiters, policy analysts, benefits administrators, diversity consultants, payroll managers, compensation analysts, and more.

It would be far more time-consuming and expensive for a company to hire each of these positions in-house, or even to pay multiple specialists on a contractual basis. Making the shift to human resource outsourcing means near-immediate access to a number of dedicated, professional services — each of which can be utilized based on the company’s need at any particular time.

2. Risk Mitigation

Think hiring the wrong person isn’t a big deal? Think again. Negligent hiring, employee fraud, and poor culture fit all have the potential to damage a company in severe (and sometimes irreparable) ways. 

Don’t believe us? Consider these statistics: 

• • Approximately 40 percent of employees have stolen data from their former office
  • 16 percent of employees say that they've posted negative comments about their employers online before
  • 75 percent of all workplace acts of violence occur during or after the firing process
  • 57 percent of all fraud cases in the United States are employee-related
  • 85 percent of hiring managers report catching some form of false information on a resume

Ask yourself: How would each of these scenarios impact your business? What repercussions could arise? 

In an ideal world, companies would be able to fully protect themselves in situations like the ones above, but this simply isn’t always possible. Investing in human resource outsourcing often provides the fastest and most effective defense against unwanted outcomes related to termination and employee offboarding.

3. Cost Reduction

Hiring and maintaining an in-house human resources department is quite expensive. As of 2022, the average Human Resources Manager makes $112,793 per year. Then, companies have to account for additional team members or consultants, which can add up at a rapid rate. 

Making the decision to work with an HRO provider is one many businesses say has saved them a significant amount of money. More specifically, 87 percent of CEOs report being satisfied with the cost-savings they’ve seen since outsourcing human resource functions. This demonstrates the impact outsourcing can have on the financial viability of businesses and speaks to the rising trend of forgoing in-house teams.

4. Heightened Productivity

It’s a well-established fact that employee onboarding and other HR processes have a measurable positive impact on overall productivity levels. In fact, one study found that 54 percent of companies with onboarding programs reported higher employee engagement, and we know that engaged employees are 17 percent more productive than their peers.

Productivity is a critical success metric for companies of all sizes and industries, and HRO providers make it easier to achieve productivity goals. 

5. Employee Retention

Very few assets are more valuable to a business than long-term employees. Why? To start, the cost of replacing a trained employee can exceed 200 percent of their salary — and that doesn’t include the cost of losing their expertise, which is more difficult to define.

Additionally, losing employees disrupts regular workflows and causes productivity bottlenecks, which drain money and slow down overall operations.

Human resource outsourcing ensures adequate employee retention strategies are implemented and reinforced throughout an employee’s life cycle, greatly reducing the likelihood of turnover. HRO providers understand which retention tactics yield the best results and have the hands-on experience required to tailor these solutions to best meet a company’s specific needs.

The Cons

1. Disjointed Employee Experience

There is potential for confusion when employees are hired and onboarded via a third-party provider. They may not fully understand the difference between their employer and their HRO provider. 

This is why it’s important for businesses to clarify duties and responsibilities with their HRO company upfront, and to clearly communicate these duties with employees so they know the appropriate resource for a particular situation.

2. Less Control

Any time a company delegates a specific task or function to a third-party provider, they are relinquishing a small amount of control. But this doesn’t have to be a bad thing. 

Delegation frees up time, energy, and resources within a company that can be better utilized elsewhere. The key is to find a provider the company can trust and to conduct thorough research prior to committing to their services.

3. Information Vulnerability

Another concern associated with human resource outsourcing is the potential for data leaks and other cyber security risks. Any time a company shares information with a third party provider there is a chance that data could be distributed, stored, accessed, or used in a way that would make the business vulnerable. 

It is true, however, that cyber attacks can happen whether or not a company decides to outsource their HR division. There are countless IT activities that can be compromised. The best bet for preventing information vulnerability is to follow cyber security best practices and to invest in a robust threat management strategy.

How to Choose an HRO Company

It’s important that you partner with an HRO provider that functions as an extension of your business. Here’s how:

• Look for a provider that already has human resource management systems (HRMS) in place so they can quickly implement solutions for your company.
• Ask the provider for client testimonials and case studies to learn more about how they’ve successfully helped others.
• Ensure the provider is capable of completing the specific functions you require, like payroll, benefits, HR, workers' compensation, risk management, training, employee administration, etc.

Hawaii's Largest and Most Experienced HR Solutions Provider

Ready to outsource your human resources to Hawaii’s largest and most experienced human resources provider? We offer a range of HR services designed to help pay, manage, and retain employees. Reach out to ProService Hawaii today!