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Small businesses and startups can benefit from outsourcing human resources tasks — from implementing new software to hiring a human resources firm. — Getty Images/FG Trade

Many startups and small businesses do not have human resource management (HRM) at the top of the priority list. At first, it can seem simple to oversee a few employees, but in reality, thorough management of HR functions is a lot to manage.

Best HR practices keep your employees happy and safe, ensure compliance with local, state and federal regulations, and support the growth of your business.

Fortunately, the good news is that you don’t have to be the expert to do this. There are many options for outsourcing some, or all, of your HR functions.

How do small companies handle HR?

We can segment HR functions into three categories, any and all of which can be outsourced:

  • Administration, including payroll, insurance, taxes, hiring and termination.
  • Employment law compliance, including legal and regulatory issues.
  • Employee performance, including performance reviews, recognition, training and benefits.

[Read: Why Human Resource Management is Necessary for Business Success]

Opinions vary on the right ratio of HR staff to employees and the old standard of one to 100 is disputed. But what seems common is that small companies have a higher ratio than large companies because there is a baseline number of HR staff needed to establish and maintain primary functions of HRM. This can be a significant challenge for a startup or small business. Interestingly, an ADP research study revealed that nearly a third of small businesses don’t use outside support for these HR needs.

ADP also learned that 70% of small businesses assign HR functions to non-HR staff — 80% of whom are not certified in HR and more than 50% are the company owners. The result is a sense of stress and insecurity over concerns that compliance, safety,and other critical HR requirements are handled appropriately.

Outsourcing HR functions can alleviate this stress and distractions from primary job functions. Software Advice™, Inc. reported that using HR software and/or an external HR organization can keep a business from having to hire a dedicated HR employee until the business has more than 200 employees.

Outsourcing HR functions can alleviate this stress and distractions from primary job functions.

Outsourcing pros and cons

By outsourcing your HR tasks, you can establish the primary HR structure and functions, e.g., employee handbook, trainings, processes, systems, etc., that can support your company’s growth. The benefits to HR outsourcing can include:

  • Improved operational efficiency.
  • Ensured regulatory compliance.
  • Reduced costs.
  • Improved employee experience and retention.
  • Available data for better decision making.
  • Reduced legal risks.

As you consider your options, be sure to assess drawbacks and risks as well, which can include:

  • Loss of some control.
  • Potential for the provider to mishandle responsibilities.
  • Costs.
  • Lack of passion and understanding of your business and needs.
  • Processes based on standards set by service provider not your business.

To reduce your risks, Personnel Today suggests:

  • Establishing a service level agreement (SLA) outlining both parties’ responsibilities and consequences for non-compliance.
  • “Don’t outsource what you don’t understand.” It will likely cost you more for the service provider to solve a problem and they may not know what’s best for your company.
  • Remember, you’re ultimately responsible for people management and provision of all HR services.
  • Contract terms can be upwards of five to 10 years, so be sure to consider future needs in your planning.

Types of outsourcing

There are many options with a range of costs. You can select one or mix-and-match services to meet your needs. Here are four to consider:

  • HR software: If you have a small HR staff or disperse HR functions across your team, HR software can provide a comparatively low-cost support structure for administrative tasks, record keeping, reporting, compliance, recruitment and employee performance. Many vendors provide cloud back up and mobile access, and software-as-a-service (SaaS) solutions are growing in popularity.
  • HR consultant: Contracting an expert in human resources to provide guidance can help you to properly set up your HR functions. If you so desire, they can also manage some of these functions. However, they’re not permitted to handle payroll or administer benefits, which can be managed by an outsource organization.
  • Human Resource Outsourcing (HRO) firm: An HRO can manage some of your HR functions or provide an end-to-end solution. Services offered and costs will vary. Typically, though, you’ll pay based on services selected and number of employees.
  • Professional employer organization (PEO): A PEO hires your employees and leases them back to you. They coordinate all HR services and charge you either a flat fee per employee or a percentage of payroll. This option enables you to offer your staff benefits generally available only to those working in large organizations.

[Read: Managing Your Own Payroll & Benefits? Why It Might Be Time to Consider a PEO]

Getting started

Take a look at how you currently manage HR functions and consider which outsourcing options might best suit your needs. Keep in mind your budget, the level of expertise you need and your anticipated growth, so that you establish a solution that supports your business today and into the future.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published October 03, 2019