We can talk all day about the debatable evils of firing people and outsourcing work to developing countries. But human resources outsourcing really isn’t about that. Most of the time, it’s about sending some kinds of administrative work to a specialist firm so your company can concentrate on what it does best.
Human resources companies come in two flavors. An HR outsourcing company can take over many of your personnel functions. You still employ your workers, but the HR company can handle recruiting and training, manage payroll, administer benefits like 401(k)s and health insurance, update policies and handle some kinds of workplace compliance. You can usually pick and choose which services you need from their menu.
For example, you may wish to offer a 401(k) plan, and match your employees' contributions. Employers can take a tax deduction for their contributions to employees’ accounts in a 401(k). But for both administrative convenience and liability reasons, you might want to use an outside company to administer your retirement program. A third-party administrator might charge a flat fee per employee, or a fraction of a percentage of deposits.
A professional employer organization is something a little different. When you use a PEO, your employees work for the HR company, not you. It becomes the “employer-of-record” for tax purposes. The practice can help get health insurance and 401(k) coverage at a competitive rate for your employees – the PEO will have more purchasing power to cut a deal with insurers and financial services than you do, if it has many more employees than you. The legal liabilities of employment fall on the PEO, not you. You’re the boss – you can hire and fire – but you’re not the employer, technically. Temporary staffing services work as PEOs.
Either way, whether you farm out HR administration to an HR company or use a PEO, you get some legal compliance problems off your back. If you need to fire someone, your outsourcer will probably have the documentation you need, or will help you figure out how to do it legally. If you’re worried about equal employment compliance, your HR firm will be able to offer advice.
But none of that insulates you from the emotional, personal interactions any employer should expect to have with employees. You still have human beings working for you. Outsourcing is no reason to think or act otherwise.
Pricing for HRO and PEO services can be tricky. Usually, an HRO will have a base price, then add on costs for each function you want to outsource. Generally, the more of your HR technology and process you’re willing to hand over, the better the deal you’ll be offered. According to a report by the industry publication HRO Today, HROs average price for services is around $600 to $800 per employee, per year.
PEOs appear to be more expensive. Some of this can be hard to tell, because you don’t get to see the ala carte pricing for each service provided, like workers compensation insurance. PEOs price their services as a percentage of employee salary. The percentages vary, depending on how much the outsourcer will have to spend to cover workers compensation, retirement and health insurance. But expect a figure between 12 and 20 percent of your employee’s wages.
A 2007 report by the Everest Research Institute, an outsourcing intelligence firm, looked at twelve different HR functions that firms send out. The functions with the smallest variation in price – managing employee data, contact center services, maintaining evaluation reports – tended to be those with the least subjective judgment to apply. The services with the widest price variations – compensation, training, employee relations – tend to require a thinking human being applying subjective judgments.
You’re going to have to shop around to get the best deal for you. We can help with that.
The rule for using an outside HR firm is simple: When someone else can do it cheaper than you can at an acceptable quality, send it out. It’s the same rule for any kind of outsourcing.
But let’s talk about how to define “cheaper” and “acceptable quality.”
Cheaper: Ask yourself how much time and effort human resources stuff is taking for you, like payroll and health insurance stuff. A hour a week? Ten? Every waking moment? How much more money could you be making by doing other things? That is your opportunity cost. If your opportunity cost is more than it would cost to employ a full-time HR person, then you should consider hiring someone. And if you can get the same or better services by hiring a HR company, then you should consider hiring the company instead.
However, that’s not the only consideration. If an outsourcer can cut your direct costs on workers compensation, insurance or other expenses, you should factor those savings into your decision.
Acceptable quality: Ask yourself how much screwing up of payroll or health benefits you would be willing to tolerate before you fired someone. You’re going to need to be ready to discuss a service level agreement with your HR provider. A service level agreement (SLA) contractually defines what services are to be provided, and at what cost. It also defines what constitutes a screw-up, and what responsibility your provider has to fix it. Don’t try this outsourcing move without one.
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