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Why Small Businesses Should Be Outsourcing HR

man deciding to to HR inhouse or if Outsourcing HR is right

While no business owner likes to hear it, 90% of startups fail. And 50% of small businesses fail within the first five years. Some factors can be linked to circumstances outside of one's control, such as the pandemic. Cash flow is usually always the top contributing factor, yet many factors that also have an impact can be linked to HR negligence. Cash flow issues often inhibit small businesses and startups from investing in the right HR policies.

Some of the most common HR factors that negatively impact the success of a startup or small business include:

  • Compliance issues. From misclassifications, to wage and hour laws, to the handling of claims, ignoring compliance laws can quickly dissolve a business.

  • High employee turnover. Without the right hiring practices in place, you risk either hiring the wrong person, or mismanaging those you do hire. Turnover is not only expensive, but lowers the morale of your current employees. It can cost well over 1.5x a persons salary to replace them.

  • Poor performance due to poor policies. Without the right standards in place, found through onboarding paperwork and codes of conduct, training, and policies for upward mobility, you may suffer from poor performance. This doesn't necessarily mean your people are lazy, but may lack the structure or motivators needed to help them perform at their best.

Effective HR management is crucial to the success of small businesses. However, it requires an HR team who specialize and have deep knowledge and experience across the many areas of HR. These areas include payroll, employment laws and regulations on both a state and federal level, talent acquisition, policies and procedures, and benefits and compensation.

Managing HR, and all of its complexities, is time consuming and demanding. The levels of compliance and legal risks associated with HR policy can be too much for one or two HR generalists to handle. Hiring the right HR team is also time consuming and expensive. Aside from

Man with umbrella in a field showing that outsourcing HR can help his business

handling the legal aspect of HR, the HR management person or team also must handle one-off employee issues, such as claims, threats, personal issues, misclassification of workers, wage and hour, workers comp, and unlawful termination. One mismanaged HR issue could end up in expensive audits or even lawsuits.

While larger organizations have the resources to build a team with all the necessary skill sets, startups and small businesses (less than 50 employees) don’t have the resources to properly handle all the complex, time-consuming, and demanding HR tasks and strategic initiatives. To focus resources on HR, small businesses can lose focus on their core competencies. That said, about 50% of small and medium sized business (under 200 employees) outsource HR.

Outsourcing HR functions can also be the most cost-effective and fastest way for growing startups and small businesses to scale. Aside from an HR provider helping business manage critical business needs such as regulatory compliance, payroll processing and recruiting, the right HR outsourcing partner can help you develop and implement effective long-term HR strategies. These HR best practices include hiring and retaining the right talent, improving employee engagement business performance.

How outsourcing HR helps small businesses

1. Reduce heavy overhead costs.

By outsourcing your human resources needs, you'll get expert support and guidance from a complete team of experienced and credentialed HR, Benefits, Payroll, Compliance, Recruiting, and HR technology specialists without incurring the heavy overhead costs of having them in-house. These heavy costs include recruitment, salaries, taxes, insurance, vacation, office equipment (such as computers, desk, chairs) and office space, where applicable. Outsourcing HR comes at a much more affordable cost.

2. Outsourced HR helps keep your business complaint.

Employment laws and regulations are getting more complex and constantly changing. By outsourcing HR, you get peace of mind knowing they're up to date on changes to employment laws and regulations. For example, AB5 has incurred many small businesses in California to be audited for misclassifying contract workers, resulting in exorbitant legal fees. Another example would be the repercussions of a wrongful termination case, or a workers comp claim.

3. An HR outsourcing partner can help you build your own HR team.

In the case you do want to have your own HR department at some point, your HR outsourcing partner can help you build the foundation for doing so. Remember, your outsourcing HR partner comes with a team of experts who have a wealth of HR knowledge, so they can help you set up an infrastructure of HR processes, policies, employee communications built within technology to help you scale your business.

4. Improve employee productivity, retention and engagement through an outsourced HR partner.

Your people are your most important asset and your competitive advantage. So, for your employees to be at their best, they need to feel like they're in a healthy environment where they're treated fairly, valued, and rewarded.

Without adequate HR support, these factors can easily be overlooked, to no ones fault. Without the right processes in place, employees risk having a negative work experience and low morale, which leads to low commitment and engagement. This can wreak havoc on your business' reputation, which then becomes an entirely new struggle to overcome!

By working with an outsourced HR firm, they'll help you be on the right track for having satisfied and productive employees. Your HR outsourcing team has the understanding and experience necessary to develop strategies and processes to improve your hiring and onboarding experience, as well as improving your workplace culture, providing training and development to help employees succeed and advance, and implement effective performance management measures.

Finding the right HR Outsourcing partner

Now that you're armed with information about the benefits of HR outsourcing for your business, let's discuss about the different types of HR outsourcing options to help you make the right choice for your business.

There are two main avenues you can take when it comes to fully outsourcing your HR and payroll:

  • PEO (Professional Employment Organization) – A PEO company employs a co-employment partnership, and employer responsibilities are shared between your company and the PEO. PEOs are increasingly becoming the service model of choice for smaller organizations. Learn more about PEOs here.

  • HRO (Human Resources Outsourcing) – An HRO company is more of a consultant and guide for your HR needs, and does not take on the risk of your employees. However, they can offer a more customized solution.

A professional employer organization, or PEO, is an organization that provides—via a co-employer relationship or employee leasing arrangement—HR management and benefits to an employers' employees.

Employment responsibilities are typically shared between the PEO and the employer; the employer retains management control over the work performed by the employees, whereas the PEO assumes co-responsibility for benefits, taxes and payroll. As co-employer, the PEO pays the wages and employment taxes for worksite employees out of its own account, collects and reports taxes to state and federal jurisdictions, maintains a long-term relationship with worksite employees, and in theory retains the right to hire, terminate and reassign employees. The employer reimburses the PEO for these expenses and pays a monthly administration fee based on the number of employees employed.

Although some PEOs offer services to larger clients, the majority of PEO business is conducted with companies with 50 or fewer employees.

Outsource Your HR Needs Today

Though all businesses can benefit from outsourcing their HR needs to a PEO, small businesses with 5-50 employees will see the positive effects the quickest. If you are the owner of a small business, we at Band of Hands would love to help get you set up for success. Band of Hands specializes in outsourcing HR for small businesses. For only $10/employee per week, small business owners can now afford to have all of their HR needs met. Contact us at our website or call us at 858.284.3700. We take pride in helping you accomplish your business goals and being with you at every stage of your employee’s lifecycle.


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