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Small and Large Employers Outsource HR Duties Differently

Complex compliance issues may be sent outside

A woman working at her desk in an office.

​Outsourcing HR functions may jeopardize the jobs of some in-house HR professionals but can be a smart move for businesses, particularly small ones, which may be likelier than corporations to outsource everything, including compliance issues.  

Small vs. Large Companies

"For a small company, it may make sense to outsource even core functions of HR, like recruiting, payroll and benefits administration," said Kelly Marinelli, J.D., SHRM-SCP, principal consultant with Solve HR in Boulder, Colo. This could lead to the displacement of internal HR. But some companies use in-house HR professionals to manage outside vendors, provide them with strategic guidance and ensure excellent service, she added.

"Larger companies may choose to outsource core functions involving more transactional tasks to free up their internal HR teams' capacity for more strategic activities," she said. "However, larger organizations tend to have the leadership and infrastructure in place to support core HR if they choose to keep it in-house."

She added that large organizations may decide that a dedicated internal HR team is important for consistency in recruiting, hiring and control of the employer brand.

One disadvantage in outsourcing an entire HR function to professional employer organizations (PEOs) is that the PEOs may lose touch with employees, said Christine Walters, J.D., SHRM-SCP, a consultant with FiveL Co. in Westminster, Md.

[SHRM members-only toolkit: Outsourcing the HR Function]

But Pat Cleary, president and CEO of the National Association of Professional Employer Organizations, said that companies that start using a PEO "almost never go back to doing HR on [their] own." He said that companies with at least 20 employees often turn to PEOs for help. Once they have 100 or 200 employees, there typically will be an HR professional who uses a PEO for support, he added.

Marinelli asserted that, "The idea that it's possible to replace HR completely with outsourced options isn't realistic" for companies that aren't mom-and-pops. Cutting HR staff too much tends to reduce the service levels employees are accustomed to, leading to employee frustration and complaints. "Expectations about service levels from the vendor must be established in advance, communicated to the vendor and made part of the contract," she said.

Compliance Issues

Some of the most frequently outsourced HR functions involve compliance issues, Marinelli noted. She said that some specialized HR functions that most often are outsourced because they are not within the expertise of the internal HR team include:

  • Family and Medical Leave Act (FMLA) administration and complex leave and disability cases.
  • Federal contractor compliance, including creating an affirmative action plan, analyzing adverse impact on minorities and women, and preventing pay disparity.

"It's important to know that the company remains responsible for legal compliance and cannot discharge those responsibilities by hiring a third party," she cautioned.

Nevertheless, Jonathan A. Segal, an attorney with Duane Morris in Philadelphia and New York City and a Society for Human Resource Management columnist, said that employers may want to seek reimbursement from outsource providers if they violate the law or employers' instructions.

"The primary risk of outsourcing is that very few aspects of HR are 'stand-alones,' " he said. For example, there is interplay between the Americans with Disabilities Act (ADA) and the FMLA. If a business outsources FMLA compliance, it needs to ensure that the consultant knows when to return the handling of leave back to the employer for any outstanding ADA accommodations, such as more time off.

Other Outsourced Areas

Other frequently outsourced functions include:

  • Executive recruiting.
  • Executive coaching.
  • Launching organizational development projects.
  • Change management consulting.
  • Implementing new technology, such as for a human resource information system.
  • Providing specialized training.

But it may make more sense to keep benefits administration in-house if a company has complex benefits needs, Marinelli said. These can include wellness initiatives administered by carriers that are contributing to cost reduction with self-insured medical benefits, or bargaining agreements that require different employee benefits plans for different groups of workers.


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