Pros & Cons of HR Outsourcing Payroll and Other HR Functions

Pros and Cons of Outsourcing Payroll and Other HR Functions

Imagine running a small business with big ambitions but limited resources. What if you could optimize efficiency by entrusting some tasks to external experts? This is where Human Resources (HR) outsourcing comes into play. While payroll services are the most commonly outsourced HR function, some businesses outsource all of their HR tasks, while others work to manage with in-house staff. If you are considering getting outside help to manage your HR needs, there are a few things you should consider.  

HR Outsourcing Options

Outsourcing can be a game-changer for small businesses, allowing them to thrive by optimizing resources and boosting efficiency. Whether to save time, focus on more important matters, or simply because hiring more HR staff is not an option, outsourcing opens up a world of strategic possibilities for the entrepreneurial-minded. Businesses have several choices when considering outsourcing their HR needs.

Subcontracting HR Tasks

Human resources outsourcing (HRO) is subcontracting human resource-related tasks or services to a specialized provider. HRO providers offer a wide range of services depending on the needs and budgets of their clients. HRO Services may include:

  • Payroll services
  • Recruitment
  • Onboarding
  • Employee training
  • Performance management
  • Benefits Administration

Hiring a Professional Employment Organization

When an organization hires a Professional Employment Organization (PEO), the company then delegates many of the human resources functions to the PEO, and employees technically become employees of the PEO. Although the company will continue officially hiring its employees, the PEO handles payroll, benefits administration, workers’ compensation, medical insurance, and retirement accounts. In turn, the PEO is compensated for its services, usually based on a percentage of total salaries and an amount to cover the employee payroll.

Benefits of HR Outsourcing

Outsourcing some or all of a small business’s HR tasks has many advantages. For example, outsourcing allows business owners to delegate compliance requirements to experts who can ensure they are current with the latest employment regulations. It can also result in significant cost savings and increased productivity.

Cost savings— Managing HR costs can be daunting for businesses of any size. However, outsourcing HR functions could be a game-changer for companies looking to save time and money. It's been found that tasks like payroll processing take a significant amount of time, and outsourcing them could effectively reduce costs. By outsourcing HR functions, companies can strategically reduce this hefty expense and redirect those resources toward other essential business needs.

Reduction in errors—Small business owners wear several hats, which can create challenges regarding specialized HR functions. Making HR-related errors can be relatively simple without a proper team and resources. Outsourcing some or all of a company’s HR needs can help reduce the risk of compliance-related mistakes and potential litigation.

Increase in productivity—Business owners can focus on other tasks by delegating HR-related tasks to knowledge professionals. By outsourcing the more time-consuming tasks, the time gained back can be used to focus on other matters that help improve a business’s bottom line.

Compliance enhancement—Especially for smaller businesses, having dedicated in-house HR professionals may not be feasible. Yet, that doesn’t make compliance any less of a priority. By being able to outsource certain areas where employers don’t have in-house expertise, such as legal or accounting, small businesses can increase their compliance efforts and mitigate potential risks.

Looking at these advantages of outsourcing, it’s evident that small businesses can benefit from seeking assistance from professional HR services.

Drawbacks of HR Outsourcing

While many small businesses may benefit from HR outsourcing, the drawbacks may not make it worthwhile for some. Therefore, these disadvantages should be considered when deciding whether to outsource HR-related tasks:

Lack of familiarity—Having people outside of an organization handle personal HR matters runs the risk of a depersonalized experience for employees. While experts in their fields, external HR professionals are less likely to personally know the individuals they are helping and may not be in tune with the company culture. This lack of personalization can lead to employees feeling like there is a disconnect between them and the people assigned to handle their information.

Reduction in availability—Outsourcing HR responsibilities can also mean that there isn’t an HR professional on-site or, if there is, they may not have access to all the information. Limited access to information can make it difficult for employees to contact HR as frequently as they may like or need.

Forfeiture of in-house expertise—Delegating tasks to professionals outside the organization can cause a business to risk losing that area of knowledge altogether. For example, suppose employers outsource too much of their HR operations or no longer focus on tasks they choose to outsource. In that case, the resulting lack of in-house knowledge can create disconnects between the outsourced HR professionals and the organization.

Before making any decisions, business owners should weigh the pros and cons of outsourcing HR tasks. While saving money or increased compliance could make outsourcing HR functions the right decision, factors such as the forfeiture of in-house experts and decreased availability may keep others from outsourcing. Employers should consider all benefits and drawbacks before outsourcing their small businesses’ HR functions.


Explore how CBIZ can help ease the burden of payroll processing and assist with other HR functions.

Pros and Cons of Outsourcing Payroll and Other HR Functionshttps://www.cbiz.com/Portals/0/Images/CBIZ_HCM_article_human_resources.png?ver=B8ouuil2hKfAwEymIoWM6g%3d%3dhttps://www.cbiz.com/Portals/0/Images/CBIZ_HCM_human_resources.png?ver=3amatkowiOwc7H0CwTpmMw%3d%3dOutsourcing Human Resources can be a great option for small business owners looking to reduce costs, enhance compliance efforts, and increase productivity. Here are the benefits and potential drawbacks of outsourcing. 2023-03-30T16:00:00-05:00Outsourcing Human Resources can be a great option for small business owners looking to reduce costs, enhance compliance efforts, and increase productivity.Employee ManagementHRIS SolutionsPayroll ServicesYes