Small business HR outsourcing options

Building and maintaining an HR department is tough for small businesses. There are so many moving parts to keep track of including changing employment laws and differing employee needs. Small businesses often can’t even justify or afford to have their own HR department, but payroll, performance management, and benefits administration all still need to happen.

One option for small businesses that aren’t quite ready to hire in-house human resources support just yet is to outsource. Small business HR outsourcing can allow small businesses to access HR services like wider benefits offerings, employee handbook preparation, and guidance from HR experts that aren’t accessible for many new businesses without an established HR department.

What is HR Outsourcing?

Human resources outsourcing is the practice of using an external party, often a consultant or HR outsourcing organization, to manage HR functions for your business. Businesses can choose full-service HR outsourcing options to fully outsource their HR needs or simply offload a few of the more time-consuming or challenging HR tasks.

This is often an interim option that small businesses use until they grow large enough to require a full-time internal HR manager. However, some small businesses do use HR outsourcing long-term as well. It’s often more cost-effective for small businesses to outsource HR rather than hiring an in-house HR team. Plus, outsourcing can provide small businesses with access to a wider range of expertise and support than they would otherwise be able to obtain.

Why Do Small Businesses Outsource HR?

The main reason that small businesses outsource HR is simply to save time and money. The owners or management team may find that they no longer have time to keep up with HR activities among all of the other operational concerns. However, small businesses can’t always afford to hire in-house HR staff. As a result, they choose to outsource HR to get help with human resources tasks without having to hire and pay a full-time HR Specialist.

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HR outsourcing can also be a more flexible way to get help when you need it. There are certain times of year such as benefits open enrollment or the beginning of the year (when W-2s must go out and businesses need to update their policies to reflect new laws) when small businesses need more HR help. However, that doesn’t necessarily mean that there is enough work to keep an in-house HR employee busy year-round, especially if the business is very small and doesn’t have many employees to manage.

Outsourcing HR functions is also a great way to work with subject-matter experts. Even small businesses with an in-house HR Generalist will sometimes contract out certain aspects of HR where specific expertise is needed. You may work with a contractor or agency to audit your HR policies when they need an update or you may want an external to come in and provide fresh ideas on how to address an employee retention issue.

HR Outsourcing Options

Depending on your budget and needs, there are several human resources outsourcing options to choose from.

Contract HR Staff

A popular solution for small businesses is to use an independent contractor to outsource certain HR tasks. This can be an HR consultant that you find locally to come in and help you as needed or a remote worker. There are outsourcing sites like Upwork that can help you find freelancers to outsource HR administrative tasks to as well as HR consulting professionals that manage human resources for a bunch of different small businesses.

Human Resources Outsourcing Companies

There are large human resources outsourcing (HRO) companies like ADP and Paychex that have small business HR outsourcing service packages available. This typically includes access to an HR software service as well as hands-on support from HR experts. This is a good option for small businesses that want well-rounded support across a range of HR functions. These HRO companies also typically offer strategic HR guidance and legal compliance expertise to small business owners.

Professional Employer Organizations (PEOs)

Professional employer organizations (PEOs) work a bit differently than HR outsourcing firms or consultants. A PEO acts as a co-employer rather than an external party. This means that your team members will also be employed by the PEO company. The PEO provider is typically responsible for processing payroll, handling related tax filings and paperwork, enrolling employees in benefits, and obtaining worker’s compensation plans for them.

This is arguably the most full-service HR outsourcing option. It takes a lot of the HR compliance and workload off of the small business, leaving small business owners to focus primarily on the day-to-day employee management rather than larger HR activities like open enrollment or end-of-year W-2s.

HR Software

Some businesses, particularly those with limited budgets, outsource some of their HR processes to HR software programs that can help automate tasks like payroll and time-tracking. This is a good option for small businesses that want to save time on human resources management tasks but don’t necessarily want to work with an outside vendor or who may not have the budget for full service HR outsourcing.

What HR Functions Can Be Outsourced?

Almost any aspect of HR management can be outsourced. Here are some of the most common functions that small businesses choose to offload to an external HR professional.

Payroll Processing

Payroll is one of the most popular human resources functions to outsource as it requires a high level of accuracy, compliance, and timeliness. Busy small business leaders don’t want to spend time pouring over timesheets, calculating payroll taxes, and cutting checks. That’s why many businesses work with payroll services who handle all of the calculations, payments, and required filings for employers.

Employee Benefits Administration

Managing employee benefits, especially during open enrollment, is time-consuming. Like payroll, it is an important function that you really don’t want to mess up, but may be something that small business owners don’t quite have the time to really focus on. Employee benefits are often outsourced along with other administrative tasks to an HR consultant or contractor.

Some HR outsourcing options will also allow small businesses to access better benefits packages including a wider array of health insurance options at lower costs. For example, PEOs act as a co-employer across several businesses and can therefore access better benefits plans and rates by negotiating with health insurance vendors for better large group rates.

Onboarding and Training

small-business-outsourcing-450x350pxHR outsourcing can also help streamline the employee onboarding experience. You can outsource some of the paperwork processing, background checks, and administrative aspects of the onboarding process.

Outsourcing employee training is also a common choice for small businesses, and many probably don’t even realize that they’re doing it. Hiring external trainers to come in and lead a seminar or using a service like LinkedIn Learning to facilitate employee e-learning is in a sense, outsourcing your training.

However, employee onboarding and training is one feature that you can’t fully outsource, even with the more full-service outsourcing options. The business will always need to do some hands-on orientations and training to help the new hire learn more about the company, it’s culture, and it’s processes.

Developing HR Policies

All businesses, even very small companies, need employee policies in place. Having clear, written policies in place is a standard risk management and compliance practice. However, writing all of those policies takes time. That’s why many businesses outsource the creation of their employee handbook and HR policies.

Many HR outsourcing companies like Bambee specialize in creating employee handbooks and policies. There are also tons of freelance HR Managers or policy writers who offer handbook or policy creation as a one-off service.


Small businesses can outsource different aspects of the recruiting process based on their needs. Some small businesses like to work with contract recruiters or recruiting firms to outsource the candidate screening process. In this instance, the recruiter will typically do the job posting, review applicants, and do an initial screening with candidates and then the small business owner will interview the top candidates. Small business owners typically work with the recruiter to create the job description and the screening criteria that will be used.

This more full-service recruitment process outsourcing is a good option for hard-to-fill roles or for small business owners who don’t have time to review a large number of applications. However, many small businesses do prefer to do their own recruiting in-house as internal employees may have a better feel for which candidates will be a good professional and cultural fit. After all, small businesses are often fairly tight knit teams.

Administrative HR Support

Human resources does include a lot of administrative work like data entry and document filing. This is an aspect that can be outsourced to an administrative contractor or streamlined by working with an HR consultant or software service who can help automate certain administrative workflows for the company.

Finding the Best HR Outsourcing Service

There are a lot of HR outsourcing vendors to choose from. Some of the top options are ADP, Bambee, Insperity, and Paychex. You don’t have to work with a large HRO service to outsource HR, but if you do want to go that route, it’s important to take some time to find the best option to fit your business’ needs.

Each HRO company, PEO provider, and even independent consultant will have their own specialties and service offerings. When evaluating options, here are some key considerations to keep in mind.

HR Outsourcing Costs

The pricing of HR outsourcing can vary widely based on the type of outsourcing service that you choose and how much help you need. It may be as simple and affordable as paying a freelancer for a couple hours a week to handle payroll and some administrative tasks, or it could cost hundreds or even thousands per month if you go with a more robust support offering from a major HR outsourcing company.

HR Outsourcing Contracts

If you’re considering HR outsourcing as a temporary solution until your business grows large enough to justify an internal HR hire, you’ll want to look carefully at the contract. Many HR outsourcing companies and PEO services have annual contracts, meaning you’re typically locked in for a year. This isn’t a huge problem for most small businesses, but it is something to be mindful of if you’re approaching the point where an in-house hire may make sense later in the year. Working with independent contractors, on the other hand, is typically more flexible.

Support Availability

When evaluating different avenues for HR outsourcing, it’s a good idea to consider how available the person or company that you are contracting with will be. Will they respond promptly when you or an employee has a question? Or will they only respond or be available to you a few days per week during set periods?

If you work with a larger HRO or PEO company, you’ll likely have a support line and maybe even a dedicated contact that you can consistently reach every day during normal business hours. Individual contractors may not be able to offer that level of service (and if you’re only paying them to help out a few hours or days per week it’s not fair to expect them to always be on-call).

Accompanying Software Offerings

If you’re going to work with an HRO or PEO company to outsource HR tasks, you’ll also want to get a demo or free trial of their accompanying software. These companies typically have HR solutions that come with their HR outsourcing services. These HR software platforms are nice for employees as they typically offer some self-service features and mobile apps that make it easy for them to check their pay stubs, pull up their benefits information, or change basic data like their address.