Outsourcing Savvy

More and more, smart business owners are outsourcing personnel management duties to maintain their focus on their business.

By Claire MacDonald, SPHR-Human Resources Manager, Doherty Employer Services.

It is rare to find a business owner who started their own company so they could worry about payroll, agonize over the constantly evolving employment laws or manage employee relations issues. Yet for many owners of small and medium-sized businesses, that is the unfortunate reality.

Not only do they need to develop business plans, oversee finances and focus on growth, but they also often deal with these day-to-day items on a regular basis. These tasks are a significant time sponge for companies and often end up hindering employers’ efforts to be forward-thinking. Many owners end up deciding enough is enough and start a search for a better process.

Susan Cary-Hanson is no exception. Cary-Hanson is principal owner of PGC, an Edina-based custom component manufacturing business that brings in approximately $15 million in annual revenue. Overwhelmed by managing the different aspects of running her business, Cary- Hanson came upon a solution at a networking meeting when a colleague suggested outsourcing human resources (HR), benefits and payroll administrative functions.

“The way [PGC] makes money is by making a part, packaging it and shipping it out on time. I don’t make money running benefits or writing a job description. My time is better spent thinking strategically [about] the skills and knowledge we need to be thinking about for the next three years and that we need to start developing in our employees - and let the day-to-day activities be handled by the subject matter experts,” Cary-Hanson explained.

PGC is an expert in manufacturing custom components for branded OEMs, and that’s where Cary-Hanson wants to focus her efforts. By outsourcing HR functions, she found she was able to do just that.

Outsourced HR provides thousands of small business owners with relief. Specific services vary based on the HR Outsourcing (HRO) firm, but a company can typically expect to receive HR services similar to a Fortune 500 company. The most common service platforms provided by HROs are Professional Employer Organization (PEO) and Administrative Services Outsourcing (ASO) models. The PEO model allows companies to co-employ their employees with the HRO, permitting the company to use the HRO’s benefit offerings and tax ID numbers. Others prefer the ASO model, which provides many of the same services without the co-employment relationship.

For many, moving to an HRO feels like a big decision. For Cary-Hanson, it was a no-brainer. Like many small companies, PGC’s HR functions were fragmented and disorganized.

“I knew a little bit about a lot of things,” she explains, “it’s really overwhelming. You cannot be a subject matter expert and continue to run your business if you’re trying to learn it and do it all, because you’re going to make mistakes.”

Cary-Hanson says risk mitigation was a key reason for outsourcing. “You’re a sitting duck as a department of one,” she says. “I don’t know what I don’t know and I didn’t think it was in the best interest of the company to run it that way. When you think about the risk of litigation, it’s really an affordable service.”

Every HRO is different and may or may not provide all the standard HR services, so employers should investigate what services are offered before making a selection. Common services a company could expect to receive include:

Risk Mitigation
Like Cary-Hanson, many small business owners find they don’t have the necessary resources to make informed HR decisions. Employment laws change constantly and keeping up can be a full-time job. Large companies have access to entire teams of legal counsel and HR professionals, giving them a huge advantage over small businesses. By outsourcing, an HR professional will be available to help navigate these laws and keep organizations educated on changes before they find themselves in trouble. Companies are able to make more informed decisions and proactively weigh risks.

Employment laws cover everything from illegal harassment claims to writing a driver’s license number on the correct line of the Form I-9. Additionally, each state has its own set of laws, which can be a challenge to manage for employers with satellite offices in multiple states. For example, Minnesota employers need to know about the Bone Marrow Donation Leave Act. In Rhode Island, non-exempt employees must be paid at least 1.5 times the normal rate of pay for working on Sundays and holidays. Violations of these laws don’t come cheap. Even unintentional errors can result in steep fines, and repeated violations could bring criminal penalties and jail time.

HR Management
Outsourcing allows small businesses to develop an employee handbook, review hiring and termination procedures, obtain wage analyses, develop performance management programs, conduct employee surveys and establish a robust HR program to maximize employees’ potential. Managers receive expert advice on how to manage employee issues, use effective coaching and development techniques, and handle termination meetings appropriately. Tasks that are huge time stealers when performed in-house are virtually pain-free when handled by an HRO.

Benefit & 401(k) Administration
After partnering with an HRO, many companies think about benefits only during annual renewal. Employers no longer worry about tracking employee eligibility, enrolling or terminating employee coverage, reconciling invoices, educating employees or ensuring COBRA is properly administered. Employee questions and changes are handled directly by benefit experts at the HRO.

Those in a co-employment relationship may also utilize the HRO’s health insurance plans. Some will allow companies the flexibility to pick and choose which benefit plans to use and which of their own benefits to  maintain, while others require companies to adopt all their benefits. Employers who opt to use an HRO but forego the co-employment relationship maintain all their own benefits, which are administrated by the HRO.

Payroll Administration
Only a handful of employers still process payroll in-house; the risk of fraud is simply too high. The HRO handles many of the standard payroll functions, including payroll processing, federal, state and local tax management, and year-end W-2 production. Many HROs also perform Independent Contractor audits, minimum wage checks and Form I-9 assessments, helping to alleviate liability should the government ever audit the company.

HR Information System (HRIS) Web Portal
In today’s technological era, small businesses are often behind in employee self-service sites. Online access allows employees to obtain their payroll and benefit information at any time. Managers can use the web portal to access employees’ emergency contact and salary information, and even report changes online.

Drug, Background and Unemployment Management
Administering drug and background screenings can be an important step in reducing liability, but they are also tedious and time consuming. An HRO will handle the entire process from start to finish and will work with the company to ensure their policies and practices are in compliance with state laws. Terminated employees often file for unemployment benefits. Small businesses can be especially burdened by these claims. It only takes one or two former employees to significantly increase a company’s State Unemployment Tax Act (SUTA) rate. An HRO helps ensure the company can defend against unemployment claims, manages responses and attends hearings on the employer’s behalf.

Recruitment and Selection
Screening resumes, selecting candidates and conducting initial interviews can be enough to make any managerpause before posting an open position. Many HROs offer the option to purchase recruiting services a la carte, either directly through the HRO or through a staffing agency partner. By outsourcing this to staffing professionals, managers can circumvent administrative tasks and initial applicant selection procedures, allowing them to focus on interviewing pre-qualified candidates. If the HRO partners with a staffing firm, the company also benefits from access to a large pool of already screened and tested candidates, expediting the hiring process and improving the quality of new hires.

Workers’ Compensation Insurance
If a company uses an HRO under the PEO model, they may have the option to apply for and obtain workers’ compensation coverage through the HRO. Typically, the premiums are paid with each payroll, relieving the burden of a considerable annual premium deposit. Additionally, the HRO will provide safety consultations and will manage all aspects of worker’s compensation claims, payroll audits and setting up insurance for out-of-state offices.

Considerations When Selecting an HRO
Using an HRO is a great way for businesses to reduce risk while significantly enhancing HR functions. Business owners often report a reduction in stress and an increase in productivity after outsourcing. However, every HRO functions differently, so it’s important employers do their homework before they make a selection.

Several factors to consider:

1. Does the HRO offer all the items previously discussed? If so, what is the depth of service provided and what items will continue to be the responsibility of the company? Some HROs say they provide everything, but actual services differ and they may not handle key administrative tasks.

2. Is the HRO ESAC accredited? In order to maintain Employer Services Assurance Corporation (ESAC) accreditation, an HRO must subscribe to a strict code of ethics and undergo quarterly audits by an independent CPA firm to verify net worth, timely payment of payroll taxes and benefit premiums, adequate reserves for insurance claims, etc. The criteria are very stringent, leaving only a handful of accredited HROs in the U.S. Accreditation provides clients with solid protection through the Client Assurance Program, with Surety Bonds guaranteeing financial performance.

3. What is the ratio of sales managers to HR professionals? If an HRO has three sales representatives for every one HR professional, this asserts their true area of focus: sales instead of service. An understaffed HRO often tries to reduce its workload by streamlining aspects of the HR process, frequently resulting in cookie-cutter, one-size-fits-all options. This means the HRO most likely won’t allow for special customizations. HRO isn’t just about risk reduction; it’s also about maximizing employees’ potential and promoting the work environment, making these serious considerations.

4. Is the HRO local? When a company chooses to outsource HR, they often forget to focus on the importance of face-to-face interaction. When the HRO is locally owned, managers and employees can meet and develop genuine relationships with their HR contacts. When harassment claims arise or volatile employees are terminated, it can make all the difference when the HR professionals comes onsite to provide services.

5. How will the implementation process and ongoing services operate? Will everything flow smoothly or will gaps occur and administrative tasks shift between departments? It is always a good idea to ask the HRO for client references. These can provide insight on how the HRO program works in practice and whether it is the right solution for the organization.

6. What are the HRO’s technological capabilities? Companies should ask for a demonstration of the HRO’s technology and discuss any special needs upfront. Each HRO’s offerings and abilities will vary, so it’s important to make sure the systems provided will be sufficient.

7. How do managers and employees contact the HRO? Some HROs function as call centers while others provide a single point of contact. The call center environment is typically staffed with knowledgeable professionals who can assist with basic HR questions, but they will not understand the company’s culture or be as valuable in ongoing employee relations issues. The single point of contact model allows companies to form a lasting relationship with their HR representative and consider them an extension of the company. It’s also important to understand upfront who may contact the HRO. Some HROs allow only the owner or a select few members of upper management to contact them, whereas others will work directly with all employees.

These are only some of the items to consider when choosing an HRO. Companies will want to assess their own needs and reasons for using an HRO, and spend time discussing these during the sales process. Once a selection is made, employers can move forward with implementing the program, mitigating their risk and freeing up their time to focus on the strategic direction of the business. For many business owners, like Cary-Hanson, it’s a win-win situation.

Claire MacDonald has been with Doherty since July 2005 and manages a variety of clients, providing services in performance management, training & development, HR strategy, policy development and HRIS reporting. She obtained a Bachelor of Arts degree from St. Olaf College with a degree in Sociology and obtained her Senior Professional in Human Resources (SPHR) designation in 2009.

For more information about Doherty and its services, please visit www.DohertyHRO.com