HR outsourcing lets small businesses delegate employee management tasks, such as benefits administration, payroll, recruiting, or training, to a professional HR firm instead of hiring internal HR staff. We looked at five common options—an HR consultant, HR firm, HR software, HR service provider, and a professional employer organization (PEO)—that cover the range of options for small businesses.
In our experience, all-in-one HR platforms like Zenefits are making it easier and cheaper for small businesses to handle HR on their own. Zenefits lets employees sign offer letters, fill out I-9 and W-4 forms, and enroll in benefits—all online before their first day. Try a free 14-day demo and see how Zenefits also helps with compliance by sending new hire info to state and federal tax agencies, automatically calculating and filing payroll taxes, and more.
HR Outsourcing Options Summary Table
|HR Consultant||Onsite or local one-on-one consulting to build HR knowledge and set up and/or manage your business’ HR practices|
|HR Consulting Company||Creating job descriptions, forms, policies, systems, employee handbooks, and/or training to support your business|
|HR Software||Tracking employee lifecycle from hire to termination in one system that provides legal HR compliance|
|HR Service Provider||Similar to HR/payroll software with the added HR compliance benefits of a team of consultants to assist with employee relations and HR functions|
|PEO||Outsourcing all things HR to a PEO co-employer that hires your employees and leases them back to you at a monthly rate|
How We Evaluated HR Outsourcing Options
An HR outsourcing firm is there to support you in managing the people-related functions within your company. Therefore, we evaluated HR outsourcing options based on a typical small business’ needs for a range of HR functions.
We found that up to 65% of businesses outsource some aspect of their HR functions, such as staffing, payroll processing, or benefits administration. While larger companies with HR staff may outsource only one aspect, small businesses, with no internal dedicated HR manager, needed broader options. Because of this, we focused on five types of HR outsourcing that could provide most all these HR services in one company or resource.
On average, businesses spend about $1,465 per year per employee on HR-related expenditures. We chose to compare and contrast each of these HR outsourcing options by looking at the basic HR services a small business would need that would keep them at or under this price range.
The final factor we considered is HR education and certification. We wanted to provide options that you could trust because they have been vetted and certified by agencies such as SHRM or HRCI.
Best HR Outsourcing for Onsite Support: HR Consultant
We find an independent HR consultant is best for those who want the benefit of someone working side-by-side with you at your location and helping you identify your HR needs as your business grows. A consultant working a few hours a week will typically cost much less than a full-time HR team member at around $60,000 per year, according to average HR salaries on Glassdoor.
HR Consultant Pricing
Human resources consultant pricing will vary from as low as $50 per hour to write job descriptions to as much as $500 per hour to manage an HR strategy session. But most HR consultants will range between $100 and $150 per hour for the type of HR generalist work you’ll need as a small business.
An HR consultant will want to talk with you to help determine whether hourly or package pricing is better based on your specific HR needs. Even so, paying $300-$500 a week for a few hours of HR consulting, or up to $11,000 a year, is still much lower than the $60,000 you’d pay for a direct hire or some of the PEO co-employers we’ll cover later.
HR Consultant Features
While the services offered by an HR consultant are as varied as the consultants themselves, most can provide small businesses with basics like creating HR policies, providing HR forms, and helping you set up legally-compliant processes for hiring, paying, and managing employees.
Some of the other services an HR consultant may provide include:
- Helping you recruit, hire, and onboard employees and managers
- Assisting you with setting up your HR filing system, forms, and processes
- Helping you choose the best HR, payroll, or timekeeping systems
- Assisting you in documenting policies and/or writing an employee handbook
- Helping you create job descriptions and org charts
- Training employees and managers on HR best practices, safety, and labor law
- Setting up a performance management system
How to Find an HR Consultant
The best way to find an HR consultant is to search online, look on a freelance website, or post on a job board. You could also look for consultants on websites dedicated to all things HR, such as the Society for Human Resource Management (SHRM). You’ll want to be sure that whomever you choose has a degree in HR or an HR certification like these shown below from the HR Certification Institute (HRCI).
Downsides of an HR Consultant
The downsides of hiring an HR consultant are that one person may not have the specialized skills and knowledge you need in all HR areas like payroll, benefits, or training. You’ll also typically need software in addition to consulting. Ask questions to ensure your HR consultant has an HR background, industry experience, and is up-to-date on your state laws.
Best HR Outsourcing for HR Project Work: HR Consulting Company
We recommend outsourcing to a professional HR consulting firm if individual tasks or projects are your primary need. For example, maybe you want to set up a health insurance benefits program, update your employee handbook, or conduct training on how to avoid discrimination in the workplace.
HR outsourcing companies will have the knowledge, tools, and resources to assist you so that you can set up your company with best practice resources based on the specific HR project needs you have. For example, do you need a maternity leave policy? Or do you want to set up a robust performance management process? Most HR consulting companies will have experts on staff in the areas shown below:
Like an HR consultant, an HR consulting firm will most likely be able to assist in most areas of HR, as shown in the diagram above that illustrates the SHRM Body of Competency and Knowledge. While an HR consulting company may or may not have local HR resources that can visit your site, they’ll usually have software, tools, and experience you can access for all your one-off HR consulting needs.
HR Consulting Company Pricing
HR consulting is typically provided hourly, ranging from $125 to $200 per hour. Services can also be bundled into a package for a fixed price—such as a package price to conduct training, hire staff members, or manage benefits enrollment. Or, you can purchase a fixed number of hours of consulting services per month. Here are two companies with pricing information as examples:
Jumpstart-HR charges $150 per hour for HR project work, and offers a $5,000 small business package that includes setting up an employee handbook, forms, and files with five hours of consulting included. They also offer a monthly package that costs $2,500 per month, covers a set list of tasks, provides you with a dedicated HR person, and allows unlimited phone calls from employees who have HR questions.
Employers Advantage charges a flat rate of per month (for example, $995 per month), or prices each project separately, such as $1,400 to create an employee handbook or $225 to write a job description. They’ll also manage your recruiting for a low rate of 10% of an employee’s first-year salary if you sign up with them. And if you need additional consulting, their hourly rate is only $110.
HR Consulting Company Features
An HR consulting firm can provide everything people-related, from compliance to paperwork. They will serve as your HR advisor to ensure your business is on track and help you reduce the risk of labor law violations by setting up best policies, procedures, and practices. Most offer phone consulting as well, serving as your go-to resource for all employee-related matters.
Some of the services include:
- General HR consulting available by phone
- HR projects like creating job descriptions or conducting a personnel file audit
- Helping you choose which HR systems and processes to set up
- HR strategy to help you plan for growth or improve employee productivity
- Training your managers and staff
- Helping you recruit and hire new employees
- Setting up employee benefits, compensation packages and other programs
- Helping you manage employee leave programs
How to Find an HR Consulting Company
You can find an HR consulting company online, or go to SHRM and search their vendor directory (shown below) for consulting firms by type. Many HR firms specialize in a particular HR discipline, such as payroll services. However, we found Jumpstart-HR, Employers Advantage LLC, and BRL HR to be three good HR consulting companies that focus specifically on small business HR needs, like setting up HR policies, practices, systems, and tools.
Downsides of an HR Consulting Company
One downside of an HR consulting company is that they rarely offer an end-to-end solution. Each company tends to specialize in what they do best, such as business startups, recruiting, or labor law compliance. Therefore, when you work with an HR consulting firm, you need to be clear on what services you need, so you don’t end up paying for more or getting less than expected.
Best Low Cost HR Outsourcing: Online HR Software
We recommend online HR software as best for those who want an end-to-end solution and don’t mind serving as their own HR/payroll professional. HR software will typically have the lowest price options for small business HR outsourcing. HR software has the labor and compliance information built in and includes the added benefit of managing all your employee data, from new hire paperwork to benefits and payroll in one place.
Online HR Software Pricing
Pricing for HR software varies from $10 to $100 per month or more. Some vendors add a few dollars per month per employee on top of the monthly service fee—from $2 to $12 per employee. In addition, HR functions are built into many benefits and free payroll software programs as well; when you buy or subscribe to those software packages, you get the HR compliance features included.
Online HR Software Features
Online HR software provides the system and tools to track everything related to your employees, from onboarding documentation like I-9 forms to performance management. Others add benefits and payroll at nearly the same price point. All the data is stored online in a cloud-based system that typically provides your employees with some level of employee self-service, via the internet or mobile app.
Some of the other features include:
- HR onboarding and processing of new hire paperwork
- Benefits enrollment and confirmation of benefit options chosen
- Timekeeping and payroll processing, compliant with US labor and tax laws
- Access to employee contact information, and sometimes org charts
- Employee self-service to update their personal information and download documents
How to Find HR Software
Here are links to our software reviews and vendors for various (and often overlapping) categories. Some of these HR, benefits, and payroll software options provide HR consulting as part of their package or as an upcharge. You could also use a website like CompareHRIS to search for HR software.
HR software can automate many time-consuming and complicated tasks. Zenefits is a great solution for small businesses and offers easy employee self-onboarding; benefits selection and management; automatic tax calculation and filing; and integrated payroll, time-tracking, HR compliance assistance, and more.
Downsides of Online HR Software
What’s often missing when you purchase online HR software is a dedicated HR expert like you would have with a freelance HR consultant or HR consulting firm. While the labor laws are baked into the software, if you have questions (such as whether to classify an employee as a W-2 worker or a 1099 contractor), you may have to call into a call center, or email the question and wait for a response.
Some HR software companies will offer a call center for support. A few will provide HR experts (typically for an upcharge), but you’re often just getting the software, not full HR service, so you will still need to serve as the on-site HR person.
Best HR Outsourcing for HR Compliance Consulting: HR Service Provider
We recommend an HR service provider as a step up from software alone to ensure your company is compliant with all labor laws, especially if you’re in a regulated industry that requires licensing, safety, and certifications such as banking, healthcare, or manufacturing. An HR service provider is not a co-employer like a PEO but provides the benefits of an HR expert at your fingertips.
HR service companies are often the same ones that offer software as a stand-alone service. They provide HR services in addition to the software for an up-charge—for example, running payroll, setting up and educating employees on benefits offerings, or helping you manage employee leave programs.
HR Service Provider Pricing
Pricing for HR services runs a bit higher than software alone—between $10 and $74 per month plus an extra $2 to $12 per month per employee. What you get in addition to the inclusive software is expertise that can help you resolve employment issues. Some HR service providers base their price on the number of phone calls you make per month, others on the number of employees you have or services you need. For example, if you need them to help recruit and hire staff, that often costs extra.
HR Service Provider Features
HR services, like software, provide the system and tools to manage hiring, payroll, benefits, and performance management. They also provide self-service features to allow employees access to their own information, like benefits providers or 401(k) balances. But in addition to best-in-class tools that are easy to use, HR service companies are advisors to you and your staff, helping you manage day-to-day HR issues that come up.
Some service features they may offer include:
- HR, benefits, payroll, tax and labor law compliance
- Applicant tracking and recruiting
- Dedicated help answering complex HR questions you or employees may have
- Standardized forms, policies, and templates you can customize
- Assistance in updating org charts, job descriptions, and job postings
- HR compliance training so that managers and employees can abide by labor laws
- Strategic HR consulting to help you structure your organization for growth
How to Find an HR Service Provider
Fit Small Businesses provides reviews of many of the top HR service providers on our website. In addition, if you’re already using an HR, benefits or payroll company, you might want to ask your sales rep if you can add HR consulting services to your package..
Downsides of an HR Service Provider
Unlike HR software that lacks dedicated HR support, you get the benefit of a consultant. However, it may not always be the same person, and you may have to navigate a phone tree if your question is payroll-related versus benefits-related, for example. HR services cost a bit more than software alone, but still much less than a typical PEO or a full-time HR person. However, unlike with a PEO, you, as the employer, retain all employment risks.
Best Full Service HR Outsourcing: PEO
A PEO is a company dedicated to managing your employees. It’s best for small businesses that want to outsource most everything related to HR, benefits, and payroll. For HR outsourcing, a PEO provides the most value but comes with the highest cost. That’s because a PEO hires your employees and leases them back to you for a fee. Learn more about how a PEO works.
ADP TotalSource is a top PEO that provides HR onboarding, payroll and tax processing, and benefits administration. Using ADP’s mobile app, employees can also access self-service features, including timekeeping and benefits.
PEOs are priced in various ways. Some cost as little as $49 per month per employee. Others charge between 2% and 6% of employees’ annual salaries. PEOs based on a payroll model, like ADP, are priced based on how many payrolls you run, costing less if you pay monthly than if you pay weekly. It’s not uncommon to pay $100 to $200 or more per month per employee if you offer health benefits, a 401(k), and use the extensive service offerings of a PEO.
PEOs are a co-employer, which means they hire your employees and then lease them back to you. In doing so, they manage all the people, paperwork, forms, legal documents, payroll, taxes, workers compensation, and insurance as examples. Your job is merely to manage the day-to-day supervision of the employee, such as their schedules, and provide feedback on their work.
Some other benefits of a PEO include:
- They manage the hiring process, onboarding and all new hire documentation and forms
- They provide employee benefits to include health insurance and retirement savings
- They manage all payroll, and often provide a system for timekeeping
- They deal with labor issues, helping prevent discrimination and reducing risk
- They provide year-end tax documents, like W-2s, 1099s, and all tax reporting
- They handle workers compensation, unemployment claims, and garnishments
- They have HR, benefits, payroll, and labor law compliance experts on staff to answer your questions, as well as questions your employees may have
- They typically provide online self-service options for employees to maintain their own information as well as download documents they need, like pay stubs and W-2s
How to Find a PEO
Check out our article for side-by-side comparisons of the Best PEOs for Small Business or use the PEO Compare website. If you think a PEO might be right for you, but need help on choosing the best one for your company size, location, and industry, consider working with The Huldisch Group. They provide free consulting to help you find the right PEO.
Downsides of a PEO
There are few downsides to using a PEO, other than it’s one of the more costly HR outsourcing options. In addition, they’re not on-site with you, so you’ll still need to be the go-to person to answer some employee questions. Since you’ll be in partnership with the PEO, you need to be aware that they’ll be firm about HR best practices like avoiding discrimination in hiring, or wrongful termination.
6 Questions to Ask When Outsourcing HR
Once you decide to outsource your HR function, take stock of your own abilities and interests so that you don’t outsource parts of the job that you enjoy or prefer to manage on your own. For example, if you want to interview and onboard every new hire yourself, there’s no need to pay someone to do that. Or if you already manage your own accounting and want to track the funds that pass through payroll, then payroll may be a part of the HR work you want to retain.
Here are questions to ask a vendor when outsourcing HR:
1. What is your HR background, or the background of the HR staff who work as consultants?
Are they HR-certified? What kind of training do you (or they) have to keep their HR skills up-to-date? You want to be sure the HR vendor you choose is knowledgeable and up-to-date on HR and labor law in your location.
2. What other small businesses do you support and in what industries?
You want to verify that the HR provider understands your company size and industry so that you don’t have to explain basic concepts to them like shift work, piecework, industry certifications, or paying by commission.
3. What is the range of services you provide?
Start-up HR, strategic HR, or both? Do you work side-by-side with our business, or do we need to contact a call center to get support? Make sure the services they offer match what you want. For example, when they say they do recruitment, do they source and screen candidates for you, or merely provide you with an applicant tracking system to track candidates you’ve sourced yourself?
4. Do you have best practice tools and templates for customization?
For example, can I download templates for an employee handbook, policies, and forms? Beware of any HR outsourcing firm that wants to create these documents from scratch and charge you to do so. Most should have existing templates that can be customized for your specific business.
5. What does your software provide and what programs does it interface with?
Or if you don’t provide software, can you help us choose the right combination of programs for hiring, payroll, benefits, applicant tracking and so forth? You’ll want to make sure they recommend affordable software or provide software that has interfaces to your general ledger or other business software and communication tools like MS Office or Google Docs.
6. Do you have package pricing, and what does it include?
If you need assistance outside of the services provided in the package, such as for an HR project or to help with an HR issue, what is their additional per-hour rate? Knowing rates up front can help you budget and prevent you from being blindsided by upcharges.
4 Pitfalls to Avoid When Outsourcing HR
Because HR outsourcing companies can be a person, a vendor, or a group of consultants, you need to do your due diligence and have a contract to clarify terms and expectations. A few pitfalls to watch for are ensuring the outsourced firm has the HR expertise you expect, transparent pricing, that you agree on who owns materials created, and that confidentiality is maintained.
Verify that the HR outsourcing person, firm, service or software has the expertise you need. For example, if you hire an HR consultant out of Ohio, but have employees working in California, be sure that person is aware of California labor law so HR mistakes aren’t made due to California’s stricter requirements.
Or if you need someone to help you as you buy an existing business and take on their employees, make sure your HR outsourcing company can manage the people-transition activities involved. You don’t want to sign up for a package only to find out the company can’t service your change management needs.
Ensure that whatever price you agree on doesn’t include upcharges. On the flip side, read your contract carefully, as sometimes providers will include extra services your small business doesn’t really need or want yet, like talent management or HR file audits.
Be sure that you retain the rights to all HR materials, such as templates and forms, and can access data stored by the vendor in case the HR outsourcing relationship doesn’t work out. If you choose to switch vendors, you’ll need access to at least three to five years of historical data for employees, payroll, benefits, taxes, etc.
By nature, HR folk and outsourcing firms understand data confidentiality and are compliant with laws like HIPAA. However, you will have a relationship with this outsourced entity, and don’t necessarily want them using your employee data for unintended purposes, such as recruiting, or using your company proprietary business information to solicit new clients.
Still Have Questions?
Have a question about choosing the right HR outsourcing option for your business? Our analysts are standing by to answer!
The Bottom Line
The best HR outsourcing option for your business is the one that matches your HR needs. HR outsourcing is much less expensive for a small business than hiring a full-time HR person—whether you choose to work with a consultant or manage HR yourself with great software. In fact, until your company gets closer to 100-200 employees, a full-time HR person may not be necessary (unless you’re in a unionized business, plan rapid growth or have lots of labor issues).
We find Zenefits to be a great HR outsourcing vendor for small businesses and startups since they provide both the software and the tools, in addition to having HR experts on staff to provide consulting support when you need it.