What Is Human Resource Outsourcing (HRO)? Types & When to Consider

Human Resource Outsourcing (HRO): Definition and Types

Human resource outsourcing (HRO) is the act of hiring a third-party provider to handle your human resources administrative tasks and functions. These can include HR administration, benefits management, payroll processing, recruitment, and more.

Some common types of outsourcing that fall under the main umbrella of HRO include:

• Professional employer organization (PEO): A PEO is a co-employment relationship with a third-party vendor that handles all HR, benefits, and payroll functions for your company
• Employer of record (EOR): An EOR acts as the financial and legal entity to handle all HR, payroll, and benefits for employees.
• Recruitment process outsourcing (RPO): An RPO is a third-party vendor that handles all recruitment and hiring for your company.
• Administrative services organization (ASO): An ASO is an outsourced third-party provider that handles all administrative tasks for your HR department, such as payroll, benefits management, and compliance.
• Contractor management organization (CMO): A CMO is an external provider responsible for managing all aspects of your contractor relationships, including onboarding, compliance, and project management.
• Human resources consulting company: An HR consulting company is a third-party provider that handles most, if not all, of your human resources functions for you. They also can provide consulting services for your existing HR department to ensure compliance.
• Individual HR consultant: This is a person you hire (most likely a contractor) who serves as a consultant to your existing HR department, helping them with everything from creating policies to securing employee benefits.

Commonly Outsourced HR Functions

Certain functions of human resources are outsourced more than others. Typically, they are the functions that require legal compliance, such as background checks, employee benefits, and payroll. Others are time-consuming functions, such as recruiting, performance management, and time-tracking.

The most commonly outsourced HR functions include background screening, employee benefits, employee relations, learning and development, payroll administration, performance management, policy creation, recruiting, risk management, tax administration, time tracking, and workplace management.

Background Screening

Part of the hiring process is conducting a background check on potential employees. By outsourcing your background screening to a company equipped to handle all aspects of the screening, you will have time to manage other important internal HR functions.

Background check companies will verify resumes, identities, and personal backgrounds. They can also provide drug screens, credit checks, employment verifications, and criminal background checks. For an in-depth look at the best background check companies, check out our guide.

Employee Benefits

When you outsource your employee benefits management, third-party providers will handle open enrollment, claims processing, ACA tracking, and even COBRA administration. HR outsourcing companies can also find top-tier healthcare providers to offer to your employees at low costs, while still providing high-level benefits. Some of the major types of benefits that can be outsourced include healthcare, 401(k), insurance, and paid time off.

With rapidly changing trends, an outsourced benefits partner can adapt and configure benefits to reflect current market demands. This ensures both compliance and attractive benefits packages that are relatable to the needs of your employees.

Employee Relations

Hiring a professional human resources mediator can help improve your employee relations. These services provide counseling and conflict resolution sources. By outsourcing this component of human resources, you will get an unbiased opinion of situations from someone who can be objective and provide an outside perspective.

Key areas of employee relations that can be outsourced are:

• Management of workplace issues
• Handling grievances
• Resolving conflicts
• Disciplinary action
• Labor relations
• Attendance issues
• Employee support
• Performance issues

Learning and Development

Many companies choose to partner with an external vendor that can create, manage, and distribute training materials to employees. This will save you time and money by outsourcing this, as you will not have to build the materials in-house.

One overlooked advantage of outsourcing your learning and development process is the ability to gather insights from various industries. External vendors bring diverse experiences that can inspire unique training modules.

Investing in development programs through outsourced solutions creates a culture of lifelong learning. It not only enhances employee retention but also positions companies as forward-thinking leaders committed to nurturing talent in a competitive market.

Payroll Administration

A lot of companies outsource payroll processes, especially when their HR employees are not well-versed in running payroll and legal and tax compliance. Some processes include:

• Calculating wages
• Processing tax payments
• Collecting time and attendance reports
• Processing payroll
• Processing direct deposits
• Handling unemployment claims

Performance Management

Outsourced performance management can offer insights into industry trends and provide tailored solutions to ensure that your performance management processes are aligned with your overall business strategy.

Policy Creation

Creating policies is a main task of your human resources department. It ensures your employees understand what is expected of them and your business is covered legally. When outsourcing this aspect of HR, you hire a third-party provider that is equipped to not only create the policies for you, but align them with federal, state, and local employment laws.

Some policies to consider outsourcing include:

• Employee handbook
• Sexual harassment policy
• Hiring policy
• Independent contractor agreement
• Employee attendance policy
• Regular paid time off policy or unlimited paid time off policy
• Moonlighting policy
• Flexible work schedule policy
• Employment contract

Recruiting

Outsourcing your recruiting efforts is helpful, especially if you have a human resources department of one. A recruiting service can help create job descriptions, post open positions for you, and handle all hiring processes, from reviewing resumes to interviewing potential candidates.

You can opt to have the recruiting service handle everything and provide you with viable candidates to hire. Or, you can have them find candidates for you, and you handle the interviewing process and hiring.

Risk Management

An external company can help you identify and assess possible risks within your human resources department. They can help with employment law compliance, workforce diversity planning, and employee safety.

A risk management provider will follow these five steps to help mitigate risk within your HR department:

• Identify risks
• Analyze risks
• Evaluate and prioritize each risk
• Treat risks
• Continuously monitor risks

Legal Compliance

As part of risk management, outsourcing the legal aspects of your HR will ensure you are compliant in all areas of human resources. A third-party provider can help with all federal, state, and local employment laws, develop compliant policies, and ensure adherence to regulations.

Some things legal compliance outsourcing can help with include:

• Review and development of policies and procedures
• Set up of tax entities
• Audit HR processes
• Risk mitigation
• Safety compliance
• Contract compliance

Workplace Safety

Workplace safety encompasses all safety measures at your company, including workers’ compensation insurance, managing claims, safety manuals, safety inspections, and safety training. By outsourcing your workplace safety, a third party handles this aspect of your company’s risk management strategy.

For example, outsourcing workplace safety training can be a significant cost and time-saver if you’re a small business in a high-risk industry like construction and manufacturing. Third-party safety companies give you access to innovative training methods, like workshops, virtual reality, and enhanced technology, plus fully-created courses and lesson materials.

Vendors also have the ability to personalize training materials. Personalization not only boosts engagement but also ensures that employees recognize potential hazards relevant to their roles. This, in turn, creates a safer work environment tailored to both company expectations and employee feedback.

Tax Administration

Handling taxes can be complicated, and if you don’t get it right, it can be a legal nightmare. Outsourcing your tax processes can ease the legal burden for your company and ensure filings are done correctly. These professionals stay ahead of shifting regulations and emerging trends, ensuring a seamless navigation of tax law complexities.

Tax administration outsourcing can help with:

• Tax filing
• Accounting processes
• Tax compliance
• Penalty avoidance

Time Tracking

Time tracking is typically done in-house; however, if you outsource this service to a qualified provider or software, you can save time and ensure your time tracking is accurate and ready for payroll processing. It is a way to optimize productivity without diverting resources from core operations.

Using outsourced time tracking introduces advanced technology and expertise that might not be readily available in-house. It provides access to sophisticated tools, like AI-driven analytics, which offer deep insights into workforce efficiency. This type of data empowers leaders to make informed decisions about resource allocation and project management.

Workplace Management

Outsourcing your workplace management can free up time for other business needs and help improve efficiency, employee engagement, and productivity. And, it can even have financial benefits as you plan for the future workforce needs in your business.

Examples of workplace management aspects you can outsource include:

• Asset management
• Diversity, Equity, and Inclusion (DEI) initiatives
• Labor planning
• Scheduling
• Succession planning

When to Consider Outsourcing HR Functions

When evaluating whether to outsource your human resources, one clear sign is the overwhelming burden of administrative tasks that distract you from strategic priorities. If your HR team spends more time on paperwork and compliance than on talent development and company culture, then it may be time to consider external support.

Some reasons you may need to outsource include:

• Top-tier benefits: Finding comprehensive benefits plans takes away from tasks your HR department may find more critical. A third-party vendor can help find the best plans available, depending on the size of your company. Additionally, a PEO provider can get large company benefits for your small business at low rates.
• Compliance concerns: Understanding employment law and compliance requires constant research and a certain level of experience and education. If you don’t have an HR professional who understands these issues and how they affect your business, it may be time to find an outside source who can handle it for you.
• Lack of HR expertise: If you don’t currently have an HR department, or the person(s) in charge are not as knowledgeable about the practice of HR, it’s a good idea to outsource this component.
• Rapid growth: If your business is experiencing a period of rapid growth, outsourcing your HR tasks can free up time for focusing on operational changes and recruiting.

Benefits of Outsourcing HR

There are many benefits of outsourcing your human resources tasks and functions.

• Advanced HR technology: HR providers have access to advanced technology to help handle your human resources needs. This includes the software required to process payroll, handle learning and development, and track time and attendance.
• Cost-effectiveness: Although long-term costs could be higher due to subscription or provider pricing, it is more cost-effective to outsource your HR department than to hire multiple employees to handle HR in-house. Additionally, if you hire internationally, an EOR provider will help manage your global employees at a far more reasonable rate than setting up your own entity in each country.
• Increased efficiency: Outsourcing your HR gives you access to specialized expertise and helps streamline tasks like payroll processing and recruiting. This frees up time and resources so your HR team can focus on strategic planning.
• Reduced administrative burden: Since your HR tasks will be handled by an external party, this reduces the need for additional HR employees. It also means your personnel are not spending time on the repetitive but important HR tasks involved in hiring, onboarding, payroll, and benefits administration.
• Risk mitigation: HR service providers are generally more knowledgeable about employment-related laws and regulations. They can ensure your HR processes are legal and compliant while reducing potential risks.
• Scalability: Outsourcing helps companies scale because as your business grows (or shrinks), you can easily adjust your needs without the urgency to hire and train additional employees.

Tips for HR Outsourcing

1. Assess your human resources needs: Take into consideration what employees you have in place to handle your HR functions and what their skill levels are. If you have no HR department or less experienced personnel, you should consider outsourcing.
2. Identify which functions you need outsourced: You may have someone in place who can handle employee relations and maintenance of employee records—however, they may not be skilled in payroll and leadership development. In those cases, outsourcing your payroll and learning and development functions would be beneficial.
3. Select a provider with relevant experience: Once you’ve determined which functions you need to outsource, it’s time to do your research and find an experienced provider that can handle all your needs. Some things to consider are budget, range of capabilities, and how much of your HR tasks the provider will take on.
4. Continuously monitor the provider’s progress: After your provider is in place and handling the needs of your HR department, keep in constant contact with them. I recommend having at least one in-house HR personnel who would be the point of contact with the provider to handle all inquiries.

HRO Frequently Asked Questions (FAQs)

How does HR outsourcing work?

How much does HR outsourcing cost?

What are the positives and negatives of HR outsourcing?