(HRO) Human Resource Outsourcing: Lifting Small Business Burdens

Human Resource Outsourcing (HRO) takes all or some human resources tasks and hires a third-party source to administer it. An HRO might be contracted to conduct payroll and the subsequent taxes associated with it. It could also handle all employee benefits. Unlike a Professional Employer Organization (PEO), the HRO is usually an a la carte service provider, handling what a company needs instead of bundling all services.

The goal of an HRO is to alleviate the stress and time of administering specific human resource tasks for business owners. Doing this frees up time, and mental energy so small and mid-sized business owners can focus on growth and marketing. It can also save money and reduce the overall risk of making mistakes. Take a look at what an HRO can do for you.

What an HRO Is

What an HRO Is

An HRO is an outsourced company hired to handle specific human resources tasks. You may use an HRO to administer various aspects of your business from health insurance, workers' comp, HR and much more. A company might want an HRO to develop patient safety protocol and define the process in an operations manual. Payroll is another human resources task often outsourced to an HRO.

One of the significant factors for more companies utilizing HRO services is the ever-changing regulatory environment as well as the growth of the gig economy. Increased regulations mean more complex administration of many human resources tasks; one error can lead to significant legal ramifications and financial penalties.

The gig economy has made an already-complex human resources environment more confusing with workers around the world subject to various payroll, tax, and health insurance regulations to name a few.

Why Business Owners Use HRO Services

There are two significant reasons to use any number of the services HRO providers offer. The first reason is to protect the small business owner. When it comes to human resources issues, claiming naiveté isn’t going to get a business owner off the hook for penalties or legal action. By hiring an expert in payroll, benefits or any number of human resources tasks, the small business owner is transferring the risk to them to handle it legally.

The second reason is time management. Business owners need to consider their role as leaders. Leaders don’t try to do everything themselves and learn to delegate. Not only does delegation free up time, it demonstrates trust in people to get the job done. When leaders are continually taking on every task, it can reduce their effectiveness.

Effectiveness is seen in the return of investment by hiring an HRO that then allows the business leader to focus on business practices that add dollars to the bottom line. Spend a little to make a lot is the parsed down version of investing in people to build the company.

However, there is a second part of effectiveness that involves the human factor. Most small business owners don’t enjoy administrative tasks. Thus it takes longer for them to complete these tasks and comes with much frustration that can overflow into other areas. Having operations systems in place, such as resource outsourcing is vital to a leader’s effective completion of duties and responsibilities.

Types of Services HROs Offer

Types of Services HROs Offer

A part of every business’ operations is human resources. The administration of this aspect of business management is not intuitive, easy or enjoyable for many small business owners. Human factors are critical to the growth of any company. The role of human resources has moved from record keepers of employees to key talent recruit and retention experts.

In many cases, having an entire department devoted to human resources is not financially practical for a small business owner. By outsourcing, the company can hire experts for less than what it would cost by utilizing internally. It also ensures that all processes and practices remain current.

Payroll Services

Without employees, many business operations stop immediately. Processing payroll correctly and timely keeps employees happy. Without a human resources department, the small business owner is processing payroll. That means calculating not just the hours worked but properly paying allowances for employer-paid benefits, taxes and employee-paid benefits.

They are outsourcing this to third-parties such as Paychex or ADP alleviate the worry about getting it right. These services often charge a rate per check, thus per employee to process payroll. The small business owner is left with two tasks at most: submitting hours and funding the payroll account. In many cases, the hours are automated, leaving one task for the business owner, which is to fund the account. The HRO takes care of the payroll and taxes, including quarterly filing with the IRS.

Recruiting and Candidate Screening

Other everyday HR tasks include finding new hires and screening them. In the modern business environment, an HRO may serve as a modified recruiting agency that takes the job description and need from the small business owner and goes into the marketplace to find the right talent pool. After initial screenings, the HRO then provides the small business owner or manager with the candidates best suited for the position.

This HRO model helps save managers time going through a ton of interviews. By outsourcing, the small business owner can also have appropriate drug screenings, background checks and credit checks conducted before the manager makes a final decision. The HRO model keeps everyone compliant with all relevant employment laws and various regulations.

Employee Handbook Creation

Good human resources administration involves creating a company culture where expectations are appropriately set and equally enforced. Small businesses that take the time to develop and implement an employee handbook are less likely to run into employee problems and more likely to build a positive corporate culture.

One of the many HR tasks that an HRO can assume for a small business owner is the best practices for an employee handbook based on industry standards and company size. Because the HRO works with many companies, it not only has the legal requirements in hand but can help a business owner create best practices that help it maintain its competitive edge in recruiting talent.

Workers’ Compensation Insurance Administration

If a business owner has even one employee, workers’ compensation insurance is a requirement. The only exception is the Texas labor code that doesn’t mandate workers’ comp. There are several components to workers’ compensation that require administration. The first is the payment of premiums and the annual audit that must reconcile projected payroll with actual payroll and confirm the working class of employees.

The second is administering any claim that might occur, serving as an intermediary between the small business, the insurance company, and the injured employee. Managing workers’ comp claims requires reliability from a department that understands privacy, the law, and needs of all parties. Resource outsourcing this HR task keeps small businesses compliant and able to concentrate on operations solutions.

Unemployment Administration

When someone is let go from a company, they are usually entitled to unemployment benefits. Unemployment is paid into a state system through payroll taxes. These HR tasks are often outsourced and managed by an HRO who handles the payroll, keeps unemployment accounts adequately funded and coordinates claims with the state unemployment offices.

Not every unemployment claim is valid. Workers must be unemployed through no fault of their own according to the Department of Labor. Meaning those who quit, were released for illegal activity, or were contract employees may not be eligible. Claims administration is necessary to prevent a dramatic increase in unemployment taxes. The HRO maintains the position of protecting the company from fraudulent claims and responding to the paperwork from the unemployment claims office.

Safety Operations

Formal safety procedures and processes help every company reduce accidents, property damage and potential injury to workers or patrons. While many small business owners understand what is necessary to keep their business and people safe, compiling that into a cohesive safety plan and training program isn’t always as clear cut. The definition of safety goes far beyond situational awareness for hazards around you.

The HRO solves the problem of compiling a plan by meeting with business leaders to develop the right safety protocol based on federal, state and industry standards. It also lays out the expectations in a clear, easy-to-understand safety manual. The manual gets incorporated into operations manuals and also becomes the foundation for safety training sessions. A safety manual addresses simple things like patient safety on the premises to best practices in an active shooter scenario.

Conflict Resolution

Human resources are always in the position of dealing with social factors. Human factors usually mean people with different personalities, backgrounds, and levels of power having a conflict. Conflict resolution, diversity training, and anti-discriminatory practices maintain a positive corporate culture, employee morale and reduce adverse legal action for poor employment practices.

Some small business owners may not feel like they have a personal understanding to address all these topics effectively, let alone compliantly. An HRO should have years of experience in human relations, helping business owners build best practices and procedures for conflict resolution. This could be in the form of written materials, coaching for company leaders or administering conflict resolution between two employees.

Employee Performance and Development

Hiring from within is the best way to build loyalty and cultivate talent that understands your company culture. If a small business owner doesn’t have the time or understanding of how to nurture talent, an HRO can make a difference. It isn’t that the HRO is going to come in and mentor your employees.

However, one of the roles an HRO can serve is to maintain all the employee files and compile information about which employees get the most commendations, awards or complaints. They can conduct personality tests, employee surveys and core competency reviews to identify employees at various parts of the company organizational chart that are great candidates for development and promotion.

HRO versus PEO


An HRO and a PEO are very similar and often confused. An HRO is an outsourced company that gets assigned HR tasks; a small business owner does not want to do. The professional employer organization takes care of HR tasks but does so as a partner to the small business, not third-party resource outsourcing. The PEO is a partner with its FEIN taking liability and ownership of employees who are leased by the employer (you).

The HRO does not have the same vested interest in the small business compared to the PEO. Small business owners remain the employer of record for employees. While the HRO and PEO do many of the same duties, the PEO offers a critical advantage over an HRO: employee benefits.

The PEO Key Advantage

A PEO makes HR task packages cost-effective because they have many companies that they partner with. Because of the number of small businesses partnered with the PEO, there is a bigger employee pool. A larger employee pool reduces healthcare costs and administrative costs for benefits plans. An HRO can’t do this because it isn’t the employer of record.

PEOs have existed since the 1960s but found popularity after the passage of the Affordable Care Act requiring most small businesses to fund health insurance plans on behalf of employees. Without the PEO grouping companies together to offer more affordable coverage, many small businesses would have been forced to close.

Finding Your Human Resources Solution

Every business is unique with its own set of human resources needs. Every business leader has its strengths and weaknesses to think about as well. Consider the costs of resource outsourcing, either partially or entirely, and how much you can turn that into profit by taking HR tasks off your plate.

If you are unsure about the right solution and afraid to get stuck in a world of pitches from various PEO and HRO companies, consult a human resources broker. His job is to find the right solution that fits your company’s needs and doesn’t break the bank.

It is in his best interest to help you succeed without burdening you with services you don’t need. As your business grows, he can help you by removing more administrative tasks from your plate to focus on what is your talent: more significant revenues.