If you’re like many entrepreneurs, you know what human resources is and you probably know that it’s a responsibility you must take on before hiring your first employee. However, you might not know about all the options there are for managing your HR. Let’s walk through some of these options, outline the advantages and disadvantages of each, and give practical tips on how to decide which option is best for your business.
HR option #1: Handling HR yourself
Many business owners start their journey as an employer by handling HR themselves or by having a member of their team—such as an office manager or in-house accountant—handle basic HR tasks such as payroll and new employee paperwork.
Advantages of handling HR yourself
- The perception that you have greater control: If you have the time and desire to be involved in the HR aspect of your business, then handling basic HR duties in-house can satisfy your need for control.
- The perception that this is the most inexpensive alternative: Obviously, doing HR yourself or assigning it to someone whom you are already paying can save resources, at least in the short-term. If your business is very small and you plan to keep it that way, this may be a viable option for you.
Disadvantages of handling HR yourself
- Takes the business focus away from the company’s core responsibilities: Most business owners do not start a company because they are passionate about HR. Business owners take the leap to start a company to build a product or perform a service they’re good at. That is where you should be focused, not on managing HR.
- Difficult to scale: When an employer has a handful of employees, they may be able to keep some level of control over their company’s HR needs. But what happens when business starts booming and they then have more employees than they are prepared to handle?
- Compliance risk: There are thousands of employer-related rules and regulations that affect small and midsize businesses (SMBs) and they are constantly changing. Even though there is no way a single business owner can keep abreast of all these laws, they are still responsible for abiding by them. The result of non-compliance with rules and regulations can be disabling. Penalties for non-compliance can include hefty fines, lawsuits and criminal charges. For this reason, in-house HR can be very risky for a small business.
- Limited expertise: We can all agree that HR is a difficult topic to master. For example, are you on top of the constant changes to the Affordable Care Act? Do you know what to do if one of your employees files a sexual harassment claim against their manager? Do you know how to create an employee manual or even why you need one? While designating someone in-house to “pinch hit” may serve as a band-aid, a lack of expertise could create additional challenges for your organization.
HR option #2: Hire an in-house HR team
Another option is to go beyond option #1 and to keep HR in-house by hiring someone with skills, training and experience in HR (or a team of HR professionals) who works for your company and focuses strictly on your HR needs.
Advantages of hiring an in-house HR team
- Satisfies any desire for control: As with option #1, if a business owner really wants tight control over their HR, this is one way to keep it.
- May make sense for larger companies: For companies with hundreds of employees who are graduating from their SMB phase, it may very well make good business sense, from a cost-benefit point of view, to create an in-house HR department.
Disadvantages of hiring an in-house HR team
- Can be pricey: An experienced and knowledgeable HR professional or a team of HR professionals does not come cheap when you’re the one solely responsible for their compensation. If you don’t have the revenue to justify in-house HR, this is likely not the best option.
- Still takes the business focus away from the company’s core responsibilities: In-house HR means more employees—and managing more employees usually results in less time focusing on your core business.
HR option #3: Outsourcing to multiple vendors
If you’ve decided that handling your HR in-house is not for you, then the clear choice is to outsource. Outsourcing presents two options, each of which we’ll discuss in the remainder of this article. The first outsourcing option is to hire multiple vendors to fulfill your HR needs. This means one vendor to handle your payroll, one vendor for benefits, maybe another to help with compliance and so on.
Advantages of outsourcing to multiple vendors
- Helps with scalability: This option can be more scalable than having in-house HR as you won’t have to worry about hiring and integrating your HR vendors while you’re busy running your business.
- Helps in mitigating risk: Hiring professional vendors for your HR needs allows you to tap into HR expertise that you might not get from handling HR in-house.
- Flexibility in choosing the features you need: Hiring multiple vendors may make it easier to select—and pay for—only the services you absolutely need.
Disadvantages of outsourcing to multiple vendors
- Multiple vendors still create additional work: Just like overseeing an in-house HR team means more work for you, having to juggle several additional service providers can be cumbersome. There’s also the opportunity cost in vendor research and selection.
- May not understand your business: Not all HR vendors understand the particular needs of SMBs or of companies in your industry.
HR option #4: Hiring a PEO as a single-vendor solution
A professional employer organization (PEO) is a single vendor solution that provides SMBs with human resources services such as payroll, payroll tax compliance, employee benefits, workers’ compensation and HR compliance. When working with a PEO for HR services, your company enters into a co-employment relationship.
Under a co-employment business model, employment-related responsibilities are contractually allocated between the PEO and its clients. This model allows the clients’ employees to receive the full benefit of the PEO’s services, including their employee benefit plan offerings. For instance, TriNet clients enter into a client service agreement with us that defines the suite of professional and insurance services and benefits to be provided by us, the fees payable to us, and the division of responsibilities between us and our clients as co-employers. Give TriNet a call for more information on this division of responsibilities.
Advantages of outsourcing to a PEO
- Flexible, scalable: A comprehensive PEO can help your business scale. For instance, TriNet provides a full-service HR solution that includes an HR platform to handle as few as one and as many as 1,000 or more employees. A PEO can also provide employees with access to the same quality of employee benefits that big companies enjoy and the ability to include additional value-added services as your business grows.
- Access to “big company” benefits and experience: More high-quality benefits options for employees and their families enable PEO clients to attract and retain key talent that might otherwise choose to work at larger, more established organizations. A PEO can help you offer your employees:
- Healthcare benefits
- Retirement benefits, including 401(k) plans
- Additional value-added benefits such as wellness plans, AFLAC and even pet insurance.
- HR expertise: Another major advantage of engaging with certain PEOs, such as TriNet, is it affords the employer assistance with the individual HR questions, needs and changes of their employees. An HR expert can answer the more difficult questions, giving your employees guidance on things like benefits, performance issues and best practices for leadership. They can also help with important HR needs such as handling harassment claims, creating or updating your employee manual, and keeping abreast of constantly changing federal, state and local employment rules and regulations that affect your business.
- Ongoing HR compliance support: The modern employer is responsible for maintaining compliance with thousands of employer-related rules and regulations. The right PEO can help you mitigate the risk involved with this overwhelming task by providing you with tools such as workplace safety and harassment-prevention guidance, employment practices liability insurance and guidance on compliance with the Affordable Care Act.
What to look for when selecting a PEO
No two PEOs are the same. If you decide that the PEO option is right for your business, it’s important to perform your due diligence before selecting a PEO. Here are some things to consider:
- What products or services are included?
- Does the pricing make sense? In the PEO market, a price that looks too good to be true probably is. Low initial introductory rates may increase within a short period of time. Find out what the pricing is based on. Consider what services you’d like to invest in and shift to a PEO. Weigh the cost of partnering with the PEO against how much it would cost you—in money, time and possibly disastrous HR mistakes—to try to perform HR tasks internally. When it comes to PEOs, the cheapest option frequently isn’t the best one.
- Verify their accreditation. PEOs are part of a regulated industry and organizations such as the Employer Services Assurance Corporation and National Association of Professional Employer Organizations monitor PEOs for adherence to important financial, ethical and operational standards.
- Geographical coverage. Be sure to confirm the PEO can serve your business in all cities, states and jurisdictions where you have employees.
- Understand the transition process. Does the transition process involve training? What are the expectations for you as a client?
- Look for enterprise-level employee benefits options. Employees need a PEO that has a stable healthcare provider network and modern administration systems.
This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.
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