Advantages of Human Resources Outsourcing

By Lyle DeWitt

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JUNE 2005 - Integrated human resources service providers, known as human resources outsourcers (HRO) or professional employer organizations (PEO), can provide more and less in the right circumstances: less as in less liability, lower fees, and smaller benefit hikes, and more as in more choices, more available time, greater competitiveness, and greater overall value. HRO and PEO services have been growing in popularity, especially with smaller businesses, which can leverage such services to compete with larger businesses in terms of employee benefits options and costs.

To stay afloat while healthcare costs continue to climb, many companies either slash coverage options or pass increases on to their employees; both approaches are unlikely to help attract and retain quality personnel. To remain competitive, more companies are outsourcing their benefits programs to third-party providers that can leverage their cumulative roster of participants in order to qualify for substantially lower rates.

Reducing Risk

According to the Small Business Administration, business owners spend up to 25% of their time on employee-related paperwork. Additionally, smaller companies are less likely to have a dedicated human resources specialist. The compliance requirements of 401(k) programs, the ADA, FLMA, and COBRA also represent significant liability issues. Many payroll service companies will claim they offer built-in compliance, but if an employee’s benefits are interrupted because a deadline is missed, a lawsuit might ensue. One major advantage of a PEO-style benefits provider is the limitation on liability; only a PEO will contractually assume most, if not all, liabilities related to the services it provides.

The advantages of contracting a third-party, integrated HRO can go beyond the time and money saved by automating payroll, leveraging group benefits, and handing off liabilities. Returns can include increased satisfaction and retention, for both employees and employers.

Due Diligence

A company must take care in selecting a provider, because not all provide the same quality of service. Useful resources include the National Association of Professional Employer Organizations (NAPEO) website (, as well as

The following are things to look for when selecting a provider:

  • Check client and professional references.
  • Check whether the provider is a member of the NAPEO and accredited by the Employer Services Assurance Corporation (ESAC).
  • Check the provider’s bank and credit references.
  • Understand how the employee benefits are funded and insured.
  • Make sure the employee risk pool matches the employer’s profile.
  • Confirm that participating employees will receive first-day coverage.
  • See if the provider contractually assumes compliance liabilities in the applicable states.

Lyle DeWitt, CPA, is vice president of finance for the national HR services provider the TriNet Group, Inc. (




















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