Is outsourcing HR the right move for your small business?

For small businesses, the HR function can be expensive. Even more expensive, though, are the mistakes that can happen when there's no HR guidance from a professional.

by Diane Faulkner
updated May 11, 2023 ·  3min read

According to Glassdoor, the national average salary for a human resources director is $82,000. For a small business, that's pretty steep — so much so that most small business owners simply take on the HR duties themselves or rely on trusted admins. After all, HR is only needed when there's hiring to be done and payroll to be processed. And, in a small business with more of a family atmosphere, there's little probability of lawsuits, or so some might like to think.

That's actually a dangerous attitude to take, according to Christine Nichlos, founder and CEO of People Science. In her company's recent poll, "a resounding 60-plus% [of respondents] said it was a lawsuit that prompted them to hire their first HR."

While a small business may not have the full workload necessary to bring on in-house HR personnel, small business HR outsourcing should be seriously considered.

Brian Calciano, attorney and co-founder of Florida-based Calciano Pierro, agrees. "Most businesses under 100 employees, under 50 especially, may not have the resources or the work required to justify having an in-house HR person, but they still need that review, that professional guidance."

Is Outsourcing HR the Right Move for Your Small Business

What is HR outsourcing?

HR outsourcing involves bringing in a third party to assist with or facilitate all or some HR functions.

A recent study by Kelly Services showed that 36% of all employers outsource part or all of the HR function, and the trend is growing. The most outsourced functions are payroll (56%), recruitment (49%), and benefits (40%), followed by training, compensation, HR information systems, and performance management.

Why consider outsourcing HR functions?

When you start your business, your priority is to bring on people who can help you build your product or service, helping grow the bottom line.

"For a small business without a dedicated HR resource, having this resource allows [the company] to scale more efficiently, bringing expertise into the organization, saving current team members time, and without adding to headcount," says John Bernatovicz, founder and president of Willory. "For small companies that do not have in-house HR expertise, outsourcing is a great start for initial strategy, structure, and tools."

HR outsourcing costs and benefits

Business buyer's guide reports that HR outsourcing costs $50 to $1,500 per month depending on the number of employees and the services needed. For that, your company can receive help with:

  • Background screening
  • Drug screening
  • Employee assistance
  • Employee counseling
  • Healthcare benefits
  • Payroll services
  • Performance management
  • Retirement planning
  • Risk management
  • Temporary staffing

According to Bernatovicz, dedicated HR personnel can also bring to your company the expertise to develop more robust compensation strategies, assist with HR audits, and train you and other staff on best practices in HR.

Disadvantages of outsourcing HR

The biggest disadvantage of outsourcing HR is that you "are not going to have the level of familiarity with the business and a knowledge of all those interpersonal relationships and dynamics within the organization," Calciano notes.

Nichlos says it's imperative to make sure you check references and get to know whoever is going to be assigned to work on your HR. An important aspect of vetting is piloting. "We do pilots with companies first so they get to know us, and we get to know them," Nichlos says, noting that this helps ensure that you and your HR personnel are on the same wavelength. "You need to make sure whoever you're signing has the same business acumen as you and has a [big enough] arsenal of services to support you."

"It can be challenging for a business owner to recognize the importance of working with an [outsourced] HR professional or attorney," Calciano says. "The problem is people don't know what they don't know. So, anyone who reads this article, don't wait until something cruddy happens to say, 'Well, now I know why I need an HR professional or lawyer on standby. You want to fix the roof while the sun is still shining."

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About the Author

Diane Faulkner

Diane Faulkner is a ghostwriter, content marketing strategist, and editor based in Jacksonville, Florida. She specialize… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.