How to Outsource HR & Benefits Administration

As a small business owner, you must comply with employment regulations. If you offer your employees benefits, such as health insurance and retirement plans, you must properly administer those programs. Human resources employees establish workplace policies and oversee employee benefits. Some employers hire an onsite HR staff to perform those functions. However, more and more employers are outsourcing their HR and benefits duties.

When to Outsource

You might consider outsourcing if your in-house HR staff lacks knowledge of employment laws, you have an increase in employee complaints, you need help motivating your employees and providing them with useful feedback, or you lack effective written policies and procedures. You also might outsource if you have high employee turnover or multiple employee lawsuits, or received fines from government agencies for non-compliance. In addition, if you need help hiring and retaining quality workers and setting competitive salaries and benefits, it might be best to outsource and use a company specializing in those areas.

Level of Service

You must decide what level of service you want the provider to perform. For example, you could outsource repetitive HR duties such as company policy development and maintenance, yearly open enrollments, benefits program implementation and new employee background checks. Or you may outsource all of your HR and benefits duties, including recruiting and new hire and termination processes.


If you currently outsource your payroll duties to a payroll service provider, see if the provider performs benefits administration as well. You might receive a discount from the provider due to the volume of your business. Some small business employers outsource their payroll duties to a payroll provider and their benefits tasks to a third-party administrator. In this case, the employer hires one internal person to serve as a liaison between the payroll provider and third-party administrator and to perform onsite HR tasks. In all instances, it is best to have at least one competent HR person onsite so employees have someone to approach with questions and concerns.

Employee Leasing

Another alternative is a Professional Employer Organization, also called employee leasing. With this method, you and the PEO enter into a contract that places your employees on the PEO’s payroll and leases the employees back to you. The PEO serves as the official employer and administers your HR functions. You pay the PEO directly for its services. PEOs must meet some state-specific requirements to perform employee leasing services. You may contact the state labor department to confirm whether a leasing company has the required licensing. Leasing companies generally have the buying power to get low benefits rates for their clients.


The key to selecting a provider is to determine your needs and choose the company that best suits your requirements. Use a firm with experience in providing solutions to businesses of your size. If you need help with a variety of duties, go with a company that has a diverse staff with broad knowledge of HR and benefits administration. Before quoting you fixed or hourly rates, the company should physically assess your records, processes and systems.


All agreements you make with the provider should be in writing, including fees and services. Ensure the contract specifically states who is liable for mistakes the outsourcing company makes. This is particularly important if the company makes an error that causes non-compliance with federal, state or local law. A good outsourcing firm absorbs penalties when it makes the error.