Outsourcing HR Services and Risk
August 6th, 2013 by Mike Yoder
Business owners have to take risks to grow, but not all risks are worth the gamble. When it comes to outsourcing HR services, as with all business decisions, smart entrepreneurs and owners take calculated risks — not leaps of faith.
Risks worth considering
The kind of risk business owners like and should be willing to take should feel more like opportunities to gain than to fail. A cost-benefit analysis should be applied to any situation from which you could lose. For example, insurance is a hedge against risk. You make payments to your provider so that you reduce liability for things such as property damage. Other such risks worth considering include things including
- moving into a new market
- purchasing new software
- changing processes or systems
- increasing your marketing budget
Risks to avoid — always
On the other hands, some risks are fraught with danger, with no benefits available. Anything in your business related to taxes or your company’s general welfare isn’t worth the gamble. If you don’t have general liability insurance, for example, serious company-killer risks can emerge. Simple errors and omissions can put your company at considerable risk.
HR Risk Management
If you are considering outsourcing HR services, the big questions to ask yourself are:
- What are my responsibilities and risks as an employer?
- What are my risks and responsibilities if I outsource?
From a HR professional’s perspective, employers carry three major areas of risk.
1. IRS/TAX COMPLIANCE. When issues of compliance and withholding funds for tax purposes come into play, there is no benefit to being risky. The short-term effects of mishandling tax issues include penalties and additional taxes. This is also where audits with employee classification come into place. If you have misclassified someone as an employee or contractor, you can owe back wages, benefits and taxes, and may be required to pay interest and penalties.
WHEN YOU OUTSOURCE: A full-service PEO collects and passes on payroll taxes, workers’ compensation payments and other IRS-related items so the employer doesn’t assume all of the risk involved. While you can’t outsource every aspect of IRS liability because you still have some control over your workers and workplace, you are receiving consulting advice on statutes, which helps you make smart HR decisions.
2. EMPLOYMENT LAW. Federal, state and local employment laws can be a hairy, complicated combination of rules and requirements. Compliance issues cover employee handbooks, required signage in workplaces — workers’ compensation, employee rights, minimum wage amounts, etc. — and processes related to hiring, disciplining and firing employees. If you aren’t diligent, you can end up with fines, penalties, lawsuits related to wage/hour issues or discrimination, attorney’s fees, lost business and opportunities. These are company-killer issues you don’t want to risk.
WHEN YOU OUTSOURCE: When you outsource these kinds of legal compliance items, you are obtaining access to the knowledge and experience to reduce your risks of legal liability.
3. COMPANY CULTURE AND RETENTION. If you choose to cultivate and manage your company’s culture and manage employee retention on your own, you should expect to spend a lot of time and money to do it well. You want to train your team to be their best, and you want to keep them on the payroll. A lot of studies show that replacing an employee is often as expensive as a full-year’s salary of that employee. Between ending a relationship with one employee, and recruiting, training and getting up to speed a new employee, you are losing precious time and opportunities — plus the financial burden of that process.
There’s a real financial cost to creating the right place to have the right talent. An engaged employee is going to be a more valuable employee. In fact, a Gallup poll of more than 17 million employees showed that engaged employees are more profitable, productive, customer focused and safer. If you aren’t doing everything right when it comes to support your company culture and retention rate, you are definitely carrying serious risk.
WHEN YOU OUTSOURCE: A PEO is a full-service human resources service provider, which means it doesn’t stop at legal compliance and payroll issues. It provides consulting and direction to ensure your company’s goals are being supported by a strong culture, and engaged employees are keys to that overall picture. If you outsource the risk related to building and maintaining a valuable culture, you are putting those responsibilities in the hands of professionals who know that the occasional ice cream social isn’t going to prevent employees from finding other employers.
What are your responsibilities and risks as an employer? What are your risks and responsibilities if you outsource? If you would like to learn more about how a PEO can reduce your risk, please contact me, Mike Yoder, at 317-585-1688.
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