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Everything You Need to Know About Small Business HR Outsourcing

5 min read

Whether you are a large or small business, HR is a vital part of any company. If you are a small business manager with limited personnel, then you may not have a dedicated HR department to handle all employee-related matters. If that’s the case, then you may want to consider the benefits of small business HR outsourcing. The variety of solutions on offer can help you effectively manage critical areas of your business without putting extra strain on your staff.

In this post we will take a look at HR outsourcing options for your business, including PEO and HR SaaS outsourcing, to help you find the right HR services for small business. We will break down the advantages and costs associated with HR outsourcing to help you find the right cost-effective services for your business. 


What is HR Outsourcing for Small Business?

HR outsourcing is when a company transfers the management of certain HR functions to a third-party provider or scalable software solution. This can include the outsourcing of recruitment and talent development, payroll, and regulatory compliance, amongst other business functions. You can opt to outsource single processes or the entirety of your human resources functions, depending on your individual needs and requirements. 

Many small businesses choose to outsource some or all of their HR functions to save time and money. Legal compliance is another big factor, as you can pass on responsibility to a third party. This then frees up valuable time for you to focus on what matters most: the growth and development of your small business.  

If you are interested in outsourcing your HR functions, then you need to be aware of all the options available. You might decide to outsource to a third-party service provider, which comes with its advantages and disadvantage, or opt for a more cost-effective solution where you still regain control of your processes, such as a SaaS software solution. More on this shortly.

First, let’s take a look at some of the most commonly outsourced HR services for small business.

What are Commonly Outsourced HR Services for Small Businesses?

The most frequently outsourced HR services for small business are payroll, recruitment, applicant tracking, and expense management. Small businesses in the US often choose to outsource benefits programs for health care, including the federally mandated Consolidated Omnibus Budget Reconciliation Act, known as COBRA, and pension and retirement plans. Many companies also choose to outsource their annual company audit as this provides a guarantee that the company is complying with all legal requirements. 

A number of small businesses also choose to outsource additional HR functions including temporary staffing, training and development, performance management, and IT software services. However, this is to a much lesser extent than the previously mentioned HR functions as most companies tend to favor the control that is maintained when these functions are kept in-house.

Types of HR Companies for Small Businesses

There are a number of HR outsourcing options for you to choose from. The service that works best for you will depend on the size of your company, and how many HR functions you want to outsource. It will also depend on whether you want to fully outsource all management and responsibility to a third-party service provider or choose a more cost-effective software solution to streamline and automate your processes so that you can manage them in-house.

Let’s take a look at a few HR outsourcing strategies you can use to improve operations at your business.


A professional employer organization, also known as a PEO, is a third-party HR service provider. You can outsource any of your HR functions to a PEO and they will assume co-employment for employees, taking on a share of responsibility for processes including:

  • Recruiting and selecting new talent
  • Processing employment contracts
  • Determining employee benefits and compensation
  • Payroll processing
  • Ensuring legal compliance

There are significant advantages to using a PEO, especially if you are a small employer with limited resources. However, there are also a number of disadvantages. These include a loss of control of and security over essential processes, a lack of institutional knowledge, and resistance from employees.

Single Source Outsourcing

With single-source outsourcing, you contract a third-party HR service provider to manage the entire employee life cycle, from talent acquisition, hiring and onboarding, to payroll and benefits, timekeeping, talent management, and turnover. 

The benefit of this solution is that it can help reduce costs and ensure compliance. The downside is that you may not be directly involved in the decisions about hiring and releasing employees.

Software as a Service (Saas) 

HR Software-as-a-Service (SaaS) is a software solution that users access via a web browser. Factorial’s all-in-one HR management solution is an example of HR Software-as-a-Service. Also known as cloud HR software, this outsourcing solution offers companies greater organizational agility and provides an opportunity for cost savings compared to third-party outsourcing. 

As a small business, you can use SaaS to automate some of your basic HR functions. Features usually include applicant tracking, payroll applications, performance management, and training and development. Many businesses are choosing to utilize SaaS because of the convenience and flexibility that this option offers.

Advantages of Small Business HR Outsourcing

We’ve already touched on some of the advantages of small business HR outsourcing. Now let’s take a look at some of these benefits in a bit more detail.

  • Saves you time and money: instead of spending all your time managing administrative tasks, you can focus on business productivity and long-term strategy. This has a direct impact on your future ROI.
  • Legal compliance: the right solution can help you stay compliant with constantly evolving HR compliance laws and regulations. This includes labor and employment laws, insurance claims management, and federal timekeeping requirements. By doing so, you will avoid any potential HR legal issues, including hefty fines and penalties. 
  • More focus on core operations: by outsourcing basic transactional duties that can be easily automated and managed with software, such as timekeeping and payroll, you can prioritize HR functions such as training and development, employee communication, and performance management. 
  • If you decide to implement an all-in-one software solution as an alternative to outsourcing to an external supplier then all your processes will be fully integrated and aligned with each other, ensuring everything runs smoothly. For example, you can create an automated HR compliance checklist or an audit checklist to keep you ahead of the game and avoid any nasty surprises.  

What is the Cost of Small Business HR Outsourcing?

The cost of small business HR outsourcing can vary greatly. You need to consider the size of your business, your needs and expectations, and the solution you opt for. 

For example, in the case of PEOs, they often charge per employee or as a percentage of payroll. If you are a growing company then this could have significant cost implications further down the line. There are also usually additional processing fees that you need to take into account (PEOs are notorious for hidden charges).  

It’s all about finding the right balance. Whether you take on the work yourself, hire an employee, or use a third party to help, costs are inevitable. It’s important to find a solution that won’t break the bank. However, it’s equally important to find an outsourcing solution that ensures compliance with labor laws and regulations. 
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HR Solutions for Small Businesses

One solution that many companies opt for is implementing a software solution that automates your HR processes. This can help lighten your load without incurring the high costs of third-party outsourcing. You get the peace of mind of using a costly human resources service provider, at a fraction of the cost. Plus, you still retain internal control of all of your HR processes.

Factorial’s all-in-one HR management software solution can be fully integrated with your entire employee lifecycle. 

Automated features include:

  • Small business hiring features: Talent acquisition, recruitment, onboarding, and offboarding
  • Time tracking, managing time-off requests, and shift management 
  • Employee performance and productivity
  • Goal and OKR tracking
  • Training and development
  • Payroll and expenses
  • Document management.

Plus, it includes an employee portal. This means your employees can manage their data and requests directly from their mobile phones. Find out more about everything that Factorial has to offer to improve the management of your business and your employees.

Cat Symonds is a freelance writer, editor, and translator. Originally from Wales, she studied Spanish and French at the University of Swansea before moving to Barcelona where she lived and worked for 12 years. She has since relocated back to Wales where she continues to build her business, working with clients in Spain and the UK.  Cat is the founder of The Content CAT: Content And Translation, providing content development and translation services to her clients. She specializes in corporate blogs, articles of interest, ghostwriting, and translation (SP/FR/CA into EN), collaborating with a range of companies from a variety of business sectors. She also offers services to a number of NGOs including Oxfam Intermón, UNICEF, and Corporate Excellence - Centre for Reputation Leadership.  For more information or to contact Cat visit her website ( or send her a message through LinkedIn.

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