How does HR Outsourcing Reduce Costs?

How does HR Outsourcing Reduce Costs?

by on 18 May, 2022

High HR costs are a common problem for businesses of all sizes. The inability to handle these expenses usually leads to reputation issues and sizable penalties. HR outsourcing reduces costs effectively but only if you choose the right solution.

When you work with a comprehensive HR outsourcing solution, such as a PEO (Professional Employer Organization), you gain access to major cost-saving opportunities that give you a competitive advantage.

According to the National Association for Professional Employer Organizations (NAPEO), the average ROI of a PEO is 27.2%. Let's take a look at the top eight cost-reduction mechanisms that make such an ROI possible.

8 Ways HR Outsourcing Reduces Costs

Understanding how HR outsourcing reduces costs can help you make a decision about choosing the right outsourcing solution.

1.) Cost Savings on Employee Benefits

Top-quality employee benefits are highly important to employee recruitment and retention. Unfortunately, SMBs (Small and Midsize Businesses) rarely have the resources to cover high premiums.

PEOs use economies of scale to provide their partners access to Fortune-500 health insurance options. Your employees join a large pool of PEO's clients and gain access to lower premiums and more benefits options.

Besides cutting costs, the ability to use group insurance rates opens new recruitment and retention possibilities for your company.

 2.) Reduced Administrative Expenses

A huge variety of HR-related administrative tasks that a company has to handle leads to significant expenses. When you work with a PEO, you can delegate such functions as:

  • Payroll Administration
  • Employee Handbook Design & Maintenance 
  • Anti-Harassment & Anti-Discrimination Employee Training
  • I-9 Training & Recommendations
  • Benefits Administration
  • Tax Filing
  • Wage Planning
  • Safety Services
  • Industry-Specific Compliance Administration
  • Open-Enrollment Assistance
  • Job Descriptions
  • Background Checks

Besides cutting administrative costs, a PEO can also save your internal HR team valuable time, which it can use to focus on revenue-generating activities.

3.) Cost-Savings on Workers' Compensation Insurance

Workers' compensation insurance for SMBs often comes with sizable premiums and large upfront deposits. Depending on the state, working with a PEO can offer two different ways to reduce workers' comp costs:

  • With access to the PEO's workers' comp plan, you don't need to pay the upfront deposit. You can begin paying premiums on a pay-as-you-go basis from the start.
  • Depending on the State, you may gain access to the PEO's experience modifier rate. If it's lower than yours, the cost savings can be significant.

Additionally, a PEO can handle annual audits and work out risk management programs to reduce the number of workers' comp claims.

4.) Less Expensive Retirement Plans

Many employers are wary of retirement plans since managing them can be complicated, time-consuming, and costly. There are numerous set-up fees and various plan documentation maintenance charges.

A PEO can help you choose, implement, manage, and maintain a 401(k) program. It also gives you access to a multi-employer plan that uses economies of scale to provide a more diverse investment menu and additional benefits.

 The outsourcing solution also cuts costs by maintaining plan documents, arranging discrimination testing, filing Form 5500, providing educational materials, monitoring investments offered by the plan, and ensuring timely contribution deposits.

5.) Lower Employee Turnover

Amidst The Great Resignation, retention is a major issue for companies across all industries. When you work with a PEO, your turnover rates are likely to go down, since your employees will:

  • Gain access to better benefits and retirement plans.
  • Benefit from improved safety in the workplace.
  • No longer need to handle time-consuming administrative HR tasks.

With the average cost of replacing one employee being two times higher than their annual salary, better retention rates have a direct effect on the company's bottom line.

6.) No HR Compliance Penalties

Monitoring local, state, and federal HR laws can turn into an impossible task for companies that don't have large HR departments. With time, loopholes in compliance monitoring can lead to sizable penalties.

When you work with a PEO, its experts make sure you are in full compliance with all HR laws so you don't face avoidable fines or employee lawsuits.

7.) Best-in-Class HR Technology

Buying, implementing, and maintaining high-quality HR software is usually out of reach for small companies.  PEOs share their HR technology that combines time & attendance, payroll benefits enrollment, and applicant tracking software.

With access to this comprehensive tech, your HR team can automate a variety of processes, minimize payroll errors, and increase employee satisfaction.

8.) More Expertise at Less Expense

When you partner with a PEO, you gain access to a large team of HR specialists with expertise in many fields.  Besides handling numerous tasks, they also offer proactive advice to your internal HR team.

To achieve the same level of efficiency, you would need to hire several new team members. With the average salary of an HR specialist in the USA being around $60,000, such a decision can be costly. Meanwhile, recruitment, onboarding, and retention costs of these employees would likely be several times higher than PEO fees.

Save Money With a PEO

Working with a PEO can help you cut costs by gaining access to Fortune-500 benefits, delegating administrative tasks and expenses, decreasing employee turnover, avoiding compliance penalties, and reducing workers' comp claims.

If you are struggling with high HR costs, partnering with this comprehensive HR outsourcing solution can have a positive effect on your company's bottom line.

top 10 benefits of a peo

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Disclaimer: this article does not represent expert advice and is provided for informational purposes. Please get in touch if you would like expert HR advice.

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