Should You Outsource Your HR? Red tape, finding talent drive human resource outsourcing

When the human resources director at Boride Engineered Abrasives retired about a decade ago, manufacturing vice president Ken Osborne took over the duties of administering benefits, hiring new workers and performing a myriad of other HR functions.

But as the company grew, Osborne found the job becoming too time-consuming and complex. He joined the Traverse City Human Resource Association where he met Human Resource Partners President Kate Greene and outsourced the work to her firm.

“As I got further involved in human resources, I found it wasn’t an area of expertise for me,” Osborne said. “Kate handles all of our recruiting policies, health insurance and compliance issues. It makes it easier for us and has really gone well.”

While human resources outsourcing isn’t a new phenomenon, firms like Greene’s are seeing a boost in business as more employers struggle to find qualified workers in a tight labor market and adhere to increasingly intricate government regulations.

“We’re seeing an influx of companies needing our assistance,” said Ronald Phillips, who manages the Traverse City office of PMP Personnel Services. “The candidate pool here in northwest Michigan is dwindling. It’s harder for employers to find qualified employees.”

Human resources outsourcing captured the business world’s attention in the technology boom of the 1990s as tech startups didn’t have the expertise to handle personnel duties themselves, said Frederick Morgeson, a human resource management expert at Michigan State University’s Broad College of Business.

Outsourcing continued during the tech bust of the early 2000s as companies needed to cut costs in order to survive.

“If you’re not a large company, you probably don’t have the internal expertise of finding talent,” Morgeson said. “Hiring an external firm can add value to your business.”

Go with a PEO?
Some businesses go a step further, outsourcing their workforces to companies known as professional employer organizations (PEO). A PEO has a co-employment relationship with a client company in which the PEO is the employer of record for tax and regulatory purposes. The client company manages its employees’ daily tasks and responsibilities.

There are as many as 980 PEOs in the United States co-employing as many as 3.4 million people, according to the National Association of Professional Employer Organizations. The industry has been adding an average of 100,000 worksite employees annually for the past 30 years.
Lisa Baker, who heads the Traverse City office of AccessPoint, a PEO based in Farmington Hills, said a PEO can help a company focus on its core business while offering its employees better benefits than the company could afford on its own.

“We like to say we’re a good noise eliminator for employers who want to take care of their employees, but don’t want all the paperwork,” she said. “A lot of bells and whistles come along with us, such as flexible spending accounts and disability insurance programs.”

In July, AccessPoint contracted with Blue Cross and Blue Shield of Michigan as its exclusive health insurance provider for client employers in the state, a move that AccessPoint President Greg Packer said allows his company to “deliver streamlined access for small- and medium-sized employers, equivalent to what significantly larger employers typically can provide.”

Small businesses that use PEOs grow as much as nine percent faster than traditional employers, have less employee turnover and are 50 percent less likely to go out of business, according to the National Association of Professional Employer Organizations.

PEOs typically charge client businesses $500 to $1,500 per employee, according to QuickBooks, a small-business accounting software company.

But PEOs have a checkered past that took them years to overcome. In the early 2000s, employers that were paying high unemployment insurance rates as a result of numerous layoffs shifted their employees to PEOs simply to acquire the PEOs’ lower tax rates.

The practice was known as SUTA dumping, named for the State Unemployment Tax Act, a federal law that required states to close the tax-avoidance loophole. Michigan passed its law in 2005, which resulted in many PEOs going out of business, Baker said.

“Changes in the legislation have refined the integrity of the professional employer organization,” she said.

Morgeson said he’s recently seen some companies bring human resource functions back in-house to gain more control over developing and administrating their workforces.

“Some are finding the (outsourced) services aren’t as good as promised,” he said. “They’re realizing how important the people aspect is to their success and that this is maybe something they should do for themselves again.”

But Traverse City area outsourcing companies say their businesses are booming, in part because of the increasing complexity of human resource functions, including complying with recent laws like the Affordable Care Act.

Employers also are bracing for a major change in the Fair Labor Standards Act that will make 4.2 million more workers eligible for overtime pay. The change takes effect Dec. 1.

“We keep abreast of all the laws. Every day there are updates on human resource regulations,” said Mary Bickley, an account executive at PMP Personnel Services.

Greene and her colleagues embed themselves at clients’ worksites, dealing with issues such as salary administration, executive coaching, communication policies and employee harassment investigations.
“Most of the time they don’t know we’re not employees of the company,” she said. “It’s not a secret, but it’s seamless.”

Osborne of Boride Engineered Abrasives said Greene typically spends about 70 hours a month at his company and sometimes sits in on corporate planning sessions.

“Resource planning isn’t just about capital equipment; it’s about people, as well,” he said. “Kate helps us become better prepared when we get to the point of adding people. It’s a great relationship.”