HR Outsourcing Costs: The Complete Guide

Small and medium-sized businesses often have difficulty handling all their human resources needs in-house. They may lack the expertise to keep up with ever-changing employment-related requirements. This puts them at risk of potential costly fines or claims. They may not want to spend the money or invest the time to run and maintain in-house HR software. They don’t want to burden their employees with routine and repetitive HR tasks when they could be contributing to growth initiatives instead.

For many of these businesses, HR outsourcing provides a welcome solution. The personnel at HR outsourcing companies are generally experts in their fields. Outsourcing companies also generally provide access to modern HR cloud technology and take care of maintaining and updating it. Small and mid-sized businesses that use HR outsourcing can save money by not having to spend money on resources to help with HR tasks in-house.

Determining HR outsourcing costs is a key step in deciding whether outsourcing is the right option for your company. HR outsourcing costs are estimated to cost $45 to $1,500 a month based on the number of employees and services engaged. Many factors contribute to outsourcing costs, which we will discuss in detail below.

Businesses need to examine their costs carefully, but always be aware of the ROI gained from HR outsourcing. In other words, your analysis should weigh what you might save and what you gain in efficiency as well as what it will cost. In this guide, we will look at HR outsourcing costs from every angle to help you make an informed decision. We will provide insights to:

• Show you how to navigate the costs of HR outsourcing.
• Provide a general overview of expenses associated with outsourcing HR.
• Explore factors that may influence pricing.
• Examine how HR outsourcing can help your company’s overall budget.

What goes into HR outsourcing costs

Many factors go into determining HR outsourcing costs, depending on the nature and size of your business and which functions you want to outsource.

Type of service

Naturally, the range and types of HR services are important factors in your HR outsourcing costs. The most common types are:

• Consultants. Consultants are useful when you want HR professionals to provide guidance in their areas of expertise.
• Specialty services. Some companies may want to order only one or a few HR functions a la carte. Payroll administration and recruitment are common services requested by small and mid-sized companies.
• ASOs. Depending on your needs, administrative services organizations (ASOs) can help with payroll tax administration, payroll processing, or many of your other HR functions.
• PEOs. Professional employer organizations (PEOs) provides full-service HR outsourcing solutions. These include certain HR administration help, payroll and payroll tax administration including calculate, withhold and remit employment taxes paid through the PEO’s technology, HR expertise and best practices to help customers comply with employment-related rules and requirements, and providing access to and administering employee benefits packages.

Level of service

The level of services you require will also influence your HR outsourcing costs. These can vary depending on how much HR work you want to handle in-house versus how much you want to outsource.

• Payroll processing includes calculating pay and deductions, providing pay stubs, distributing pay to employees via check or direct deposit and keeping required payroll records. This is a core function of most HR outsourcing plans.
• Limited functions can be specific to your company’s needs. This is a good option for companies that want to keep some of their HR tasks in-house and only need assistance with a specific set of functions.
• Comprehensive services are a good choice for companies that want to outsource most their HR functions.

Some services are more complex and may therefore cost more than others. For example, routine HR functions that can be largely or entirely automated may cost the least. Situations that are less automated and require high-level professional expertise may cost more. These may include assistance with:

• Strategic planning
• Global workforce
• Human capital management
• Independent contractors
• Risk mitigation in multiple states
• Aligning your company’s mission
• Staying on top of changing employment-related rules and requirements
• Support for mergers and acquisitions

Size of company

In many cases, your HR outsourcing costs will rise with the number of employees on staff. Sometimes the costs are directly related to the number of employees, for example, when the outsourcing company charges a flat fee per employee per month. Other times, there are different factors involved. For example, if an outsourcing company charges a percentage of your payroll, both the number of employees and how much they are paid will affect your costs.

Other factors

• The location of your business will affect the cost of living, which, in turn, affects wages. Depending on the pricing model the HR outsourcing company uses, the amount you pay in wages can be a factor in your HR outsourcing costs.
• Companies operating in multiple states may generally pay more for HR outsourcing services. This can be due to the complexity of multi-state compliance each location.
• The type of business you conduct may also be a factor. Certain industries are more heavily regulated and need may need more specialized services.

Pricing models

There are different pricing models for outsourcing HR functions. Your situation's model will depend on what services you are outsourcing and what type of outsourcing provider you are working with (for example, a PEO or an ASO). In some cases, this will also depend on what you have negotiated with your outsourcing company. The pricing models are:

Per employee/per month

Under this pricing model, you are charged a flat fee per employee per month. Your costs are directly related to the number of employees you have.

Percentage of employees’ pre-tax monthly earnings

Costs using this model may be higher in industries where employees are highly paid.

Per-service pricing

This pricing model is sometimes used for companies ordering services a la carte.

Fixed fee/retainer

With this model, your costs are generally more predictable.

Project-based or hourly pricing

These models are also known as pay-as-you-go. They may be used for short-term needs.

Custom pricing

Sometimes, none of the common pricing models is an exact fit for your situation. In that case, your outsourcing company may offer or negotiate a custom pricing plan, which combines features of the more standard pricing models.

Some HR outsourcing companies require that your company employ a minimum number of workers, typically at least five or minimum charge of at least five employees. Some have a preference for working with smaller or larger businesses, and these may have a limit on the maximum number of employees. When considering HR outsourcing companies, always check to see that they work with companies of your workforce size.

Are there any other costs or fees to consider?

In addition to the recurring monthly or annual fees, HR outsourcing companies may also have one-time fees or fees that may be charged at irregular intervals. These can include:

Startup fees

There may be one-time charges for creating new accounts, training your managers and staff on using the system and or transitioning data from any existing software system. There may also be indirect costs through productivity loss while your employees are getting used to the new workflow.

Early termination fees

Some HR outsourcing companies may charge an early termination fee. In certain cases, you can avoid the fee by giving the proper timely notice pursuant to your client service agreement with the provider.

Software fees

In some circumstances, you may need to subscribe to the outsourcing company’s human resources information system (HRIS) to access its other outsourcing services.

Overtime or off-hours support

If you need support from the outsourcing company’s personnel outside their regular business hours, you may need to pay an additional fee.

Extra services

• An HR outsourcing company may provide one-time services, such as performing an audit to provide guidance on your payroll tax documents and processes to help you navigate compliance concerns.
• Other one-time services may include guidance on employee handbook or consulting on specific issues as they arise, such as providing guidance remote work policy considerations.
• After you select the level of service that best suits your business, you may have one-time or occasional needs for services outside that level. These could be added on to your plan for a fee.
• You might be charged a fee for travel expenses for the provider’s personnel.

Variable costs

Some HR outsourcing costs might increase as your workforce grows. Increases in the recurring per-employee-per-month monthly or annual fees, due to a higher number of employees, are more predictable, but other costs might not be.

How can I optimize costs?

There is often some flexibility in pricing for HR outsourcing services. You may be able to make your relationship with an outsourcer even more cost-effective by negotiating with the provider and taking advantage of discounts. HR outsourcing providers want to gain your business. They may be willing to work with you on costs, payment models and the range of services provided.

Service providers often offer discounts for long-term contracts and volume. You may be able to save money by paying annually instead of monthly. If you have more than a few employees, see if volume discounts apply. Also, look for other opportunities to save. For example, the outsourcing company may be willing to waive setup fees.

Weighing HR outsourcing costs

To make an informed decision about whether HR outsourcing is a good choice for your company, estimate the costs of outsourcing versus not outsourcing.

To obtain an estimate of how much it costs your company to handle your HR functions in-house, consider these expenses:

• Costs of hiring and employing in-house personnel to handle the company’s HR functions. In addition to the wages and overtime pay for these employees, also include the costs of employee healthcare and other insurance benefits, retirement plans, payroll taxes, unemployment insurance, workers’ compensation insurance, time off, bonuses, recruiting, onboarding, training, office space, furniture and supplies.
• Costs of choosing, purchasing, maintaining, updating, and troubleshooting your own HR software.
• Possible higher costs for health insurance premiums.

To estimate your outsourcing costs, start by researching outsourcing companies. Decide whether you want to outsource selected HR functions or whether you want a comprehensive plan that is full-service. If you want to outsource only some functions, decide on which ones.

With this information, you can make at least a preliminary decision on what type of outsourcing company would work best for your needs. Research some of these companies to determine which pricing model they are most likely to use. From there, you can estimate a range of likely recurring monthly or annual fees. Add on any likely one-time or non-regular fees to get a total estimate of your costs.

ROI From Using an HR Outsourcing Company

Remember that HR outsourcing costs are only one piece of the complete picture when deciding whether outsourcing will provide a financial advantage. The other crucial piece is the amount you may save by using an HR outsourcing company. As long as your savings are greater than your costs, you will come out ahead by outsourcing some or all of your HR functions.

The annual return on investment (ROI), just from cost savings alone, from using a PEO averages 27.2%, according to a white paper published by the National Association of Professional Employer Organizations (NAPEO).

The actual ROI could be higher. Some of the benefits of outsourcing HR are substantial, yet not easily quantified:

• The expertise that outsourcing companies provide on compliance concerns, along with simplified payroll and payroll tax reporting can help you from avoiding potential errors. That can potentially save you from fees and penalties or claims.
• An HR service provider’s assistance with the recruitment process can help you get top people for your company. This can increase employee retention, lowering the extensive costs that come with employee turnover.
• Outsourcing HR can also increase employee satisfaction. Access to premium benefits, timely pay, and more control over benefits information and enrollment may mean a happier workforce. Employees also enjoy the convenience of an employee portal to the HR system accessible from anywhere 24/7 via an app.
• Workforce management tools, staffing solutions, and personalized training plans provided by HR outsourcers can help give employees more opportunities for career advancement. This is one more way that outsourcers can increase employee satisfaction and retention.
• Outsourcing HR frees up your time and energy to focus on core activities aimed at business growth that will help increase your revenue and profits.
• The overall organizational efficiency you gain by outsourcing HR tasks makes your company more streamlined and effective.
• Analytic reports based on HR data can help your company make informed business decisions and optimize its financial strategies.

The TriNet solution

TriNet offers top-tier HR outsourcing services at multiple levels.

TriNet’s HR Plus is for companies that want to retain full control over their HR functions while getting help with their HR administrative tasks. Alongside engaging with our advanced cloud-based HR technology platform, you will gain access to a team of expert HR professionals so you can navigate compliance and other HR concerns. You can choose to use our payroll tax compliance services, payroll processing, and HR services, including employee onboarding tools, reviewing your HR procedures and handling unemployment claims. It’s up to you. Fees range from $20 to $50 per employee per month, plus fees for the HR Platform.

If you want more, TriNet’s PEO provides a comprehensive full-service HR solution that can assist with your HR needs. This includes providing payroll services, access to premium employee benefits and mitigating certain risks. We will provide workers’ compensation coverage and manage these claims, and handle payroll and payroll tax administration tasks to help free up your time so you can focus on the things you do best. We have a more transparent fixed-rate per-employee per-month pricing model and invite you to contact us for a quote.

No matter what your outsourcing needs, TriNet has options with different levels of services and pricing so you can engage what is the best fit for your company.