Definition of HR Outsourcing

A HR manager poses in front of two employees in a modern office
A HR manager poses in front of two employees in a modern office (Image: TongRo Images/TongRo Images/Getty Images)

A company's human resources department typically handles employee compensation and benefits, deals with hiring and firing and conducts orientations, among other tasks. Human resources employees don't generate revenue for a firm, but they do generate costs in salaries and benefits. Some companies decide that outsourcing these services makes sense, for both economic and efficiency purposes.

Professional Employer Organizations

To outsource its human resources department, a company might turn to a professional employer organization. That PEO becomes the legal employer of a company's workers, leaving the company to focus on its primary business goals. The PEO's business is human resources, so it stays current on all employment-related law and regulation. For employees, the PEO might offer a benefits package superior to that offered by the outsourcing company. While very small businesses and large companies can more efficiently handle human resources on their own -- the former because they have so few to contend with, the latter because they are capable of handling HR internally -- outsourcing the job to a PEO makes most sense to mid-sized business entities between 16 and 80 employees, says Janis Sweeney, owner of National Employee Management Resources, a PEO.

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