Outsourcing HR? Two things to get right before you sign

Most outsourcing advice is a list of benefits: save time, save money, get better benefits. Those are real. But the clients who call me after an outsourcing deal went wrong almost never picked the wrong provider. They signed a contract without checking two things. Here they are.

How do you check who carries the risk?

Start with this rule: outsourcing moves the work, not the responsibility. Your company is still the employer for most employment law purposes. If the provider misses a final paycheck deadline or mishandles a leave request, the claim names you.

So before you sign, find out exactly which risks the provider takes on. For a professional employer organization, or PEO, the first check takes two minutes. The IRS certifies PEOs that meet its financial and reporting standards, and a certified PEO generally takes on responsibility for the federal employment taxes on wages it pays (IRS CPEO program). Open the IRS list of active certified PEOs, search for the provider, and compare the legal entity name on the list to the one on your contract. Large PEOs operate through several entities, and the one you sign with should be the one the IRS certified. My HR software guide covering PEOs lists the contract questions I ask before signing.

Then read the contract for these four things, in writing:

• Who files and pays payroll taxes, and who pays the penalty if a filing is late.
• Whose workers’ compensation policy covers your employees, and from what date.
• Who is responsible for California wage-and-hour compliance, such as meal and rest breaks, overtime and final pay.
• Whether employment practices liability insurance is included, and what it excludes.

One California rule to know if your provider supplies workers rather than running HR for your own staff, as a staffing agency does: under Labor Code 2810.3, a business with 25 or more workers in total that uses more than five workers supplied by a labor contractor at one time shares liability for those workers’ wages and workers’ compensation. A cheap contractor that underpays its workers can become your bill.

How do you keep the decisions, and the exit, in your hands?

The second mistake is handing over control you meant to keep. A provider runs processes. It should not be making your judgment calls by default, and it should not be hard to leave.

Write down which decisions stay with you: who you hire, how you set pay, when someone is disciplined or let go. A provider can advise on all of them, but the approval should be yours, in the contract, so nobody discovers the default after a termination goes wrong.

Then plan your exit on the day you sign. Ask three questions and get the answers in writing. Can you export all employee records, payroll history and documents in a standard format, at no charge? How many days of notice do you have to give to leave? And when can you switch without disrupting benefits? Changing health plans in the middle of a plan year can reset employees’ deductibles, so the cheapest time to leave a PEO is usually at renewal, and you need to know that date before you need it.

If you are choosing a provider, start with the five HR services I would shortlist, and if you are still deciding between models, fractional HR, a PEO or a first HR hire lays out the tradeoffs. The same discipline applies to consultants, me included: the questions to ask an HR consultant work just as well on a PEO’s sales rep.

Compare fees across models in how much HR consultants charge.

McKinley holds a J.D. but is not a licensed attorney. Articles here are general information, not legal advice. For your specific situation, talk with an employment attorney.