HR Outsourcing Guide: Models, Costs & Partners

Overview

Outsourcing HR is the practice of delegating some or all human resources functions to a third party. The goal is to control cost, reduce risk, and focus your team on core work.

If you’re an owner, COO, or HR lead at a 10–500-employee company, this guide will help you decide what to outsource and which model fits (PEO, HRO, ASO). You’ll see what it should cost and how to select, implement, govern, and—if needed—switch providers.

We’ll start with clear definitions, then move into a build vs buy framework, a simple breakeven check, and a pragmatic map of which functions to keep vs outsource. You’ll also get an implementation roadmap, integration and data protection guidance, SLA/KPI targets, and an exit plan. Where compliance is involved, we link to authoritative sources.

What HR outsourcing is and how the models differ

HR outsourcing spans three common service models: PEO (co-employment), HRO (outsourced services without co-employment), and ASO (administrative support and compliance). Each offers access to payroll, benefits administration, compliance support, and HR guidance.

They differ mainly in who is the employer for certain tax and benefits purposes, and how liability and control are shared.

In a Professional Employer Organization (PEO), you enter a co-employment relationship. Your provider becomes the employer of record for certain purposes and may pool benefits to improve rates. Some PEOs carry an IRS Certified PEO (CPEO) designation; the IRS outlines what that means for federal employment tax treatment and liability, which can reduce risk and simplify filings.

In HRO and ASO models, you retain employer of record status and more direct control. You buy specific HR outsourcing services à la carte or in bundles.

The right model hinges on your appetite for benefits pooling, how much you want to offload payroll tax filings, and how tightly you need to control policy, systems, and employee relations. Keep the compliance boundary in view: even with outsourcing, you remain responsible for following labor laws and company policies.

PEO (co-employment) at a glance

A PEO becomes a co-employer of your workforce. It typically handles payroll, benefits, and HR compliance while you direct day-to-day work. CPEO status means the provider is treated as the employer for federal employment tax purposes and is generally responsible for paying and filing those taxes.

Many PEOs offer access to large-group benefits plans that can stabilize rates for smaller employers. They also provide HR guidance and risk management. The IRS details the Certified PEO program and verification steps you can use when evaluating providers (see the IRS Certified PEO page: https://www.irs.gov/businesses/small-businesses-self-employed/certified-professional-employer-organizations-cpeo).

PEOs fit organizations seeking bundled services, reduced administrative risk, and potentially better benefits buying power.

HRO and ASO: flexible outsourcing without co-employment

HRO (Human Resources Outsourcing) and ASO (Administrative Services Only) let you outsource specific functions while you remain the sole employer of record. You keep more control over policies, systems, and employee relations.

The provider executes agreed tasks with defined service levels. Typical bundles include payroll and tax filing, benefits administration and COBRA, handbook and policy creation, and compliance calendars. Recruiting, training/LMS, and performance programs are often optional add-ons.

These models fit teams that want targeted expertise and scalability without sharing employer status.

Should you outsource HR or keep it in-house?

The decision comes down to risk, complexity, growth rate, and the cost of building versus buying expertise. Common triggers include multi-state hiring, fast headcount growth, leadership bandwidth constraints, benefits volatility, frequent policy or org changes, audit or lawsuit exposure, back-office strain, an upcoming HRIS/payroll cutover, and benefits re-bids.

If your environment is stable, you have strong HR leadership, and you value bespoke policies with tight cultural control, building in-house may be best. You can supplement with targeted outsourcing for payroll or benefits.

Many midsize companies adopt a hybrid approach. Keep a lean internal HR team for strategy and employee relations. Outsource payroll, benefits administration, and compliance calendars. As a rule of thumb, outsource the high-volume, high-liability mechanics first, then add advisory elements as needed.

A simple breakeven check

Estimate annual vendor fees using per-employee-per-month times headcount plus add-ons. Compare that to the fully loaded cost of an in-house HR generalist or manager, including salary, benefits, payroll taxes, software, and compliance tools.

The U.S. Bureau of Labor Statistics reports median annual pay around the mid-$60,000s for HR specialists, excluding benefits and overhead, which can add 25–40% to total employer cost (BLS HR Specialists: https://www.bls.gov/ooh/business-and-financial/human-resources-specialists.htm). If a provider quotes $85 PEPM for 75 employees, that’s roughly $76,500 per year before add-ons.

That total often compares to one HR FTE, but with deeper functional coverage and systems included. Adjust for your needs: heavy recruiting or complex benefits may improve outsourcing ROI. A single-state, low-turnover team may break even in-house. Revisit breakeven annually as headcount and scope change.

What to outsource vs what to keep internal

Outsource high-frequency, rules-driven tasks that carry compliance risk. Payroll and tax filing, benefits administration and COBRA, leave tracking, and routine onboarding/offboarding often fit this profile. These processes benefit from repeatable accuracy.

Keep strategy, culture, manager coaching, and sensitive employee relations in-house. Your context matters most here, and trust is built one conversation at a time.

For a 10–50-person team, outsourcing HR basics (payroll, benefits, handbook, compliance calendar) often lifts a heavy administrative load. Accuracy usually improves as well.

At 50–200 employees, a hybrid model usually wins. Maintain an internal HR lead for strategy and employee relations. Outsource payroll, benefits, and compliance, and add recruiting support during spikes.

Past 200 employees, internal centers of excellence can be cost-effective. Many still outsource payroll tax filing, benefits administration, and learning platforms to manage scale and regulatory change.

Compliance and risk guardrails you can’t ignore

Labor compliance doesn’t transfer entirely when you outsource. You remain accountable for following laws and meeting deadlines, even when your provider executes tasks.

Key examples include the Fair Labor Standards Act (FLSA) overtime rules for non-exempt workers, COBRA continuation coverage administration for benefits-eligible employees, and annual EEO-1 reporting for most private employers with 100+ employees.

The U.S. Department of Labor explains FLSA minimum wage and overtime requirements, including time-and-a-half for hours over 40 for non-exempt employees (https://www.dol.gov/agencies/whd/flsa). COBRA continuation coverage rules and notices are overseen by the DOL (https://www.dol.gov/general/topic/health-plans/cobra).

EEO-1 data collection guidelines are maintained by the EEOC (https://www.eeoc.gov/employers/eeo-1-data-collection). In a PEO, a CPEO may assume federal payroll tax filing and payment responsibility. In HRO/ASO, the provider files as your agent while you remain the employer of record.

Clarify ownership of each compliance task and require deadline tracking in your SLA.

How much does outsourcing HR cost?

Most HR outsourcing pricing follows three archetypes: per-employee-per-month (PEPM), percent of payroll, or flat fees for projects and add-ons. For small and midsize businesses, core HRO/ASO bundles often range from roughly $40–$100 PEPM for payroll, tax filing, and benefits administration. Add-ons such as recruiting, LMS, and advanced analytics increase the total.

PEOs typically price at 2–12% of payroll or $100–$200+ PEPM depending on benefits, states, and risk. A simple estimate is PEPM x average headcount + implementation + add-ons.

Implementation is usually a one-time fee tied to data conversion, configuration, and payroll parallel runs. It can range from about $1,000–$5,000. Variables that move price include multi-state complexity, benefits plan design and carrier mix, ACA tracking, union or prevailing wage rules, and integration requirements.

Industry studies report PEO clients may see lower turnover and administrative burden, though results vary by company and the source is industry-reported (NAPEO: https://www.napeo.org/what-is-a-peo/benefits-of-a-peo). Always request a transparent fee schedule and identify any indexation clauses or out-of-scope charges.

How to choose an HR outsourcing partner

Start with fit. Decide whether a PEO, HRO, or ASO aligns with your risk appetite, benefits strategy, and need for control.

Then evaluate compliance posture (e.g., CPEO status for PEOs), integration capabilities with your HRIS/payroll/ATS, service depth, and the provider’s support model and SLAs.

1. Shortlist criteria to weigh: model fit (PEO vs HRO/ASO), regulatory credentials (CPEO, ACA expertise), integration library and APIs, security certifications (e.g., SOC 2), service delivery (named team vs pooled), SLA KPIs, references in your industry and states, and financial stability.

Close with references and a pilot mindset. Ask for customer contacts that match your size and complexity, and verify who will support you post-sale. Request sample contracts, SLA reports, and governance calendars. Insist on a no-surprises fee exhibit with clear renewal and exit terms.

RFP and demo questions that surface real risk

1. If PEO: Are you a Certified PEO (CPEO)? How do you handle federal and state payroll tax filings, and where can we verify your status?
2. Describe your SOC 2 scope, audit frequency, and how you manage access controls, encryption at rest/in transit, and audit logs.
3. Which HRIS/payroll/ATS/time systems do you integrate with natively? What data flows are supported, and how are errors surfaced?
4. What is your implementation timeline by milestone (config, data load, parallel payroll, benefits enrollment), and who owns each step?
5. Show your standard SLAs and KPIs: payroll accuracy, ticket response/resolution, compliance deadlines, and benefit enrollment turnaround.
6. Explain your escalation path for payroll-critical issues within 24–48 hours and who is on-call during payroll close.
7. How do you administer COBRA and ACA reporting, and who signs filings?
8. What are typical add-on and out-of-scope fees (e.g., off-cycle payrolls, garnishments, year-end W-2 corrections, custom reports)?
9. Provide your data retention schedule, backup/restore process, and procedures for cross-border data transfers (e.g., SCCs).
10. What is the exit process, notice period, and data handback format (employee records, payroll histories, audit trails), and are there fees?

Ask these questions in writing and during the demo so you can compare answers side-by-side and validate them with references. Strong vendors answer crisply, provide documentation, and welcome due diligence.

Implementation roadmap: the first 90 days

Implementation succeeds when you treat it like a project with clear owners, sequenced milestones, and change management for managers and employees. Expect a 6–12 week window from contract to accurate first payroll depending on complexity. Parallel runs and benefits enrollment shape the critical path.

A typical 90-day flow looks like this: weeks 0–2 for kickoff and data collection. Weeks 2–4 for system configuration and policy mapping. Weeks 4–6 for payroll parallel runs and corrections. Weeks 5–7 for benefits build and enrollment. Weeks 6–8 for manager/employee training and communications. Weeks 8–10 for first live payroll. Weeks 10–12 for post–go-live hypercare and stabilization.

Assign a RACI. Your HR lead owns policy decisions and change management. Finance owns funding and reconciliations. IT supports integrations and SSO. The vendor owns configuration, testing, and filings.

Close with a lessons-learned review to lock in process improvements. Finalize your recurring governance cadence.

Integrations and data protection

Integrations tie your HRIS/HCM, payroll, time and attendance, and ATS together so employee data flows once and stays accurate. Aim for secure, event-driven connections that update core fields and trigger downstream actions. Ensure clear error handling and audit trails.

On security, require a current SOC 2 report that covers relevant trust service criteria and confirms controls for access, encryption, change management, and incident response (AICPA SOC 2 overview: https://www.aicpa.org/resources/article/what-is-soc-2). Set role-based access controls with least-privilege principles.

Define data retention and deletion timelines, and confirm backup/restore testing. If data crosses borders, document transfer mechanisms (e.g., Standard Contractual Clauses) and verify data residency expectations with legal counsel. Your contract should embed these controls and require timely notice of incidents.

SLA and KPI governance

SLA/KPI governance prevents service drift and aligns both teams on outcomes that matter. Focus on accurate payroll, timely compliance, and responsive support.

Establish targets such as first-payroll accuracy (e.g., ≥99.5%), ticket response within 4 business hours for high-priority issues, and resolution within 1–2 business days for standard cases. Require on-time filings for all payroll taxes and ACA/EEO-1 deadlines.

Meet monthly during onboarding and quarterly thereafter. Review SLA performance, ticket themes, compliance calendars, and roadmap items like new integrations or policy updates.

Include remedies for misses. Use service credits for material failures, executive escalation, and corrective action plans with dates. These levers provide clarity and accountability when performance slips.

Exit strategy and switching without chaos

Plan your exit the day you sign. You’ll negotiate better handback terms when everyone is optimistic.

Define notice periods (often 30–90 days). Require no-fee data exports in usable, machine-readable formats with field dictionaries. Ask for cooperation on parallel payroll runs with your new provider.

When switching, set a cutover calendar that avoids year-end if possible. Run at least one parallel payroll and reconcile tax liabilities, benefits enrollments, and PTO balances.

Freeze policy changes near cutover to reduce variables. Document who handles quarter-end and year-end filings to prevent gaps. A clean exit lowers lock-in risk and makes renewals truly optional.

FAQs

What does co-employment in a PEO actually change about payroll tax filings and liability? In a PEO, the provider becomes a co-employer. If it is a Certified PEO (CPEO), it is generally treated as the employer for federal employment tax purposes and is responsible for paying and filing those taxes with the IRS, while you retain day-to-day control of work.

You still own business policies and many compliance obligations. The CPEO structure can reduce filing risk for federal payroll taxes.

Is it cheaper to outsource HR? It depends on headcount and scope. Core HRO/ASO often runs $40–$100 PEPM, and PEOs about 2–12% of payroll or $100–$200+ PEPM.

These totals can rival the fully loaded cost of an HR generalist at smaller sizes. Outsourcing can bundle software, expertise, and compliance that would otherwise require multiple hires and tools.

How do I calculate breakeven versus an in-house HR hire? Multiply PEPM by average headcount, add implementation and add-ons, and compare that to an HR FTE’s fully loaded cost (salary plus 25–40% for benefits and overhead) and software fees.

Use BLS HR pay data as a benchmark and rerun the math annually as your team and scope evolve.

What’s the practical difference between HRO and ASO for a 50-employee company? Functionally they overlap. Both provide outsourced services while you remain employer of record.

HRO often implies broader, consultative scope. ASO emphasizes administrative execution. At 50 employees, the choice usually comes down to whether you want advisory depth and integrations (HRO) or primarily admin efficiency (ASO).

How long does HR outsourcing implementation take from contract to accurate first payroll? Most small to midsize companies go live in 6–12 weeks depending on states, benefits, and integrations.

Parallel payroll runs and benefits enrollment drive the timeline. Plan buffers around those milestones.

How do data security certifications like SOC 2 apply to HR outsourcing vendors? A SOC 2 audit reports on a vendor’s controls for security, availability, processing integrity, confidentiality, and privacy. It’s a key assurance when you entrust sensitive HR data.

Ask for a current SOC 2 report and map its scope to your services.

Which compliance tasks remain ours even with a PEO or HRO in place? Policy enforcement, accurate timekeeping, exemption classification, and workplace practices remain your responsibility.

Vendors can file taxes, administer COBRA/ACA, and maintain calendars. You must still meet FLSA, COBRA, and EEO obligations with timely, accurate inputs.

What are the hidden costs in HR outsourcing contracts? Common extras include implementation, off-cycle payrolls, garnishment processing, year-end amendments, custom reports, ACA forms, extra integrations, and renewal indexation.

Ask for a complete fee exhibit and caps on out-of-scope work.

How do I verify a PEO’s CPEO status and why does it matter? The IRS publishes a list and explains requirements. Verification confirms the provider’s federal employment tax treatment and can reduce your liability risk for those taxes.

Always check current status on the IRS site before contracting.

Can we partially outsource while keeping employee relations in-house? Yes—many companies outsource payroll and benefits while retaining strategy and employee relations internally.

A hybrid model often maximizes control and culture while offloading high-liability administrative work.

How do global employment models (EOR vs PEO) compare to U.S. HR outsourcing? An Employer of Record (EOR) hires employees on your behalf in countries where you lack a legal entity, taking on full local employer compliance.

U.S. PEO/HRO/ASO models serve domestic employers and do not substitute for creating foreign entities. If you’re expanding internationally, evaluate EOR alongside your U.S. outsourcing stack.

What KPIs and SLAs should be in an HR outsourcing contract? Include payroll accuracy, on-time tax filing, ticket response/resolution times, benefits enrollment turnaround, and compliance deadlines with clear remedies for misses.

Tie SLAs to monthly/quarterly reviews and escalation paths so issues don’t linger.