Should you outsource your HR?

Aug. 10, 2010 | by Richard Yelton

For many restaurant owners, outsourcing certain administrative functions provides them the ability to better focus on the strategic and operational sides of their business.  For example, restaurant owners have traditionally looked to outsource such functions as accounting and payroll.  Others have seen success in outsourcing more strategic roles such as the CFO or COO positions to assist them with implementing best practices within finance and operations.  

One area of outsourcing that is becoming increasingly popular is the human resources administration function, through the use of a professional employer organization, or PEO. Sometimes referred to as an employee leasing company, a PEO enables you to outsource the human resource management functions, including payroll, employee benefits, record keeping, and workers compensation coverage.  However, before deciding to outsource that important function, the restaurant owner must fully consider the benefits and risks of such an arrangement.

The primary benefit is fairly clear, and consistent with the reason why you would consider outsourcing any other administration function: if done correctly, a PEO will enable you to minimize your internal staffing and allow you to focus on other key areas of your business.  A PEO may be able to offer you lower health insurance premiums or other employee benefits discounts due to efficiencies of size.  These volume discounts may also allow them to provide you with competitive rates for workers compensation.

The PEO generally derives its profits from two primary sources:  1) the fee for providing the administrative services, which generally range from 5% - 15% of your total payroll, and 2) marking up the cost of the discounted employee benefits it can purchase on your behalf, while still offering you competitive rates.

The downside or risk of using a PEO is that it places another level between you and your employees.  Therefore, it is important that key communication between you and your employees is maintained.  For example, the PEO will often become the employer of record for the employees, which means that the weekly paychecks or annual Forms W-2 may be issued under the name of the PEO rather than your company.  It is important for the employees to understand that they are still part of your team, to minimize any anxiety this may create.   

Another risk to consider is to ensure that you do not jeopardize your eligibility of certain employment related income tax credits, such as the FICA tip tax credit.  The FICA tip tax credit must be claimed by the employer.  Make no mistake, you are still responsible for the payroll and payroll taxes for the leased employees.  However, even though the PEO may be the employer of record, the FICA tip tax credit is available to the common law employer, which is typically the entity that has the rights and responsibilities of hiring, terminating, and managing the employees on a day to day basis.  Therefore, if structured correctly, and the restaurant maintains these key responsibilities, the restaurant owner should maintain the benefit of the FICA tip tax credit.

Outsourcing certain functions of your business may provide many benefits.  Ultimately, whether you maintain internal staff for these functions or consider outsourcing, having the right people on your team will allow you to focus on the most important areas of your restaurant.

Topics: Human Resources

Richard Yelton / Richard Yelton is a principal at Windham Brannon in Atlanta. His specialties include restaurant and hospitality tax, mergers and acquisitions, and more. Visit him at the Windham Brannon website.
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