What Is Outsourced Employment? A Practical Guide

Outsourced employment is when two organisations share responsibilities for the same group of workers. This business relationship usually splits up responsibilities by having one organisation manage the day-to-day work while the other is the legal employer and manages HR, payroll and other types of admin. 

It can be a useful arrangement for smaller businesses or startups, allowing them to outsource administrative burdens and costs, as well as reduce compliance risk. Typically, outsourced employment will be between a company and another agency known as a professional employer organisation (PEO). 

In this guide, we’ll take a look at the benefits and risks of outsourced employment and the potential solutions it can provide small and medium businesses. 

What is outsourced employment? 

Outsourced employment is a type of business relationship, bringing two companies or organisations together to manage different aspects of the same workforce. It can also describe a situation where an agency brings in independent contractors to fulfil work for their client. 

In this arrangement, a business will continue to manage operations, performing whatever work or service their company does, while the outsourced employer, such as a PEO or staffing agency, manages things like HR admin, legal compliance, staff benefits and recruitment and employs the staff on the business’ behalf. 

How outsourced employment works 

Outsourcing certain tasks can be a big help for smaller businesses, delegating the mountain of admin that comes with managing a workforce. While each arrangement will be tailored to each relationship, the usual approach is offload HR tasks, taking responsibility for employee admin and legal compliance. This leaves the client free to focus all their resources on the service or product they provide.

It’s important that the outsourced employment terms are precisely defined, and the roles and responsibilities are clear. 

Outsourced employment relationship and agreement 

Outsourced employment agreements are a more complex arrangement than simply agency and client. It’s a relationship governed by various laws and regulations, with penalties for non-compliance. It’s important that the Outsourced employment terms are precisely defined, and the roles and responsibilities for each party are clear. 

This is not only vital for carrying out everyday tasks, but also for liability should any problems or disputes arise. 

Key clauses in an outsourced employment agreement

Some of the key elements of an outsourced employment agreement might include: 

Employer responsibilities – Clearly defining the roles of each party and what their responsibilities cover. This will usually set out the PEO is the legal employer of the staff, employing them on behalf of the client.

Payroll and taxes – Setting out who is responsible for what, both in terms of compliance checks and managing monthly admin tasks. 

Termination clauses – When and how the relationship might end, and how the transition would be managed. 

Benefits of outsourced employment 

There are many advantages to choosing an outsourced employment relationship, including: 

Access to expertise – Partnering with an experienced HR provider or staffing agency immediately gives you access to years of knowledge and experience, particularly useful if you’re a small business just starting out, or you’re expanding into a new country or region.  

Reduced admin – Outsourced employment allows you to outsource those daily and monthly HR tasks that can eat up so much time. From managing employee data to doing payroll calculations, outsourced employment can free up resources. 

HR support – HR is an area that requires extensive experience and understanding of complex systems, something that takes time to build up for a new business. Investing in a full HR team isn’t always possible, so choosing the outsourced employment route provides that vital HR support. 

Cost-saving – Freeing up resources and allowing your team to completely focus on delivering your particular service also brings reduced costs. The bottom line matters for every business, but using every penny wisely is always a major concern for small and medium businesses. 

Lower compliance risk – Errors in payroll or not meeting local employment regulations can quickly lead to fines and lost revenue from reputational damage. The benefit of experienced, specialised HR and other support services is a greatly decreased risk of compliance mistakes. 

Attract more talent – Partnering with an HR or staffing agency can also lead to better recruitment results, bringing invaluable talent to your organisation. An experienced team knows how to find and attract the best potential employees, leaving you to simply choose the best people for your business. 

Outsourced employment risks

As with anything, there are also risks associated with outsourced employment. These can include: 

Liability exposure – Both parties have legal responsibilities in an outsourced employment arrangement, and local regulations need to be complied with. Making mistakes with things like working hours, wages and workplace safety can mean legal liabilities for both parties. 

Unclear responsibilities – It’s vital to set out clear and defined responsibilities when making an outsourced employment agreement. Any confusion or uncertainty can lead to mistakes or missed tasks, with potential repercussions for employee satisfaction. 

Data access and control – Handing over control of your HR systems means also sharing access to employee data and other important information. Make sure your chosen partner has rigorous data protection systems and processes in place, and assess the ease of access to employee and other information. 

HR access – Outsourcing HR could potentially have the impact of making accessibility harder for your employees, creating a barrier by having to deal with an external organisation if problems arise. This is why it’s important to thoroughly research potential partners to make sure you’re confident they can deliver an excellent and reliable service.  

Is outsourced employment illegal? 

Outsourced employment is perfectly legal, but it does come with a complex set of legal obligations and potential risks for non-compliance. One of the main risks is an individual being found to be employed by a business, when they had intended to outsource employment to a PEO.

Employment laws and compliance 

Outsourced employment may mean splitting responsibilities between different companies, but you still may have to abide by certain employment laws and worker rights. Make sure you know who is managing different areas of compliance, from payroll to recruitment practices and contracts. 

The benefit of outsourced employment is the experience and expertise you can expect in your partner agency, relying on their knowledge to minimise the risk of legal issues. Of course, this means choosing an outsourced employment partner you can trust. 

Outsourced employment and other alternatives

In the UK, “outsourced employment” and “joint employment” are business terms rather than formally defined legal categories. In some working arrangements — particularly outsourcing, staffing, or supply-chain models — courts and tribunals may decide that more than one organisation has responsibilities toward the same worker, depending on the level of control and supervision involved. 

But generally speaking, an individual will usually only ever have one employer at any one time. 

For businesses hiring internationally, another option is to use an employer of record (EOR). An EOR acts as the legal employer on behalf of a company, taking responsibility for employment contracts, payroll, tax, and local compliance in the worker’s country. This differs from a PEO arrangement, where the client company usually remains the legal employer.

Using an employer of record vs a professional employer organisation

Outsourced employment examples and use cases

There are several ways an outsourced employment arrangement might be used by a business. Let’s take a look at a few examples: 

Hiring temporary workers – A business needs extra employees for a limited time, so makes use of a staffing or temporary worker agency. The agency manages the recruitment of the workers, including payroll, benefits and legal compliance, as well as being the legal employer, while the client business manages their day-to-day work. 

PEO and a small business – A newly started small business makes use of a PEO to take over their recruitment, HR admin and payroll. The PEO becomes the employer for legal compliance and tax purposes, while the small business manages the daily work and activities of their employees.  

Using freelancers or contractors – Similarly to hiring temporary workers, if a business makes regular use of freelancers or contractors, they might engage a creative agency to find and engage them. The agency would manage the admin, including paying the freelancers according to local regulations, while the client business works directly with them as needed. 

Outsourced employment do’s and don’ts

Get started with navigating outsourced employment with our list of do’s and don’ts. 

Do’s

• Choose trustworthy and reputable partners – Always do your research before picking an outsourced employment partner, making sure you’re completely confident in their experience and expertise. 
• Get familiar with the law – It’s great to be able to rely on the expertise of your outsourced employment partner, but it’s important that you familiarise yourself with relevant regulations so you have a grasp on your – and your partner’s – responsibilities.
• Set out clear responsibilities – The best foundation for a successful outsourced employment relationship is clearly setting out what each party’s responsibilities and obligations are. This should be set out in proper documentation and a written agreement from the start. 
• Provide clear communication – This should include your employees. If your HR is being outsourced, make sure your staff know exactly how to access help or get answers, and how things will work with the pay and benefits. Confusion or uncertainty will quickly build resentment and erode trust. 
• Update and review – Regulations and business needs change, so make sure you’re reviewing your outsourced employment contracts regularly. 

Don’ts

• Rely on verbal agreements – Every part of your outsourced employment agreement must be written down and set out clearly. Processes can quickly break down if decisions are made based on quick verbal assurances, so make sure everything is documented. 
• Assume compliance – Fines and legal risks can cost more than just money. Don’t just assume your outsourced employment partner is taking care of everything and you can ignore the risks. Know your liabilities and make sure everyone is meeting compliance.  
• Settle for vague language – Unclear responsibilities can often lead to disputes or missed tasks. Ensure everyone fully understands their areas of responsibility within the outsourced employment agreement. 
• Losing control of costs – Working with a partner to manage HR and other tasks can bring many cost-savings, but don’t assume that’s always the case. Keep control of your budget and review costs to make sure you’re still getting value for money as your company evolves. 

Ready to try outsourced employment? 

If you feel outsourced employment could be the right direction for your growing business, make sure you do your research and thoroughly review your potential business partners. Make a checklist to cover for each candidate, including things like: 

Specialism – Do they primarily provide the services you need, such as HR or recruitment?

Experienced – Are they established with a list of happy outsourced employment clients? 

Compliant – Are they up to date and knowledgeable about relevant employment laws and regulations? 

Good value – Are their costs clearly set out and do they represent good value for money? 

Seek advice – Take advice from other businesses or experts on what to look for with potential outsourced employment partners who’ve worked in successful relationships. 

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