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February 15, 2024

Should you outsource your leave management?

Robyn Bartlett, Sarah Dahl, Nicole Delimitros, and Andrew Drabik

In the past, outsourcing leave management was a strategy exclusive to larger corporations with expansive human resources (HR) departments. However, a notable transformation occurs as compliance grows more complex around regulatory or mandatory leave. Small teams need help to provide employees with a seamless and positive experience while managing increasingly overwhelming workloads.

Our Absence, Disability, and Leave (ADL) Benchmarking report found that 42% of employers across industries, sizes, and geographies name “staying updated and compliant with state and local leave laws” as one of their biggest challenges in managing leave benefits. At the same time, 33% consider remaining compliant with the Family and Medical Leave Act (FMLA) and the Americans with Disabilities Act Amendments Act as challenges. Some states may also have additional leave laws that employers must comply with, adding to the complexity of leave administration.

For this reason, about 70% of mid-sized businesses with 500 to 1,000 employees outsource their leave management process entirely or combine it with in-house management.

To keep in-house or to outsource?

Determining whether to keep your leave management in-house or outsource it requires thoroughly analyzing your business’s current and future needs. This decision will shape the efficiency of your operations, compliance levels, and overall employee experience. A third-party consultant can help conduct a comprehensive analysis to ensure you choose the most effective approach for your organizational goals. Here are some considerations to guide your analysis:

Leave frequency and company size: Evaluate the average number of leaves of absence your company experiences annually. Consider the number of states you currently operate in. For example, a 500-life company operating in North Dakota could be less complex than a 200-life company operating in Illinois, New York, and California. For smaller groups with infrequent leaves, in-house management may be more cost-effective.

Decentralization of leave management: How decentralized is your leave function? An approach where individual offices or departments manage the leave function may lead to less control, increased oversight challenges, and higher compliance risks.

HR team size: Smaller teams may find outsourcing beneficial, freeing time for other critical responsibilities.

Cultural fit and management style: Reflect on your desired level of involvement in managing employee leaves. Regardless of what you choose, your internal team must still have their eyes on the process. How involved do they want to be? Do they have the capacity to do so?

Cost: Understand the cost implications of outsourcing. Gather proposals, compare charges, and contrast offerings from different vendors to make an informed decision.

Integration with other benefits: According to our ADL Benchmarking report, 41% of employers find it challenging to integrate mandated leave, paid leave, disability, and other company-sponsored leave benefits. A potential benefit of outsourcing is a combined claims submission and coordination of benefits.

There are various levels of outsourcing and integration to consider. Do you prefer a fully integrated approach where short-term disability (STD) and leave management are filed through a single system? Or do you prefer a co-sourced or non-integrated approach where different aspects are managed separately?

Compliance cost awareness: The average cost of defending an FMLA lawsuit is $80,000.That doesn’t include back wages, potential discrimination lawsuits, penalties issued by the Department of Labor during audits, or the costs of negative publicity on your business’s reputation. Not to mention the business operational and productivity disruption during an investigation or lawsuit. What is your team’s likelihood of non-compliance in an in-house versus an outsourcing approach?

Are you considering outsourcing?

Suppose your analysis leans toward outsourcing your leave management. Considering several elements can help facilitate a seamless transition and effective operation. Outsourcing doesn’t equate to completely removing your team from the process. Before taking the plunge, first get your house in order.

Your outsourcing partner will need you to have clearly defined and well-documented leave policies to guide the outsourcing process. This should include:

  • Accrual and utilization policies and notification period
  • Contact information for the individuals responsible for addressing leave-related inquiries
  • Employee documentation requirements
  • Outlining the different types of leave available at your organization
  • Return-to-work guidelines
  • The approval processes

A dedicated in-house HR resource still plays a crucial role in overseeing and managing the outsourced processes. It ensures they align with the organization’s specific needs and policies. They can also help build practical managerial training and communication channels with employees to provide clarity and understanding of the new processes among the workforce before the rollout.

Many vendors will also require technology implementation, usually at least an eligibility data feed for integration. The digital submission of income and salary information is often necessary for paid benefits. Your outsourcing partner will also need clear and accurate financial instructions on what payments you need to make.

Selecting your outsourcing partner

The market offers a variety of carriers, and it’s essential to consider factors such as diversity and quantity when doing your due diligence on outsourcing options. Here are three key considerations to guide your search:

Timeline: Always allow for more time than you anticipate needing in your search and implementation process. We recommend starting the request for proposal (RFP) process for a January 1st initiation by May, if not earlier. Carriers typically require 120-day implementation periods, so decision-making should take place in the summer.

Comprehensive RFPs: Include questions in your RFP to help you determine cultural alignment, communication strategies, timelines for claims, call center operations, and payment processes. You should also outline how the carrier will work with your internal team and how easy it is for your employees to use it. Emphasize your business pain points within the RFP, and make sure the vendor you select addresses them and their solutions.

References: Collect references from the leave management vendors you’re considering. This can help you gain deeper insights into a vendor’s performance and reliability.

How Marsh McLennan Agency can help

Keeping leave management in-house or outsourcing requires a thorough analysis of your organization, HR team capacity, culture, and cost implications. Finding the right outsourcing partner is an additional process.

Our team of experienced advisors is here to guide you toward a successful future, providing deep insights and strategic solutions tailored to your needs. Let us help you navigate the complexities of outsourcing and unlock new growth opportunities.

Contact one of our Employee Health & Benefits consultants today to determine if outsourcing is right for your business.

Download our ADL Benchmarking report to see how your time-away policies compare to other companies.