In the past companies of all sizes would do everything by themselves from operations to payroll to finance, they would keep everything in-house. As time progressed the benefit of outsourcing certain features became more apparent, with businesses starting to outsource an array of functions. Businesses began to outsource different functions that made operations easier and an example of this is payroll outsourcing.
What is Payroll Outsourcing?
Payroll administration involves the calculation of employee’s salaries or wages, taking into account the number of days worked, any deductions, expenses, re-imbursements, taxes and any other calculations that may need to be made. The administration of the employee payroll can be a complex task, as it needs to be done in compliance with local laws and regulations.
Payroll outsourcing is a service which is offered by an external company or service provider that specializes in payroll administration. These organizations often provide accounting, legal and tax support, ensuring that their clients remain in compliance with local laws and practices.
Who Should Outsource Payroll Activities?
Businesses across of all sizes and across all industries are able to outsource their payroll activities. Generally, small to medium sized business outsource payroll as it may be costly or slowdown productivity if it is processed in-house. Larger businesses who opt to outsource their payroll activities generally do so when sending an employee or group of employees to a different region on assignment for a particular period of time.
Payroll outsourcing is most useful for businesses who:
- Do not have an in-house finance team who usually process the payroll.
- Do not have an effective payroll management system setup.
- Are considering expanding and do not wish to employ more administrative or finance staff.
- Wish to operate in a different country or region and do not have an entity setup in that region.
- Want to solely focus on their core business activities.
- Wish to reduce risk of non-compliance with local regulations and processes.
Companies should consider the above-mentioned points as well as the specific circumstances surrounding their business, to determine if they should start looking for an outsourced payroll service provider.
When Should you Outsource Payroll?
When a business should outsource their payroll is a subjective question that is dependent on a number of different factors. Companies should assess their specific needs and future plans in order to determine if their payroll process should be outsourced. Companies should also look at their available resources and determine whether it will be beneficial to carry out payroll administration in-house or whether outsourcing it simplifies the general operations of the business.
Why Outsource Payroll Processes?
In-house payroll management requires money, time, and resources, which can be challenging for many businesses. Businesses who do not have the HR and accounting staff to process their payroll internally need to outsource payroll operations in order to ensure they remain compliant with local regulations. Outsourcing functions like payroll, primarily allow businesses to focus on their core functions and not have to worry about performing such administrative tasks.
Benefits of Payroll Outsourcing
More companies are starting to see the benefits of payroll outsourcing and as such more companies are starting to use an outsourced payroll service provider. From small businesses to large corporations, payroll outsourcing has many advantages. Business should look at the benefits and the cost of payroll outsourcing and if the benefits outweigh the costs, they should then consider finding a payroll services provider. The main benefits of outsourcing payroll services include:
1. Saves your business time and resources
The internal management of payroll is a function that requires not only money, but time and other resources as well. Your business needs to ensure it has the qualified staff who understand the accounting principles and HR regulations of the region or country they are in. Furthermore, you may require certain equipment and software to ensure the proper organization and accurate record keeping of the payroll.
Payroll management does not only require accurate calculations and timeous payment. It also requires ensuring compliance with local laws and norms, processing timesheets, preparing reports, and handling queries from employees. While some businesses still manage their payroll internally, this requires the dedication of staff, time and resources that can otherwise be dedicated to the other parts of the business.
Outsourcing payroll functions does not only free up your staff and reduce the amount of resources being used, but also provides your business with access to experts whose primary business function is to attend to your payroll.
2. Ensures Compliance with Local Regulations
HR professionals, accountants and payroll officers should not only ensure the correct, timely payment of employee wages, they also need to ensure that they do so in compliance with laws of the jurisdiction they are in. These professionals play an important role in ensuring the correct pay conditions have been met for each employee.
In today’s times, many companies operate with a combination of staff at different levels. A business may consist of full-time employees, part-time workers, independent contractors, and freelancers. Payroll staff must ensure that all payments adhere to the minimum pay standards and take into consideration other rules surrounding maternity leave, public holidays, social security contributions and taxes.
3. Cost Benefits
Having an internal payroll department requires much more than a single staff member dedicated to making payments to all employees. It requires staff with the necessary expertise, equipment, payroll software and more.
For small to medium sized businesses, they are able to make the cost calculation of the department by looking at the total amount of time used on all payroll activities, multiplying that figure by the total salary cost, and then dividing that by the number of pay slips that have been processed in that particular pay period and that will give you the labor cost per head (excluding overhead costs).
Once the cost has been calculated, businesses will be able to see the benefit of outsourcing payroll processing. As businesses grow and hire more employees and have more expenses, their payroll department should also scale up according to the increasing needs. Combined with overhead costs, and the administrative risk, an outsourced payroll provider offers a more cost-effective solution.
4. Efficient Record of Payments
With payroll processing being among the core business functions of a payroll service provider, they will have efficient processes and systems implemented to assist businesses with their needs. Having the correct software and processes is just as important as having skilled staff to perform the payroll administration.
An efficiently processed payroll management system is essential in ensuring compliance with the local HR and tax regulations, as well as in the prevention of fraud. All payments, deductions, taxes, and expenses should be accounted for by whoever manages the payroll. If outsourced, your payroll provider will be responsible for making the correct payments, making sure payments are made on time, keeping an efficient record of the payroll, and dealing with any queries or claims by employees or outside bodies.
5. Reduced Risk
In-house management of a payroll makes companies liable to ensure that their practices are compliant with local regulations and processes. They also need to make sure that their deductions and payments are correct, to avoid any issues or claims arising against them by their employees.
As a contracted partner, an outsourced payroll service provider will be liable for all calculations and ensuring the correct payments have been processed on time. This not only limits the administrative duty of the business, but also makes the service provider liable or any errors or omissions made, deadlines missed, or taxes filed incorrectly. This ultimately gives your business 1 less thing to stress about.
Disadvantages of Outsourcing Payroll
There are some downsides to allowing another service provider to manage your payroll, some of the downsides include:
1. Co-ordination with a 3rd party
By using an outsourced payroll partner a 3rd party is introduced in an employer employee relationship. The 3rd party will have to communicate with both the employee and the company when a claim arises. It is important that there is an easy path of communication with the payroll provider, to ensure any claims that arise can be dealt with quickly and efficiently.
2. Allowing Access and Control to a 3rd Party
When outsourcing any particular function of a business, you allow a 3rd party access to that function, and payroll administration is no different. By using a 3rd party to administer your payroll, you will have to provide them with access to your employee payroll information, as well as with the funds necessary to remit payment to your employees. Therefore, you have reduced control on the payroll department, and cannot alter the payment processes at your will.
3. Threats of Confidentiality
As the payroll service provider will have access to your employee information, they automatically gain exposure to information that should be protected. It is your duty as an employer to ensure that the data and information of your employees remains safe.
In order to ensure the safety of the data and information, you should ensure that in the agreement between your business and the 3rd party, employee information is protected and cannot be shared. If it is not included in the agreement, you can request the payroll service provider include a clause protecting important employee information.
How Does Payroll Outsourcing Work?
Once a company has found the right partner, they can then proceed to starting the outsourcing process. This usually involves first outlining the process, then transferring information, establishing the procedure and maintain the ongoing relationship.
- Outlining the process – the payroll provider needs to outline how the process usually works and both parties can determine what needs to be adapted by each party to ensure the collaboration works (e.g., timelines, payment dates etc.)
- Transfer of information – the company then provides the outsourced payroll provider with all necessary information (e.g., employee names, banking details, time sheets, expense sheets etc.)
- Establish the procedure – the service provider and company agree on how payment will be made, and the process to follow if any adjustments need to be made or any queries need to be dealt with.
- Maintain the relationship – companies and the service provider need to establish a clear channel of communication so that they are able to manage and maintain the relationship.
While it is not necessary for companies to have an internal department totally dedicated to payroll administration, they should not completely forego HR or accounting professionals. Internal HR staff are still necessary for other important tasks as well as serving as a link between the company and the payroll provider.
Ultimately it is becoming more common for businesses of all sizes to use an outsourced payroll provider. For many companies, the benefits far outweigh the risk, and greatly reduce the administrative liability placed on a business, by having to manage their own payroll.
INS Global is a leading HR solutions and global payroll provider. After having been established in 2006, they have helped more than 600 companies around the world, with their business expansion needs. Whether you are looking for a PEO, recruitment agency or a partner to help you invoice clients around the world, INS Global can help you. Contact us today and let our consultants provide your business with a free consultation.