Adapting to the digital era is not a task for which all companies are prepared. It is now becoming common for companies to outsource certain processes that are not feasible internally to external providers so that they manage functions.
One such example is payroll outsourcing.
What is payroll outsourcing?
Payroll outsourcing is a service offered by an external entity that provides legal, tax, and accounting support to companies to ensure that employees receive their paychecks on a timely and accurate manner, and with minimal risk.
By allowing an external provider to manage their payroll, companies can simplify legislative compliance and relieve their team from a large administrative burden.
Outsourcing their payroll enables companies to:
- Register and control incidents.
- Calculate, pay, and distribute payroll according to the appropriate frequency (weekly, biweekly, monthly).
- Calculate benefits, such as vacation time, commissions, or incentives, vacation premiums, severance payments, pre-retirement, or other payments that are not part of the employee’s salary.
- Simplify regulatory compliance, including data protection legislation.
- Operate globally and seamlessly manage payroll across national and international locations.
Is payroll outsourcing right for your company?
Companies of all industries, sizes, types, and locations can benefit from a complete payroll outsourcing service. However, they need to consider the quality of the service provided and the technology used to perform the functions.
Payroll outsourcing is especially useful if your company:
- Does not have an in-house finance and administration team.
- Needs the finance and administration team to focus on strategic tasks outside of payroll.
- Operates internationally, but does not have payroll management experts in each country.
- Requires continuity of payroll management and lacks a robust data recovery system.
- Is concerned about compliance with current or future regulations.
While these reasons are valid, each company is different. Therefore, they must perform a thorough analysis of their situation to choose the right provider. This analysis requires consideration of specific factors including:
- Workforce size and number of people preforming payroll functions internally.
- Impact on the employees who were performing the company’s payroll functions — will they be transferred to other areas of the company, or will they have to be laid off?
- Whether the company lacks payroll knowledge and expertise.
- Whether the strategic decision to transform the costs associated with payroll functions into a variable cost proportional to the size of the workforce makes sense for the company.
How does payroll outsourcing work?
Once the company has decided to hire a payroll outsourcing service, they have to define guidelines and processes to ensure collaboration.
The first thing to do is to establish an information transfer system. Companies must share essential information about their workforce with the third-party service provider, such as names, wages, hourly or daily rates, timesheets, vacation and sick day policies, expense allowances, and any other data that is involved in calculating payroll.
Since the information being shared is sensitive, the company must also ensure that the payroll provider commits to protecting that information and obeying a security and confidentiality agreement. A data protection policy may also be needed.
Once the system is established and the processes are defined, the payroll provider can use the information to calculate payroll and pay your employees on time. They can also take care of compliance, payroll taxes, and reporting.
Companies must understand that outsourcing payroll does not mean they can do without internal payroll professionals. It means that these professionals can focus on other important accounting tasks, such as reviewing finance reports and resolving any accounting issues that may arise.
Advantages and disadvantages of payroll outsourcing
Payroll outsourcing presents great advantages, but it can also have disadvantages that are worth weighing. The key is to evaluate the pros and cons in advance.
Advantages of payroll outsourcing
1. Saves time
Payroll is a time-consuming process. By relieving the payroll department of these burdens, these employees can focus on other key areas of the business, such as developing financial strategies that strengthen the company’s competitive advantage.
2. Minimizes expenses
Outsourcing payroll helps companies minimize expenses and quantify visible and hidden costs around payroll management.
3. Prevents mistakes
By hiring professionals whose sole responsibility and focus is payroll, you minimize the chances of errors, missed deadlines, omissions, or late payroll tax filings.
4. Guarantees compliance
Payroll outsourcing providers are on top of labor codes and legislations, making it easier for employers to remain compliant.
5. Speeds responsiveness
Payroll providers can dedicate time to resolving any queries or issues your employees may have, speeding up response times.
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Disadvantages of payroll outsourcing
1. Loss of control
Handing over your payroll operations to a third party limits your control over processes and information accessibility.
2. Confidentiality threats
As mentioned above, it is extremely important to ensure that all company and employee information is protected and to establish confidentiality and data protection policies and agreements. Otherwise, confidentiality threats could pose issues for you company.
3. Difficult coordination
Companies still need to set time aside to coordinate certain tasks and activities with their payroll providers, which can prove time consuming. They also need to provide ongoing support to ensure the third party achieves the desired results.
After analyzing the advantages and disadvantages of outsourcing payroll, companies face another dilemma: choosing the right payroll outsourcing provider. Here are some factors you need to consider.
How to choose the right payroll outsourcing provider
1. Internal control
A good payroll outsourcing provider takes care of their business and invests in bettering their own offering. This ensures they are well organized, structured, and able to commit to ensuring quality performance. This commitment and focus also makes them less likely to generate data loss payment delays, fines, and lawsuits.
2. Best-in-class technology
A good payroll outsourcing provider has the best-in-class technology to help companies scale. Technology provides increased functionality and delivers benefits for the employer and the employees. A good technology also provides data backup and disaster recovery, which can mitigate potential risks.
In addition to providing a tailored experience to meet unique company goals, payroll providers stay on top of changing regulations. This will result in maintaining compliance with tax and labor laws, regardless of the company’s location.
Price is and will continue to be important when choosing a provider. However, the price must align with the company’s objectives and performance expectations.
5. Customer service
Good customer service is crucial to successful payroll outsourcing. Consider other clients’ reviews and ask for references.
Outsourcing your payroll can be a complex process, and choosing the right provider is not easy. Globalization Partner’s AI-driven, fully compliant global Employer of Record (EOR) platform is powered by our in-house worldwide HR experts and allows you to automate your payroll process with just a few clicks.
We take care of international payroll so you can focus on growing your business and save time and money while remaining compliant with labor laws and regulations.
Learn more about international payroll.