4 Common Misconceptions Around Payroll Outsourcing

Running payroll across multiple regions can be overwhelming and complex for multinationals as there are numerous regulations and local labour laws to adhere to. As such, most multinationals frequently rely on payroll outsourcing to handle this administrative function. Based on Deloitte’s 2018 Payroll Operations Survey, which collected responses from a wide variety of organisations based globally, they found that more than 50 percent of respondents outsource their local payroll processing and tax reporting.

Despite the relatively high uptake of payroll outsourcing, there may still be organisations who are sceptical about the use of payroll outsourcing. The term “outsourcing” often creates a sense of fear that the role of payroll can be automated and subsequently, the job role made redundant. As outsourcing payroll involves engaging an external service provider, business owners may be concerned with the additional costs involved.

What is payroll outsourcing?

Payroll outsourcing is essentially the use of an external or third-party service provider to handle the organisation’s administrative and compliance functions of paying employees. This could include overseeing the end-to-end spectrum of payroll processing, from calculating wages and withholding tax or statutory contributions through to disbursing funds for employees or issuing checks as well as creating payslips.

What are some of the common misconceptions around payroll outsourcing?

1. My organisation is too small to benefit from partnering with a payroll outsourcing provider

Regardless of the organisation size, payroll is still an essential business function. Particularly for small business owners, there are plenty of administrative and business tasks that will need to be taken care of. In addition, employees need to be paid accurately and on-time in order to boost employees’ productivity and morale. As such, outsourcing payroll may be one of the options to free up more time for strategic business initiatives.

For small businesses, payroll staff may lack the necessary know-how to run payroll effectively and accurately. Staff may not be fully aware of the compliance matters relating to payroll such as appropriate tax-withholding for certain employee groups or meeting statutory submission deadlines. One small error could be a costly mistake for the business. Outsourcing payroll to a reliable payroll service provider can take away the strain of having to run payroll while ensuring that the necessary tax and statutory obligations are met.

2. My organisation is too large to benefit from partnering with a payroll outsourcing provider.

If your organisation is well established in the industry with a large volume of employees spread out across various countries or regions, processing payroll is likely to be even more complex and time-consuming. Your HR may even be constantly on the lookout for ways to streamline processes and minimise operational costs. Concurrently, as your organisation headcount increases, the higher the risk of incurring compliance issues simply due to the sheer number of employees. Many organisations may feel that by leaving payroll to the respective local HR teams, this may be a more efficient and effective solution. This may not necessarily always be the case.

With a large number of employees to process payroll for, an external payroll provider may be extremely handy. For one, most payroll providers use a cloud-based platform to store the organisation’s payroll data, which frees up system storage space for other critical business data. Second, payroll providers are expected to be familiar with the respective country’s labour laws and statutory contributions. This helps to ensure that your payroll data complies with the local employment laws and that the mandatory contributions are made on-time and accurately for all employees. This frees up time for your HR and payroll staff to focus on strategic initiatives to drive productivity and efficiency.

3. We have been processing payroll internally over the past decade and it has been smooth-sailing so far.

As technology evolves over the years, our business processes evolve in parallel in order to become more productive and efficient. The same can be said for payroll functions as well. While payroll is known to be fairly administrative in the past, advancements in technology have automated some of these administrative aspects of payroll so that staff can focus on other payroll priorities such as ensuring compliance and data security.

Despite the technological advancements, some people may be resistant to change and prefer to stick with what they are comfortable with. As long as processes and outputs have been smooth-sailing, there is no need to upgrade or change, right? Majority of the time, this leads to internal efficiencies and over time, incur high operational costs. When introducing a new payroll software to employees, be upfront about the impact that it will have on their jobs. At the same time, communicate to employees how their roles may evolve to support the transition to an external payroll provider.

4. It is too expensive to outsource payroll

In a study conducted by PwC on The hidden reality of payroll & HR administration costs, it found that “organisations tend to underestimate the true expense of processing payroll, administering employee health and welfare benefits, and managing other key HR systems and functions.” Many of these organisations fail to recognise certain “hidden” costs necessary to operate and integrate these interdependent HR processes. Separate technology and process solutions are often used to execute individual HR functions, including payroll, without considering how these HR solutions can actually work together with each other.

Organisations often confuse payroll software vendors with payroll management systems, falling into the trap that these two HR functions should be on separate entities. In fact, most payroll software vendors typically offer other features in their payroll software such as leave management system or expenses tracking. Concurrently, payroll software vendors will often recommend integrating the payroll software with the organisation’s existing HR management system so as to feed employee data into the payroll software to facilitate payroll processing. Given the interdependency of these HR functions, most payroll software vendors are able to offer organisations a bundled HR management solution, instead of organisations having to purchase each software as a standalone HR solution. This helps to minimise fragmentation of HR processes and reduce administrative costs as well.