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Outsourcing payroll to a third-party supplier can work really well for some businesses, but it’s not necessarily suitable for all.
When you’re thinking about outsourcing your payroll there are some points to consider. We’re going to run through them, so you’ve got total transparency when it comes to the pros and cons of outsourcing payroll.
What are the advantages of outsourcing payroll to a third-party?
Saves time:
Outsourcing payroll allows businesses to focus on their core operations instead of spending time on payroll processing.
When businesses don’t have trained payroll experts in-house, managing and running the payroll can be complex and time-consuming. It’s often left to the business owner, HR Professionals or Accountants to run payroll. This takes them away from their core activities, it can take them much longer than a trained payroll professional and adds in more risk of errors or omissions.
Even if businesses do have payroll professionals in-house, outsourcing can still save time. Outsourced payroll professionals can ensure that critical calculations and payroll processing is done correctly and on time while the in-house team focus on collecting and managing the raw data and gross pay information.
Third-party service providers can run payroll quickly and efficiently. They also have a team of experts on-hand to answer payroll queries and questions, which reduces the time and effort required to do this in-house.
Expertise:
Payroll service providers have specialist knowledge and expertise, in payroll processing as well as on complex payroll issues and legislation. There are over 170 pieces of legislation that relate to payroll in the UK. By outsourcing payroll to a third party, the third-party takes on the responsibility of keeping up to date with all relevant legislation, so you don’t have to.
Third-party personnel ensure that payroll is completed accurately and efficiently. They can also help businesses with best practice and have a keen eye and the best technology to identify and correct inaccuracies.
Saves money:
Outsourcing payroll can be more cost-effective than hiring an in-house payroll team. It reduces the need for keeping payroll software up to date and also the cost of salaries, benefits, training and professional memberships for payroll personnel.
It can be costly in both time and money to recruit payroll personnel and maintain their knowledge in-house. If the in-house payroll person leaves the business, there’s cost again to the business to recruit and onboard new staff.
By out-sourcing payroll, this problem is taken out of the equation. Payroll service providers have the responsibility to find, train and retain the appropriate payroll professionals who have the expertise to support their clients.
Continuity:
When payroll is run in-house and the person responsible for processing it is absent – maybe through sickness or holiday – it can have a major impact on the business’s ability to run payroll successfully. Payroll might be left to someone who’s not fully trained and this runs the risk of errors in payroll or the payroll being run late.
When payroll is processed by a third-party, there’s a team assigned to a client. If there are any absences, another member of the team can step into place to run payroll, providing a seamless experience for both the business and its employees.
The payroll professional will also be fully trained and have the relevant expertise to support the client.
Compliance:
Payroll service providers are responsible for keeping up to date with constantly-changing payroll laws and regulations. By doing so, they ensure their clients are compliant with legal requirements.
This has two-fold benefits. The first is that the business doesn’t have to try and keep up to date with over 170 pieces of legislation – so this saves both time and effort. The second is that by ensuring the business is compliant with legislation, the payroll service provider reduces the risk of the business being levied with fines and penalties for non-compliance.
Reduced errors:
Outsourcing payroll to an experienced provider reduces the risk of errors.
Not only do payroll service providers have expert resource in-house who can spot problems and know what to look out for, but their systems also have automation built in. This means that the system looks out for errors, changes and omissions. Once these have been identified, they can be flagged for checking and verified to make sure changes are correct.
This leads to a reduction in errors when it comes to the final running of payroll, leading to more accurate payments to staff as well as accurate reports being submitted to HMRC and for staff benefits.
Scalability:
As a business grows, so does its payroll needs. By working with a third-party service provider, payroll is easily scalable without having to recruit, onboard and train new personnel. Services are both scalable and flexible along with system automation that can take care of much of the ‘heavy lifting.’
Enhanced security:
Reputable payroll providers are extremely security conscious. They’ve stringent security measures in place, combined with disaster recovery plans and systems, to protect employee data. One such measure is having ISO 27001 certification in place.
ISO 27001 is important for payroll companies as it sets out requirements for an effective information security management system. This includes risk assessments, security controls and planning for continuous improvement.
An ISO 27001-compliant information security management system helps payroll companies protect their data and systems from threats and to ensure compliance with relevant laws and regulations.
Increased employee satisfaction:
Payroll is a business-critical function. Salaries and wages need to be paid on time, every time. By using an expert payroll service provider, errors in payroll are reduced, accuracy is increased, experts are on hand to answer questions and employees get paid on time. This leads to an overall increase in employee satisfaction as they are paid correctly and feel more valued.
Access to technology:
Payroll service providers use cutting-edge technology to streamline the payroll process. Artificial intelligence and automation is built into the best payroll solutions which means data can be automatically checked and potential errors flagged. Many processes can be streamlined, reducing processing time and errors in data.
Businesses also get access to online portals that provide access to payroll data and reports. The best solutions have a suite of reports, giving a better view of analytics. This also helps businesses meet their legislative requirements, such as producing gender pay gap reporting (mandatory for businesses with over 250 employees).
Peace of mind:
Outsourcing payroll to a trusted provider can give businesses peace of mind, knowing that their payroll is being handled accurately and efficiently, that their submissions are being handled for them and their legislative responsibilities are met.
Timeliness of information:
Not only do employees have to be paid on time, every time, but it’s also essential that submissions are made to HMRC on or before the day that employees are paid. There are also other submissions/reporting requirements to schedule throughout the payroll year.
Data includes monthly submission of payroll and pension reports , P11D data, annual reports to HMRC.
A payroll services provider will schedule all these requirements and make sure that submissions are made in full, on time, so that businesses remain compliant and avoid fees and penalties.
Accurate budgeting:
Using a third-party payroll provider allows a business to know their costs when it comes to payroll which leads to more accurate budgeting.
Not only do payroll service providers save the business money in comparison with having to have in-house resources, but they usually have a fixed price per employee per month which means that the business always knows their costs when they bring new personnel on board.
As we’ve already said, outsourcing payroll is completely scalable and flexible, so the business doesn’t run the risk of internal personnel reaching a ‘saturation’ point, where the business then needs to recruit new team members to manage payroll. Businesses will always know their payroll costs.
So, as we’ve demonstrated, there are lots of advantages to outsourcing your payroll. But in the interests of total transparency, there are some elements which might be less advantageous and should also be considered.
These may be different depending on the size of a business considering outsourcing and the service that’s being offered by the supplier.
What are the disadvantages of outsourcing payroll to a third party?
Cost:
While outsourcing payroll can be cost-effective, it still involves a cost to the business. This can be a disadvantage for small businesses with limited resources.
Some payroll service providers require a minimum number of employees for payroll processing and out-sourcing may not prove cost effective for all. It’s important to evaluate different service providers - understand if they have minimum requirements, see if there are set up fees and per employee per month costs.
Turnaround time:
With some service providers, outsourcing payroll may lead to longer turnaround times, particularly if the provider is located in a different time zone or has a large volume of clients and they haven’t scaled their own resources appropriately.
Resources are needed for businesses both for processing payroll as well as for supporting employees, so this should be assessed to make sure adequate provision for all the elements needed by a business is in place.
Lack of support for answering queries and questions:
It’s critical when choosing a payroll bureau that effective support is available for employees so they get questions answered and problems resolved. Payroll forms a large part of the employee experience and, done badly, can have an extremely negative effect.
Sadly, poor customer service is a relatively common complaint about many payroll companies. This is down to untrained or inexperienced support personnel or simply not enough customer service staff being onboard. This leads to delays in responding to payroll processing problems; bottlenecks and a lack of responsibility or ownership and ultimately a poor employee experience.
Employees have different preferred methods of communication when they want to ask questions or raise queries about their payroll. Some may prefer to do all their communicating online or via messaging, while others want to speak to someone on the phone. Service providers need to make provision for this and some are not yet up to speed or simply don’t allow employees to make contact.
If an outsourced service provider hasn’t made provision for the different ways that employees want to communicate, this will limit the employees’ ability to get questions answered. If they can’t do this, it can lead to resentment from the employee or errors in their payroll not being picked up and corrected. When effective support isn’t available, there’s no relationship between the employee and the payroll bureau and that’s when they’ll feel like a ‘payslip’ rather than a person.
It’s also essential that the team answering questions are experts in payroll, not just cheap resource that have been brought in to staff a call centre.
How employees are supported is a very important consideration when choosing an outsourced payroll bureau.
It’s also important to check whether the Payroll Bureau will accept calls directly from employees. Some providers insist that only head office contacts are authorised to contact them which can create a bottleneck and certainly needs resource to manage in house, especially around paydays.
Lack of personal touch:
Outsourcing payroll can result in a lack of personal touch, particularly if the provider isn’t local and doesn’t have a personal relationship with the business.
When choosing a service provider, it’s important to understand the onboarding process - who the business will be in contact with; whether they will have a dedicated payroll manager and a team that will support them from within the third-party organisation.
Payroll is not only business-critical, but it’s also personal – and incredibly important to those getting paid. Having a team that’s invested in your business’s success is essential for the relationship and drives the positive outcome for your payroll processing.
Lack of control:
Outsourcing payroll means giving up some control over the payroll process. This can be a disadvantage for some businesses who prefer to have full control over their payroll.
Some payroll service providers offer both fully managed services where they do everything for the business client, or they may offer a partially managed service for those who want more involvement. If a business doesn’t want to give up any control of their payroll, they’re unlikely to find outsourcing a good fit.
Security risks:
While payroll providers have security measures in place to protect sensitive employee data, outsourcing payroll can still pose a security risk if the provider experiences a data breach.
Check that service providers have the highest level of security in place, that they’re ISO 27001 certified and have appropriate disaster recovery protocols documented, tested and updated as required.
Dependence on the provider:
Outsourcing payroll means becoming dependent on the provider for timely and accurate payroll processing. This can be a disadvantage if the provider experiences problems, experiences technical or security issues or goes out of business.
Make sure that the service provider is robust financially and has a good customer base. They should also have a solid disaster recovery plan in place, a strong management team that’s not solely reliant on one person and robust security for their payroll solution.
Hidden costs:
Some payroll providers may charge hidden fees or additional costs, which can increase the overall cost of outsourcing payroll. A valuable exercise to carry out is a comparison of all costs, depending on the size of your business, across a number of service providers.
Costs aren’t everything, though are a good indicator. Some service providers have more functionality that’s available as standard; a development roadmap with future functionality that’s automatically included in the solution and higher levels of support and service for both the business and employees. Evaluating costs is a good place to start to ensure affordability for the business before looking at the wider picture.
So, we’ve run through some of the pros and cons of outsourcing your payroll and we hope you find this information useful – or at least food for thought! If you have any questions, we’d be happy to answer them for you.
Interested in learning more? Take a look at some of these articles:
When is the right time to outsource payroll?
Which are the best payroll companies?
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