What is payroll outsourcing?

Payroll is one of the business functions that companies outsource most often. The case for global payroll outsourcing is even stronger than for domestic payroll outsourcing. That’s because the complexity and compliance risks linked to payroll increase with every new target market.

What does payroll outsourcing mean? How does it work? What are the pros and cons of outsourcing payroll? How much does it cost to outsource payroll? And what should global organizations keep in mind when externalizing their payroll processes?

Outsourcing is when a company hires out a certain business function or process to a third party. Payroll outsourcing hence describes the externalization of a business’s payroll processes. Outsourcing payroll is typically associated with cutting costs, improving process efficiency, and enhancing compliance.

While many businesses use payroll services for their domestic workforce, the real value of outsourcing lies in simplifying global payroll management. Global payroll outsourcing takes outsourcing to a new level by externalizing payroll tasks for employees in different countries and locations, either using several local payroll outsourcing companies or a single global payroll provider.

Not all outsourced payroll services are the same. Which payroll functions and processes can be outsourced depends on the provider—and sometimes also on the country. In theory, it’s possible to outsource the entire payroll process and everything related to it.

However, it’s up to the company to decide which parts of the payroll process they want to hand over to the chosen payroll outsourcing provider. Outsourced payroll services can include:

• Payroll implementation and set-up,

• Payroll processing and salary calculation,

• Calculation and administration of payroll taxes, 

• Employee benefits administration,

• Administration of salary payments,

• Statutory payroll reporting,

• Administration of tax payments,

• Payroll recordkeeping,

• Compliance management, and

• Employee payroll support.

In the case of global payroll outsourcing, the services offered by in-country payroll providers might be limited due to local restrictions. For instance, not all countries allow for salary payments to be handled by a third party.

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There are various reasons why companies decide to outsource payroll. The main advantages of payroll outsourcing are cost and time savings, reduced compliance risks, fewer payroll errors, better payroll security, and improved data visibility.

• Saves time and money: Payroll outsourcing companies use payroll software to automate payroll processes. Contracting a payroll outsourcing service is therefore often cheaper, faster, and more efficient than operating with an in-house payroll department. The more employees and payroll countries businesses have, the more money they can save.

• Frees up internal resources: Businesses need to be fully focused on their international expansion if they want to hit their growth targets. Not having to deploy a part of the HR team to take care of payroll means that the internal team has more time to focus on core business activities.

• Enhances global payroll compliance: One big advantage of working with international payroll outsourcing companies is having direct access to payroll expertise. Payroll providers are experts with regard to local tax rules and regulations and know the payroll and compliance calendar of every country they cover. Outsourcing payroll therefore frees businesses from worrying about important payroll-related deadlines and other global payroll compliance risks.

• Minimizes payroll errors: Deciding to outsource payroll to an external service provider goes hand in hand with reducing payroll errors. External service providers typically leverage payroll automation, which means less human intervention and thus less room for errors. Plus, payroll is their core business activity and a good payroll provider is a real expert in all things payroll.

• Improves data security: Payroll providers process large sets of employee data on a daily basis and hence know the importance of having strong security measures to prevent sensitive payroll data from getting leaked.

• Supports strategic decision-making: International payroll outsourcing services often offer additional global payroll reporting which enhances data transparency and supports strategic decision-making.

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Not all organizations consider payroll outsourcing as a viable option. Depending on the corporate mindset and general management approach, it’s possible to identify some disadvantages of payroll outsourcing.

• Data ownership and perceived loss of control: Some companies want to be in full control of all business processes and entirely own their employee data.

• Availability of payroll partners: Having payroll partners in different countries all over the globe means dealing with different time zones and language barriers which can slow down communication and procedures to correct payroll errors.

• No compliance guarantee: Contracting an external payroll service reduces compliance risks significantly. However, there is always a certain residual risk of compliance mishaps.

If not managed correctly, global payroll outsourcing can pose further problems for organizations, such as:

• Multi-vendor management issues: Businesses that decide to work with several local payroll outsourcing companies instead of contracting the services of a global payroll provider are likely to experience difficulties in managing multiple service providers.

• Fragmented payroll data: Another potential risk of working with multiple payroll providers is that payroll data for different locations will be fragmented and non-standardized. This leads to reduced operational oversight in global payroll. When outsourcing global payroll, businesses should always look for a solution that includes global payroll consolidation.

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Here are the most important pros and cons of payroll outsourcing at a glance:

Payroll outsourcing is typically the best option for organizations that struggle to process payroll in a fast, efficient and accurate way with their in-house team—or that don’t have a dedicated internal payroll unit at all.

For companies that are in the middle of global expansion, the need to outsource payroll emerges due to different factors:

• Global payroll complexity: With different rules and regulations that apply to payroll in every country, cultural differences, multiple currencies, and different time zones, global payroll can be incredibly complex. One way of reducing global payroll complexity is outsourcing.

• Need to focus on global expansion: Global expansion is a challenging business endeavor that requires a lot of resources. Payroll outsourcing frees up resources in the Finance and HR departments to work on expansion-related tasks and problems.

• Increasing compliance risks: With every new target market, there are new compliance risks the business needs to deal with.

• Changing regulations: Legal changes affecting payroll are very common. Keeping track of regulatory changes in one country is challenging, even more so when payroll operations span across several countries.

All these factors make global payroll outsourcing a highly popular option for multinational and expanding businesses. The 2020 Deloitte Global Payroll Benchmarking Survey showed that almost 73 percent of organizations outsourced at least some aspect of payroll.

Meanwhile, data published by Statista shows that 12 percent of organizations worldwide fully outsourced their payroll function in 2019. And, as shown by the expected growth trajectory of the global payroll market, the demand for payroll outsourcing services is continuously growing.

Payroll outsourcing is generally considered to be a cost-effective approach to payroll management. However, whether it is really cheaper to outsource payroll depends on the business’s individual situation (e. g. existing internal structures and expertise).

So, how much does it cost to outsource payroll? There is no clear-cut answer to this question. Payroll processes, legal regulations, and payroll service fees vary from country to country, which impacts the total payroll outsourcing cost. Additional factors that influence payroll outsourcing costs are headcount, payroll cycle, and the range of services required by the organization.

Also, payroll outsourcing providers have different pricing models. While some payroll providers calculate their service fees based on payroll frequency, others will charge a fixed fee for a basic service package. Yet others calculate their prices per employee and per month.

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There are several steps businesses need to go through when outsourcing their payroll. Here is a break-down of the main process steps.

• Developing a payroll outsourcing strategy: Businesses first need a clear understanding of what payroll services they actually require and what they expect from a payroll outsourcing provider. A solid strategy makes things easier for both the internal team and the payroll partner.

• Creating a project timeline: Timing is everything when hiring out payroll functions. Before taking any further steps, the project team should develop an implementation timeline.

• Reaching out to service providers: The next step is to find a suitable payroll partner (or payroll partners, depending on the scale of the business’s payroll operations).

• Setting up the new payroll: After concluding a payroll service contract, the provider needs to set things up to process payroll on behalf of the business. In order to do this, the business needs to transfer all the data needed for payroll as well as any other information that is relevant for payroll processing.

• Double-checking the information: Having a clean data input is crucial for payroll accuracy. Incorrect source data will lead to inaccurate payroll calculations. Therefore, businesses should make sure to double-check all the information that was added to the system that is set up by the payroll outsourcing provider.

• Notifying employees: Payroll affects all of a business’s workforce. Therefore, notifying employees about the planned changes is crucial. Also, team members who are actively involved in the payroll process should receive clear instructions.

• Parallel payroll run: When switching from in-house payroll processing to payroll outsourcing, it’s always a good idea to have at least one parallel payroll run to make sure both payrolls deliver the same results.

Regardless of whether an organization is looking to outsource its domestic payroll or searching for a solution to outsource their multi-country payroll, there are a few things to keep in mind to make payroll outsourcing a success:

• Finding the right payroll partner(s): There are many payroll outsourcing companies in the market and businesses should choose their payroll service provider carefully after comparing different options. Using a global payroll RFP can help create a shortlist of promising candidates that can serve as a starting point.

• Choosing a good moment: Year-end might be the busiest time of the year for payroll, but it’s the best time to outsource payroll or to switch payroll providers. That’s because it allows businesses to start the year with the new payroll set-up and avoid complications in year-end reporting.

• Not rushing things: Payroll is a critical business function which should only be outsourced to a trusted and experienced service provider. Businesses should take their time to do their due diligence when developing an outsourcing strategy and selecting a suitable payroll outsourcing provider.

• Maintaining global oversight: Outsourcing its payroll doesn’t free a business from all payroll-related duties. No matter how good the payroll provider is, the business should always keep track of processes, data, and cash flows. Global payroll outsourcing should help the business maintain operational oversight of its payroll processes.

• Asking the right questions: Outsourcing payroll is not a business decision that should be taken light-heartedly. Businesses should make sure to raise all the questions they have upfront. Also, there are many preliminary questions that should be answered before embarking on any payroll outsourcing journey, from needed payroll services to specific provider requirements.

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