Is it true that payroll outsourcing risks data leaks?

In the digital age, cybercrime is on the rise. Payroll data is highly sensitive, which makes it a prime target for hackers and cybercriminals. It’s not only small businesses that are at risk, but also large companies with advanced payroll security standards. One recent example of large companies being targeted is the payroll data hack that affected the BBC, British Airways and Boots.

Keeping employee data safe is a key concern for businesses, and many organizations are hesitant to put their sensitive data into the hands of an external payroll service provider. In fact, concerns about data safety are among the most commonly cited payroll outsourcing risks.

But are data security concerns in payroll outsourcing warranted? Is it true that outsourced payroll is more susceptible to leaks of sensitive employee data?

Outsourcing payroll is the process of transferring the responsibility for certain or all payroll-related processes to an external service provider. Payroll activities that are typically outsourced include:

• Payroll processing,

• Calculation of payroll taxes,

• Employee benefits administration,

• Payroll tax reporting and filing,

• Distribution of payslips, and

• Salary payments.

When businesses decide to outsource their payroll, they conclude a service contract with their chosen payroll provider. During the onboarding phase, the data needed for payroll is made available to the provider and a parallel payroll run is completed to make sure everything is set up properly.

Once this is complete, the client business just needs to make sure to report any salary changes or other changes regarding payroll-related employee information to the payroll service.

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There are different threats to payroll data security, including: 

• Data breaches and identity theft,

• Human error, e. g. employees responding to phishing emails,

• Employees intentionally leaking payroll information to get revenge for perceived unfair treatment, and

• Payroll fraud.

Payroll outsourcing has its pros and cons. On the one hand, it saves businesses time and money, frees up internal resources, and reduces payroll errors. On the other hand, it comes with a certain loss of control over payroll data and processes. Problems may arise if  the payroll partner is difficult to reach or slow to respond, making it important to do proper due diligence before choosing a payroll partner.

Another perceived downside of outsourcing payroll is that it increases data security risks. The reasoning being that  the transfer of payroll data between different systems offer hackers additional opportunities for accessing and stealing employee data.

Incidents like the recent payroll data breaches that affected big payroll processors like SD Worx show that payroll services can also become the target of cyber attacks. With the necessary precautions, however, data security risks in payroll outsourcing can be mitigated.

In order to prevent data security risks, it’s important to take precautions along the entire payroll processing chain. When outsourcing payroll, data security can only be guaranteed if the systems are secured at both ends (i. e. on your side and on your provider’s side) and if data is also protected during data transfers between the systems. Here are some tips on how to get there.

Ask the right questions when choosing a provider

Most payroll outsourcing risks (or perceived risks) can be minimized or even completely avoided by carefully selecting a service provider. When choosing a payroll service provider, it’s crucial to ask the right questions. This should include inquiring about the provider’s data security standards. Make sure to ask any potential payroll partner:

• Where they store their client’s payroll data,

• How data is protected when in storage,

• What measures are taken to secure data transfers, 

• If they have ISO or SOC certifications, and

• Who has access to payroll data.

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Include the right stipulations in your payroll SLA

Payroll SLAs (Service Level Agreements) outline what level of service is expected from your chosen payroll service partner. This not only includes setting standards for payroll accuracy, reporting and more, but also defining expectations regarding payroll data security during storage, transfers, and processing.

Use secure channels for data transfers

One critical mistake some businesses make when outsourcing payroll is to send emails containing employee payroll information. Emails are not a secure communication channel that should be used for transferring sensitive data. Payroll data and related information should only be shared via secured communication channels. Ideally, all processes involving payroll data should happen inside an end-to-end encrypted, secured platform.

Increase your internal data security standards

There are many different measures businesses can take to make their payroll more secure. This includes:

• Keeping payroll software up to date,

• Segregating payroll duties and limiting access internally,

• Properly disposing of old data,

• Enabling data encryption, and

• Storing payroll data in a secure cloud environment.

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Is payroll outsourcing without risks? The answer to this must be ‘no’. However, the data security risks associated with outsourcing payroll to a third party can be mitigated by working with the right payroll provider and by taking the necessary precautions to safeguard data both in your internal system and in your payroll partner’s system.

When choosing a payroll service, businesses must make sure to ask the right questions and put a strong payroll SLA in place that clearly outlines how data should be handled throughout the entire payroll process. Another important aspect to consider is the use of secure channels for data transfers between systems. This is where global payroll platforms like Lano come into play.

With a global payroll solution like Lano, you get access to a network of pre-vetted local payroll partners that covers more than 170 countries worldwide. Plus, you can send and receive data to and from your payroll providers with peace of mind. Our cloud-based global payroll platform provides a secure environment for storing your payroll data and uses encryption to protect data during transfers. Book a demo with one of our experts to learn more.