The definitive guide to creating strong payroll SLAs

Whenever you contract external services for your business, it is advisable to establish a detailed service level agreement to set standards against which you can measure the performance of your service provider. This especially holds true for payroll outsourcing.

According to the Deloitte Global Payroll Benchmarking Survey, 81% of large businesses use payroll SLAs to track and monitor third-party payroll provider performance. Once established, payroll SLAs provide numerous benefits for enhancing the client-provider relationship and improving the overall payroll efficiency.

What exactly are the benefits of creating SLAs for payroll? What should be included in a payroll outsourcing service level agreement? What KPIs should be used to evaluate vendor performance? What additional aspects do businesses need to consider when drafting service level agreements for global payroll services?

A service level agreement (short: SLA) is a document that represents a formal agreement between your business and a service provider about the expectations, deliverables, and responsibilities of both parties in the contractual relationship.

A payroll SLA is hence an agreement you conclude with your payroll service provider to define what you expect from their services and how responsibilities are divided between the two parties.

SLAs should be established every time your business uses an external service provider, but they are of particular importance when contracting payroll services. Since poor performance in payroll can have severe negative repercussions on your business’s reputation, compliance, and your employees, service levels for payroll should be closely monitored.

Putting in place a strong payroll SLA is crucial when outsourcing payroll to a third-party service provider. The reason why SLAs are so important in payroll outsourcing is that they offer many advantages that enhance the relationship between vendor and client. This includes:

• Prevention of conflicts,

• Improved management of expectations,

• Better mutual understanding,

• Enhanced communication,

• Reduced risk of misunderstandings,

• Strong payroll partnership,

• Legal protection for both parties,

• General risk mitigation regarding payroll disruptions,

• Reduced uncertainty towards the payroll vendor,

• Improved payroll processes, and

• Enhanced payroll efficiency.

In short, a payroll processing service level agreement lays the foundation for a successful working relationship between your company and your payroll vendor. Only when the conditions and rules governing the payroll partnership are clear, your payroll vendor will be able to act as a real payroll partner.

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There are different elements that are typically included in SLAs, regardless of whether they are intended for payroll services or services required for another business function. The two categories of elements in SLAs are: service elements and management elements.

Examples of service elements in SLAs are:

• Contextual information regarding the required services,

• Overall objectives of the service provision and the SLA,

• Description of services,

• Service and performance standards,

• Service dependencies, and

• Service exceptions.

Examples of management elements in SLAs are:

• Service tracking,

• Service reporting,

• Reviewing and updating of the agreement, and

• Management of change processes.

Let’s try to get a better understanding of the different elements by looking at a payroll SLA as an example. When establishing a service level agreement for payroll outsourcing services, typical elements to include would be:

• Description of the installation set-up and installation services 

• Description of the ongoing payroll services, including payroll cycle services and services at the end of the pay period, registration of new employees with tax and social security authorities, payroll calculation, payslip distribution, salary payments, and more;

• Description of client duties and responsibilities (e. g. timely notification of employment termination, timely submission of employee timesheets, and timely communication of salary increases);

• Description of customer services, such as software support or consulting services;

• Penalty clause for service failures (although difficult to negotiate) that result in payroll compliance mistakes;

• Description of what will happen if the payroll provider repeatedly falls short of the agreed service standards;

• Description of escalation procedures in cases where issues in payroll cannot be resolved through regular procedures (including a payroll disaster recovery plan);

• Mention of possible limitations in payroll service delivery, such as reduced service availability during certain hours;

• Clear definition of metrics that can be used to evaluate the service delivery against the agreed service standards and deliverables (and choice of frequency with which performance metrics will be measured and reported).

A strong payroll SLA includes KPIs that can be used to measure the quality of the payroll service delivery and improve payroll efficiency. Key performance indicators that are typically included in service level agreements for payroll include:

• Payroll accuracy benchmarks, such as frequency of payroll errors and number of off-cycle payments,

• Response time for payroll-related queries or issues,

• Number of repeat enquiries on the same item,

• Time needed to resolve payroll issues,

• Data input quality,

• First-time approval rate, and

• Timeliness criteria for both client business and service provider (e. g. submission deadline for payroll changes).

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When creating a SLA for measuring the performance of a global payroll provider, timeliness and accuracy are still important metrics to track. But with multi-country payroll service delivery, there are also additional aspects to take into consideration when defining service standards.

First, the scope of the agreement can be defined in different ways. For instance, the SLA could be specific to either the technology platform leveraged for managing multi-country payroll operations or to the global payroll services. Also, the payroll outsourcing service level agreement can be created either for a specific geography or for the business’s global operations.

Second, it might be necessary to set up different service level agreements for different vendors. Running a multi-country payroll typically involves a number of different in-country providers. Depending on the set-up of the global payroll provider, there could either be different SLAs for each subcontractor or one centralized master SLA that applies to all the payroll providers that are part of the global payroll solution.

Knowing what to include in a payroll service level agreement and what KPIs and metrics to track to measure provider performance is not all though. There are many more aspects you should keep in mind when it comes to managing SLAs for payroll. Here are a few tips to help you succeed:

• Involve all relevant stakeholders: A payroll service level agreement that is created without input and feedback from different stakeholders is likely to fall short. Avoid this by getting all the parties involved that are relevant for payroll.

• Consider it a living document: Don’t think of your SLA as a “done and dusted”-type of document. SLAs are living documents that need to be developed. The rule is: test, get feedback, improve.

• Get a thorough legal review done: It’s not uncommon for SLAs to be referenced in the courtroom. So make sure the document is watertight from a legal point of view.

• Appoint a SLA manager: Managing payroll SLAs takes time and effort, which is why it’s advisable to appoint a dedicated SLA manager. This can be someone from the payroll department, such as one of your payroll managers.

• Communicate SLA expectations early: If you wish to include a service level agreement in the contract with your new payroll partner, you should make your wish known early on in the process. Mentioning this last minute might lead to the payroll vendor pulling out of the deal.

• Be reasonable and practical: When formulating the performance standards for the SLA, it’s important to define standards that can actually be met by the provider. One hundred percent accuracy in payroll is an expectation no payroll provider can meet.