What is payroll outsourcing?

Payroll is very complex, costly and time-consuming. Therefore, it’s hardly surprising that payroll is the business function that companies outsource most often. The business case for global payroll outsourcing is even stronger than for domestic payroll. That’s because the complexity and compliance risks linked to payroll increase with every new target market.

But what exactly is meant by outsourcing payroll? What are the pros and cons of outsourcing payroll? And how does payroll outsourcing work for global organizations?

Outsourcing payroll means entrusting an external payroll service provider with the administration of payroll processes instead of handling payroll in-house. While some businesses use payroll services for their domestic workforce, the real value of outsourcing payroll lies in simplifying global payroll management.

Payroll outsourcing is a relevant option for organizations that struggle to process payroll in a fast, efficient and accurate way with their in-house team. For companies that are in the middle of global expansion, the need to outsource payroll emerges due to different factors:

• The complexity of global payroll (different rules and regulations in every country, time zone differences, and more)

• Need to free up internal resources to focus on global expansion 

• Increasing global payroll compliance risks with each new market

That’s why payroll outsourcing is very popular among organizations that are expanding globally. In fact, the 2020 Deloitte Global Payroll Benchmarking Survey showed that almost 73 percent of organizations were outsourcing at least some aspect of payroll.

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It’s up to the company to decide which parts of the payroll process they want to hand over to a payroll outsourcing company. Outsourced payroll functions typically include:

• Payroll processing and salary calculation

• Calculation of payroll taxes 

• Employee benefits administration

• Submitting reports to the tax and social security authorities

• Issuing payments to said authorities

An additional payroll function that can be outsourced is the administration of employee payments. However, this isn’t always possible in the context of global payroll outsourcing, since some countries require wages and salaries to be paid directly by the employer.

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 data security, and improved data visibility.

Saves time and money

Payroll outsourcing companies usually use payroll software to automate payroll processes. Contracting a payroll outsourcing service will therefore usually be cheaper, faster and more efficient than setting up, managing and paying 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 and drive the expansion project forward.

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.

Reduces payroll errors

Deciding to outsource payroll to an external service provider usually goes hand in hand with reducing payroll errors. Payroll services often work with payroll automation, which means less human intervention and thus less room for errors. Plus, payroll is their core business activity and a good payroll service provider is a real expert in all things payroll. And since less mistakes in payroll means happier employees, the benefit for the business is real.

Improves data security and transparency

As payroll providers process large sets of employee data on a daily basis, they generally have strong security measures in place to prevent sensitive payroll data from getting leaked. What’s more, international payroll outsourcing services often offer additional global payroll reporting which enhances data transparency and supports strategic decision-making.

Depending on how an organization thinks and operates, it’s possible to identify some disadvantages of payroll outsourcing. Some possible drawbacks are:

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

• Accessibility of payroll partners and error rectification: 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: Although contracting a payroll service company reduces compliance risks significantly, there is never a 100% guarantee.

Given that payroll processes, regulations and service fees vary greatly from one country to the next, there’s no clear-cut answer to the question of how much money businesses need to spend for multi-country payroll outsourcing. Additional factors that influence payroll outsourcing costs are headcount, payroll cycle, and the range of services required by the organization. 

When it comes to pricing models, there also are different options. While some payroll providers base their prices on payroll frequency, others will charge a fixed fee for a basic service package. Yet others calculate their prices per employee and per month.

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 few things to keep in mind to make payroll outsourcing a success:

• Clear payroll outsourcing strategy: The first step for the business is to have a clear understanding of what payroll outsourcing services are required. Having a solid strategy in place will make things easier for both the internal team and the payroll partner.

• Choosing the right payroll partner: There are many payroll outsourcing companies in the market and businesses should choose their payroll service provider carefully after comparing different options.

• Careful planning: Usually, the end of the year is the busiest period for payroll departments. When switching to a payroll outsourcing model, it’s best to choose a different moment.

• Notification to employees: Payroll affects the entire workforce. Therefore, notifying all employees about the planned change is crucial. Especially team members who are involved in the payroll process (either for admin purposes or other) should receive clear instructions.

• Parallel payroll run: Especially 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.