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TREND WATCH:
PAYROLL OUTSOURCING
Choosing Whether to
Manage Payroll In-House or
Use an Outsourced Solution
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INTRODUCTION
Accurate and timely payroll management is paramount to the successful operation of any
business, whether a company has five employees or 5,000. If employees are not paid on time—
and if employers fail to follow state and federal directives for employee classification, payroll tax
filing, and other regulatory issues—management can soon find itself facing critical challenges,
from high turnover to steep fines.
Although employers are increasingly comfortable outsourcing human resources functions, such as
recruitment and benefits administration, many choose to keep payroll in-house. Small and midsize
businesses (SMBs), in particular, often find that the tools and support provided by off-the-shelf
software solutions and software as a service (SaaS) providers are more than sufficient to handle
payroll functions internally. However, technology is not without its challenges, including the cost
of purchasing and maintaining systems, data security issues, and incompatibility with other HR
platforms. In addition, variables such as increasingly complex regulatory requirements and the risk
that an internal payroll administrator may be out sick or leave the firm can leave organizations
vulnerable to incurring fines and penalties if payroll is managed incorrectly.
In light of these realities, more and more
companies are looking to outsourced
From payroll to benefits
payroll solutions to handle part or all
administration, 85% of businesses
of the day-to-day administrative tasks.
In fact, an estimated 85 percent of
outsource at least part of
businesses outsource at least part of
their HR functions,
their HR functions, according to The
reports The Fiscal Times.
Fiscal Times.1 Payroll often is a key
area of focus, as companies seek to
reduce administrative costs and improve
integration with other HR functions. Outsourcing not only can minimize the cost of setting up
software and data servers in-house, but also allow employers to benefit from economies of scale,
guard against business disruption, ensure compliance with state and federal legislative mandates,
and free up internal staff to concentrate on core business activities.
Of course, not every business will reap the full benefits of outsourcing. Determining whether
a third-party service provider is the right solution requires a careful analysis of existing
administrative costs and processes.
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2
“HR: Big Savings for Small Business,” The Fiscal Times, July 22, 2013.
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This report examines the pros and cons of both internal payroll management and outsourcing,
so that employers can make an informed decision about which path is best suited for their
organization.
THE TRADITIONAL MODEL: IN-HOUSE MANAGEMENT
These days, managing payroll means more than writing checks to employees and contractors
for the hours they worked. In the modern marketplace, employers must also ensure employees
are properly classified to meet Fair Labor Standards Act (FLSA) regulations, calculate gross and
net pay based on the employee’s tax filing status, and adjust payroll distributions to take into
account vacation days, sick time, and unpaid leave. In light of these considerations, payroll often is
intricately interwoven with workforce administration (WA) to maintain employee information, as
well as time and attendance (TA) management and health and welfare (H&W) administration.
During the lean start-up years, businesses commonly choose to handle payroll in house. For
smaller firms with a handful of employees, the process is often quite manageable, particularly
when using newer off-the-shelf software or an SaaS solution. After a worker is set up in the
system, the business owner or a trusted employee takes over the administrative tasks of running
and distributing paychecks according to the company’s schedule, and things move along pretty
smoothly. Because the software does the heavy lifting on calculations for tax and benefits
withholdings, the time commitment for SMBs is still manageable.
ADVANTAGES OF IN-HOUSE MANAGEMENT
Regardless of the company size, keeping payroll
administration in-house offers several advantages,
including:
• Control over the timing and process for
payroll distribution
• Customizing systems to the organization’s
needs
• Immediate access to payroll information
to run reports or correct errors
• Data security and integration with other
HR systems
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EMPLOYEE ELIGIBILITY
Workers eligible for overtime
must be paid at least 1.5x their
regular rate of pay for the time
they worked over 40 hours/week.
Knowing which employees qualify
for overtime and which are exempt
can ensure employers avoid FLSA
violations.
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Although managing payroll internally can be a comfortable place to start, many organizations
discover the process can become unwieldy as the business grows, particularly as continued
legislative changes demand increased paperwork and reporting to meet compliance standards.
Failure to comply with relevant minimum wage, overtime, and other salary-related regulations
under the FLSA can result in stiff fines for employers, and even imprisonment for supervisors or
company executives.
Likewise, penalties levied for missing payroll tax filing deadlines, submitting incorrect payroll
deposit amounts, or misclassifying employees can slow the pace of growth for larger organizations
and often are financially crippling to small and mid-size firms. Failure-to-deposit penalties can
be as much as 10 percent of the total payroll tax amount, and employers can realize a 5 percent
penalty based on their unpaid tax bill for failure to file.2 If a key employee who is responsible for
payroll administration is absent due to a prolonged illness or injury, or if the employee leaves the
firm, the organization runs the risk of missing a deadline or submitting erroneous reports and may
pay a steep price as a result.
A NEW PARADIGM: OUTSOURCING PAYROLL
In light of increasingly complex compliance regulations, more and more businesses are looking
to outsourced solutions for payroll processing and other HR functions. In the past, companies
often shied away from using a third-party vendor because they viewed outsourcing as inflexible
and difficult to manage. However, continued innovations with online platforms and cloud-based
servers, combined with improved process development, have made outsourcing an obvious
choice for SMBs as well as larger businesses.
Ironically, in-house technology often creates
Employers that use in-house software
added expenses, rather than reducing
or SaaS solutions to manage payroll
costs, because companies fail to take
and other HR functions spend an
into consideration the impact that the
average of 18% more than those
technology will have on business processes,
that outsource these functions to a
single provider, according to a 2011
the challenges of customizing the solution
survey report from Pricewaterhouse
to the company’s needs, and the burden
Coopers.
of managing and upgrading software. In
contrast, small and midsize firms that use
an outsourced vendor for payroll management can see a substantial cost savings over on-premise
software and SaaS solutions. What’s more, organizations who use a single outsourcing provider
2
4
“Employers Paying the Penalty for Wage and Hour Violations,” AccountingWEB, March 8, 2012.
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for workforce administration, health and wellness, time and attendance management, and payroll
spend 18 percent less, on average, than those that manage HR in-house with SaaS or premisebased software.3 In addition, integrating payroll with other HR functions can help organizations
better meet state and federal regulatory standards, maintain data security, and access meaningful
analytics while still enjoying all of the benefits of real-time processing.
Outsourcing also is often a necessary step for businesses experiencing a growth phase, as they
seek a common platform for managing multiple HR functions. Companies are able to benefit from
economies of scale and leverage the expertise of an outside service provider on issues such as
on-boarding, employee benefits training, and compliance, while also continually modifying the
scope of services to accommodate changing needs without incurring additional costs for new
administrative staff or software systems within the organization.
ADVANTAGES OF OUTSOURCING
Regardless of company size, cost savings remains
one of the primary advantages of outsourcing
Administering payroll, time and
payroll. Administering payroll, time and
attendance, and related HR
attendance, and related HR tasks in house costs
tasks in-house costs SMBs
nearly $2,000 per employee per year (PEPY) for
nearly $2,000 PEPY.
SMBs with 100 – 1000 employees, while larger
organizations with more than 1000 employees
Source: The hidden reality of payroll & HR
spend more than $1,400 PEPY.4 Add to this sum
administration costs, PwC, January 2011.
the commitment of time and internal resources
that could be put to use supporting strategic
growth initiatives or core business activities that directly impact the bottom line, and the true
burden of managing payroll internally becomes clearer.
What’s more, companies often underestimate the hidden costs involved with payroll and HR
administration, and therefore erroneously believe that they can more effectively reduce outlays
by managing these tasks in-house. For businesses large and small, however, the Total Cost of
Ownership (TCO) of processing payroll and managing other HR systems may be markedly higher
when handled internally compared to using an outsourced service provider.
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3
The hidden reality of payroll & HR administration costs, Pricewaterhouse Coopers, January 2011.
4
Ibid
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Areas that impact the cost of internal management include:
• System integration, maintenance and upgrades
• Labor and non-labor costs for IT staff, consultants, and vendor fees
• Indirect labor costs for employees who support payroll functions in the field (e.g.,
preparing employee hours for payroll, distributing checks, etc.)
Overlooking the hidden costs in these areas means companies may miscalculate the true total
cost of ownership for payroll functions by more than half, as illustrated in the table below.
Companies with 100-1000 employees
49%
51%
Companies with 1000+ employees
35%
65%
“Visible” costs, including system installation and upgrades, direct labor, outsourcing
“Hidden” costs, including indirect labor costs, direct non-labor costs, systems maintenance
Source: The hidden reality of payroll & HR administration costs, Pricewaterhouse Coopers, January 2011.
Despite improved technologies and process innovations, companies with more than 1000
employees that manage payroll in-house have seen the TCO increase by $1 per paycheck since
2003, due to hidden costs, according to a
recent industry survey.5 The same report noted
Payroll functions account for 41% of
that payroll functions accounted for 41 percent
the average annual TCO per employee
for SMBs with 100 - 1000 employees.
of the average TCO per employee per year for
SMBs with 100 – 1000 employees, and 36
Source: The hidden reality of payroll & HR
percent of the total cost of ownership PEPY for
administration costs, PwC, 2011.
organizations with upwards of 1000 employees.
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6
The hidden reality of payroll & HR administration costs, Pricewaterhouse Coopers, January 2011.
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Using an outside service provider can reduce these costs because the vendor bears the expense
of developing and implementing software, data storage, and data security systems, as well as
hiring additional staff to manage the expanding needs of its customers. Businesses that use an
outsourced provider have the option to scale the services up or down, as company needs dictate,
and leverage the vendor’s expertise and resources to reduce the burden on internal staff for
setting up new hires in the system and managing routine payroll processing functions.
Other advantages of outsourcing include:
• Keeping key staff focused on core business activities that impact the bottom line
• Classifying both union and non-union employees properly to meet FLSA guidelines
• Minimizing the burden internally to stay abreast of ongoing legislative changes and
regulatory mandates
• Eliminating the need to purchase accounting software or upgrade software systems as
the business grows
• Providing the ability to conduct routine payroll audits
• Allowing in-house IT staff to focus on network systems for the overall business, rather
than managing software maintenance and updates for accounting systems
• Ensuring that payroll processing continues without interruption, regardless of whether
internal employees are sick or on vacation
In addition, companies that outsource are still able to maintain control over payroll data and run
detailed real-time reports, thanks to web-based and cloud-based systems. Businesses retain all
the benefits of an in-house system without purchasing software or having ongoing IT support
costs.
SELECTING AN OUTSOURCING PROVIDER
A first step when looking for an outsourced payroll solution is to review current processes and
determine where opportunities exist for improving efficiencies and reducing costs. The ability to
integrate payroll management with other HR functions, such as benefits administration and TA, is
a key consideration for streamlining payroll functions and reducing overhead and internal staffing
needs.
For example, BenefitMall PayFocus™ lets organizations easily add employees through a web-based
dashboard by following a step-by-step process that includes demographic information, taxes and
payroll deductions, and banking information for auto-deposit. Employees can use the same online
system to track work hours and, when granted authorization, download paystubs and W-2 forms
at any time. Employers are freed from the burden of managing administrative paperwork while
still benefiting from real-time reporting tools and exceptional customer service.
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Protection against compliance risk is also a primary benefit of outsourcing, and companies should
look for a vendor that offers strong support in this area. The outsourced service provider not
only should handle all payroll tax filings and year-end processing, but also be able to provide
expert guidance and educational resources to ensure employers adhere to all local, state and
federal regulatory requirements. In this area, too, integration with other HR functions can reduce
administration and increase business efficiencies.
Other considerations when looking for an outsourced payroll administrator include:
• A commitment to rigorous data security
• Easy access to robust reporting tools
• Flexibility and scalability to meet changing needs
Overall, a good outsourcing provider should offer tools to automate previously manual
administrative transactions, allow employees to enter and self-manage information that does
not require direct HR involvement, and empower employers to access data systems anywhere,
anytime through user-friendly technology platforms.
THE FUTURE OF PAYROLL OUTSOURCING
From payroll tax filings to benefits withholdings, payroll administration has become increasingly
complex for businesses to manage internally. Pending changes in the tax code, EEO compliance,
health care, and other legislation combined with the risk of penalties for breaching existing
regulatory requirements place a heavy burden on businesses’ internal staff to maintain a high
level of expertise while still managing routine administrative tasks. Similarly, the set-up and
ongoing maintenance requirements of accounting software increase the need for internal IT
support and drive hidden costs. By outsourcing payroll and other HR functions to an experienced
and knowledgeable payroll services vendor, employers can mitigate the risk of non-compliance,
streamline operations, and reduce both direct and indirect costs to the business.
The adoption of cloud computing and improvements in online platforms will continue to
make outsourcing a more popular and viable solution for SMBs as well as larger organizations.
Employers can eliminate redundant tasks and reduce the risk of errors while still benefiting from
real-time reporting tools, expert guidance, and 24/7 customer support. Moreover, the flexible and
scalable nature of many outsourced solutions and the ability to integrate other HR functions give
employers the option to pay for only the services they need and improve economies of scale.
The classic arguments against outsourcing being costly and cumbersome have become obsolete,
as new technologies and improved processes give employers the visibility, control and cost
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savings they desire. Partnering with an outsourced vendor allows business owners and executives
to spend less time worrying about unwieldy paperwork, administrative tasks, and regulatory
requirements, and more time focusing on the needs of their employees and the success of their
organization.
ABOUT BENEFITMALL
BenefitMall® is a national provider of employee benefits, payroll, HR and employer services.
Headquartered in Dallas and founded in 1979, BenefitMall works with a network of more than
20,000 brokers and CPAs to deliver payroll, HR and employee benefits to more than 200,000 small
and medium-sized businesses.
Combining efforts with our Trusted Advisors, we help employers identify and provide the best
benefits solutions for their employees, ranging from medical and dental plans to accurate
and timely payroll. We serve as a single source for your payroll and benefit data management
and provide the additional security of easier health care compliance. Our knowledgeable and
innovative employees are respected in their industries for providing legendary customer service
and building extraordinary relationships.
We partner, serve and deliver value to:
• Brokers by providing leading products, tools and knowledge enabling them to design
comprehensive benefits packages for small to medium-sized employers.
• Accounting Professionals by delivering accurate and timely payroll to their clients.
• Carriers by providing the nation’s largest General Agency distribution.
• Businesses Owners by delivering the nation’s largest portfolio of benefit and payroll
products and services supported by a network of trusted advisors and designed to
support health care compliance.
For more information about our products and services, visit www.benefitmall.com.
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