Risk With Payroll Outsourcing (And How To Avoid Them)

As with any business decisions, the decision to outsource payroll should not be taken lightly. Outsourcing payroll, as with any other outsourced business function, comes with its benefits and an element of risk. After all, it involves dealing with confidential and sensitive payroll information and employees’ personal information.

That being said, exposing your organisation to a small element of risk can sometimes lead to greater rewards. Being aware of the potential risks associated with outsourced payroll can help organisations to preempt or mitigate these risks.

Here are some potential risks that come with outsourcing payroll and ways to outsmart them.

Poor onboarding process

The very idea of moving your payroll function and setting up with a new payroll provider can be daunting. After all, a lot of time and effort is required to transfer your payroll data to your outsourced payroll provider. And this is a vital process that comes with several risks. Incomplete transfer of payroll data means that the payroll provider does not have the expertise or technology capability to manage unique payroll challenges. This may ultimately compromise the overall service delivery of the outsourced payroll provider.

It helps to learn about the onboarding and payroll transfer process before engaging an outsourced payroll provider. If you are uncertain, always request for a trial run before committing to a contract. Alternatively, consider running a parallel pay run prior to the first pay cycle. This helps you and the outsourced payroll provider to uncover potential risks or errors and take steps to address them.

Lack of expertise within the payroll provider’s team

Managing payroll requires detailed understanding of payroll terminologies and computation methods. Not to mention the ongoing changes in labour laws and tax obligations across countries. Inaccuracies in payroll computations or non-compliance with legal responsibilities can lead to employee dissatisfaction and distrust. After all, one of the key reasons for engaging an outsourced payroll provider to maintain accurate payroll computations. The last thing that you want to face is hefty fines for missing the tax filing deadlines.

A good way to find out if your outsourced payroll provider is on top of these payroll responsibilities is to snoop on their website, customer reviews and social media profile. Knowledge providers are likely to be sharing their insights or thought articles on their corporate blog and receive positive customer reviews.

Poor service management process

Suppose a payroll issue came up, such as a mistake on an employee’s overtime pay or a part-time worker has a dispute over his total hourly pay. Managing this in-house may seem quicker. However, if you work with an outsourced payroll provider, they may not be able to respond as quickly as you wish. Perhaps their customer support service is only available during standard working hours or your request gets added to the support ticket queue. On your end, you have 24 unanswered angry emails and your top performing employee is threatening to quit.

To ensure that this never happens, always enquire about the service management process when shortlisting outsourced payroll providers. Make sure that you are agreeable to their service management process before signing the contract. It should be clearly-defined and straightforward. The best scenario is to have a dedicated account manager who you can reach out to at any time in order to get timely one-to-one support when the situation calls for it.

Data security

It is worth noting that data security is one of the biggest risks associated with outsourcing your payroll function. How can you be very certain that your outsourced payroll provider is able to store and transfer your organisation’s sensitive payroll data safely?

The best way to mitigate this is to train your internal employees on best data protection practices. This includes password protecting payroll data that is transferred in and out of the organisation and seeking management approval prior to sharing personal or sensitive data. At the same time, clarify with your outsourced payroll provider on their data protection policies and the measures undertaken should there be a data breach.

It is always a gamble when it comes to deciding whether you should outsource your payroll function. To avoid getting swept in convincing sales pitches or too-good-to-be-true deals, always request for a demo from the payroll provider before you commit. Concurrently, it is always good to err on the side of caution and implement measures to mitigate potential outsourcing risks. That will allow your organisation to reap the full benefits of outsourcing payroll.

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