Top 10 Reasons Why Businesses Outsource Their Payrolls

Businesses decide to outsource their payrolls for different reasons. Here are the most common reasons we have found:

1. Business Continuity

When only one person in a business is responsible for payroll (which is often the case), the business becomes extremely dependant on this person to always be around when payroll is done. It creates an unhealthy reliance on one individual for a mission critical function. When this person is “run over by a bus” or suddenly falls ill or decides to emigrate etc, it leaves the business in a difficult position and creates significant risk. When businesses outsource their payrolls this risk falls away.


2.Segregation of Duties

As mentioned under point 1 above, businesses often rely on one person to do the payroll. It is good business practice to segregate duties where one person processes the payroll and a second person checks the payroll for correctness. Payroll outsourcing businesses would normally have at least two people working on a payroll in order to segregate duties.


3. Payroll Fraud

Payroll fraud is mostly committed when a payroll is done in-house and by one individual. The likelihood of payroll fraud being committed by a payroll outsourcing service provider is much less because there are multiple people involved (refer point 2 above) and it would therefore require them to collude in order to commit payroll fraud.


4. Statutory Compliance

Because payroll outsourcing providers specialise in payroll, they normally have a better grasp of the latest statutory requirements than a person who does the payroll in-house along with many other duties. The propensity for payrolls to be statutory compliant is therefore higher when payrolls are outsourced. The statutory burden increases exponentially when businesses have offices in multiple countries. There are often “grey areas” where statutory regulations are open to interpretation.


5. Fast growth businesses

Fast growing businesses often don’t want to get distracted or be burdened by administrative work. They tend to outsource non-core functions in order to allow them to focus on growing their businesses.


6. Downsizing

When businesses reduce their headcount they often look at non-core divisions that can be outsourced. Although there is still a cost associated to payroll management, headcount is reduced which is often an important KPI.


7. Sensitivity of Exec Pay

Businesses often don’t want salary information (especially executive pay) to be known to anyone in the business. That is why businesses often elect to outsource their executive payrolls.


8. Botched Payroll Implementations

Businesses tend to be wary of large payroll implementations when they have had a botched payroll implementation – and normally at a significant cost. By electing to outsource payroll, business pass the risks of implementation on to the payroll outsource service provider.


9. Payroll Manager to Employee Ratio

The norm is to have one Payroll Manager/Administrator for every 500 employees. Businesses with less employees can therefore not justify a full-time payroll manager which leads them to “bundle” other non-payroll duties with payroll. This in turn dilutes the focus on payroll and related matters e.g. statutory compliance – refer point 4 above.


10. Global policy

Many global businesses who have operations around the globe, have a policy to outsource their payrolls. This is done in the name of good governance and is normally justified on one or more of the reasons explained above.


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