Should payroll be outsourced, or handled In-house? What are the benefits and disadvantages of either? PayFit's Product Legal Adviser, Nichola Hailes, explores the answers.
The in-house vs outsourcing debate continues to rage in organisations right across the UK.
Board and management meetings often see a constant stream of questions like: "Should we use someone external to the company?" and "Have we got the capacity or resources to do this in-house?"
Just about every department or business function can be outsourced. Whether it's marketing for support with advertising campaigns, logistics to optimise supply chains or contract automation to improve legal processes, the reasons behind each decision are usually pretty similar.
Typically, outsourcing is favoured because companies either don't have the means to handle things in-house, or they want to focus on more high-value tasks and receive access to expert knowledge. In the UK, payroll is one of the commonly outsourced business processes. This is due to several reasons:
- Payroll is complex to manage and there is a need for a certain level of pre-existing knowledge and free time to manage it correctly.
- Many companies lack the resources to manage payroll internally.
- Finance is already outsourced and the natural choice is to outsource payroll as well.
Traditionally, there have only ever been two ways of managing payroll. We explore the pros and cons of both in-house and outsourced payroll and analyse why the pandemic has left many companies searching for a more modern solution.
Outsourcing: the pros ✅
One of the principal benefits of outsourcing payroll to reputable payroll companies is receiving access to expert support. Payroll is a recurring and complicated task that is continually evolving which can, unfortunately, mean that many businesses struggle to stay on top of changes in legislation. In doing so, they could be non-compliant and run the risk of punitive legal and financial measures.
Consequently, it's essential that whoever is running payroll knows what they are doing and is up to date with any legislative changes that have taken place.
Time saved is a further advantage of outsourcing payroll. It's relatively common knowledge that payroll management is both a fiddly and manual task that eats into a lot of time. By delegating these to a third party, startups, scaleups, SMEs and other businesses with limited resources can channel their time elsewhere and into more high-value tasks that can directly impact business success.
Outsourcing: the cons ❌
Despite the perks, there are several challenges linked with outsourcing.
A big one is cost. Outsourcing to an expert doesn't come cheap and can often be beyond the modest budgets many companies have.
To help reduce cost, accountants are often asked to perform the monthly payroll run. Although this may mean that the same people run all of a company’s finance-related topics, it doesn't necessarily guarantee that everything will be done entirely correctly.
While accountants can provide exemplary service when it comes to managing accounts and providing financial advice, their payroll knowledge can sometimes be a little limited.
Unfortunately, many businesses unwittingly leave themselves exposed to payroll errors by choosing unqualified providers to manage their payroll. This can have dire consequences as, although they may be externalising the service, the accountability for ensuring that payroll is run correctly and that employees are paid accurately and on time will always lie with the employer.
A further issue that is commonly associated with outsourcing is an inability to view important company information and control the way things are managed. With payroll, generally the most considerable expense, companies can ill afford to be without insight into critical data or left without visibility over costs or month-on-month evolutions.
In-house: the pros ✅
There are certainly a few advantages to running payroll in-house.
Companies can maintain transparency and control over the entire payroll process – e.g. choosing their own deadlines and having their payroll data immediately available.
As everything is housed internally, they can also affect changes and action tasks themselves – e.g. change pay rates, correct errors and download reports and important information – much more rapidly than if payroll were outsourced.
In-house: the cons ❌
However, although in-house payroll has its advantages, there are still problems that can exist.
We've already detailed how payroll management can prevent businesses from focusing on what may be perceived as more critical tasks and, while this is undoubtedly a key point, there are greater causes for concern.
As is the case with outsourcing, the success of in-house payroll is dependent on who is running it and how they are choosing to do it.
Companies frequently ask finance or HR managers to run payroll using legacy systems that are both outdated and unable to meet modern payroll standards, which, as we all now know, require a much greater level of flexibility than ever before.
Again, this can lead to errors occurring, employees being under or overpaid and potential fines if the same mistakes are frequently repeated.
Payroll during the pandemic 💰
Events throughout much of 2020 and the start of 2021 have highlighted just how difficult payroll management can be.
The COVID-19 pandemic has led to several changes affecting payroll administration, namely the introduction of amendments to Statutory Sick Pay and the various iterations of furlough leave through the Coronavirus Job Retention Scheme (CJRS).
Staying on top of these changes has been a constant challenge for businesses and even industry experts have struggled at times.
The need for payroll specialism has become apparent, particularly for those using unqualified providers or running payroll in-house on out of date software. Although a significant number of businesses have required the need for specialist support, many have struggled to accept this to be the case.
The uncertainty bred by the pandemic has led to visibility and control becoming hot topics in organisations. Many have become insular and reluctant to seek third party help in the belief that they would lose the capacity to oversee how things are managed.
Historically, it’s always been an either/or choice when it comes to payroll management. For many businesses, it’s almost been a trade-off between the two options. By seeking specialism, they are inadvertently also choosing limited control; but, by pursuing control, they’re risking compliance.
However, alternatives do exist that can provide the very best of both worlds.
A modern, hybrid solution 🙌
Services such as PayFit's HMRC-approved payroll software fall into the category of an in-house solution, but with the perks commonly associated with outsourcing.
With qualified payroll professionals forming part of the customer support team, customers are never too far away from receiving the expert help they need.
Beyond just helping clients, the customer support team is continually analysing the latest legislative changes affecting payroll to ensure the software is up to date and compliant at all times.
The software is also designed to provide app administrators with visibility over the entire payroll process. Not only can they access key reports, but they can also customise them too!
Payslips can also be amended at just the click of a button and the changes can be viewed in real-time.
Finally, calculations are automated and alerts have been set up to identify any areas of non-compliance, meaning that even people with little payroll experience can use PayFit's software confidently.
Nichola Hailes is Product Legal Adviser at PayFit.
Interested in finding out more? Find out more with one of PayFit's product specialists today.