Many employers outsource their payroll, and at NZPPA, we get questions on this regularly, usually in two areas: when an employer is thinking about outsourcing their payroll and asking for advice and the total opposite when they are using an outsourced provider and are having issues.

There is a place for outsourcing payroll, but the employer, in choosing this option, must ensure it meets the needs of the business and its payroll requirements. They must have a clear understanding of what the boundaries are (what the business does and what the outsourced provider does) to ensure payroll pays employees correctly and on time.

The key to using an outsourced provider is that the employer is still in control, as all the liability sits with the employer. An outsourced provider acts as your agent only.

So, in this article (Part 1 of 2), I wanted to write about the advantages of using an outsourced provider. In my next article, I will write about the disadvantages, so I provide a balance between both. You will need to decide and judge overall if the advantages outweigh any disadvantages. Also, there may be specific points in your payroll environment that will drive this, but as I always say, compliance should be your number one concern.

Advantages of using an outsourced provider

Here are some of the typical advantages of using an outsourced payroll provider:

• Cost-effectiveness
• Time savings
• Compliance and expertise
• Data security
• Scalability and flexibility
• Error reduction

Cost-effectiveness: One of the primary advantages of outsourcing payroll is cost savings. Maintaining an in-house payroll department involves expenses such as salaries, benefits, payroll software, training, and infrastructure. Outsourcing eliminates these costs, as you only pay for the services you need, typically on a per-payroll basis. But this should not be the primary driver because the old adage “you get what you pay for” could be quite true. And that could be a major mistake for an employer taking shortcuts on quality and compliance to save a dollar.

Time savings: Processing payroll can be a time-consuming task, especially for businesses with a large number of employees. Outsourcing payroll frees up valuable time that can be redirected towards core business activities. This allows you and your staff to focus on productivity and business growth. There will still be time involved from the employer’s side in supplying everything the provider needs to process pay. There are also questions that must be answered by an employer regarding a payment or payments made to an employee. These are areas that you cannot just outsource, so yes, work time still needs to be factored in for the employer, even when outsourcing payroll.

Compliance and expertise: Payroll legalisation can be complex and subject to frequent changes. Outsourcing payroll to a specialised provider can help in creating accurate payroll processes, which are kept up-to-date and compliant with legislative requirements. Having a provider solely focusing on payroll activities, processing, and compliance is a real benefit to an employer. But the liability when things go wrong still sits with the employer, so the employer must own the decision on legislative settings, especially with calculations. For example, the Holidays Act details different calculations for different situations, and one calculation would not be compliant in all employee situations. As stated previously, you cannot outsource liability. Just a final point for this section, the outsourced provider may have expertise in the payroll system they use, but it does not mean they are employment or tax law experts, as this is not their role. For an outsourced provider, if they offer advice on employment or tax law and it is found to be wrong, then that could open the door for the provider to be held liable, so this is why you will mostly find that the provider will not give advice.

Data security: Payroll data contains sensitive employee information, such as employee addresses and other contact details, information on employee deductions (child support, court fines, IRD deductions) or even details of leave taken, such as family violence leave. Having an outsourced provider that’s processing payroll, data security should be advanced as it is one of the essential points that any customer would be checking for the service being provided. For this reason, they will often have robust security measures in place, including encryption, firewalls, and access controls, to protect the employer’s data from unauthorised access or breaches.

Scalability and flexibility: As your business grows or experiences fluctuations in employee numbers, outsourced payroll providers can have the ability to scale their services to accommodate these changes. They can have the necessary infrastructure and resources to manage varying payroll volumes without causing disruptions to your operations. This would be part of the selection process in choosing an outsourced provider (future proofing). Check if they can grow if the business grows and what infrastructure they have presently, and what investment in this area they plan to make in the future.

Error reduction: Processing payroll involves numerous calculations, deductions, PAYE and agreed terms between the employer and employee. Any payroll mistakes can lead to penalties, dissatisfied employees, or create a risk of being audited or investigated by government departments or agencies. Outsourced payroll providers are experienced in managing these calculations because it is part of the core work, they do day in and out. They have developed timely and accurate payroll processing so they can cater for the multiple payrolls they run for their clients. Mistakes in processing are a cost to their business (if caused by them), so they are focused on error reduction.

As stated, the employer is liable, so it is important that the employer understands how all calculations are undertaken for their payroll by the outsourced provider (this should be fully documented, agreed and signed off if the provider puts forward options on setup). If the provider does not front up on this, that should be seen as a clear warning sign and risk for the employer not to enter a relationship with that provider. Just one last point on error reduction, the employer must be just as focused as the payroll provider (in processing the payroll) on ensuring that payroll data is valid and correct, or this will undermine everything that the payroll provider does. It will become an additional cost to the employer as this is part of their responsibility (rubbish in is rubbish out).

So, in conclusion to Part 1 of this two-part series (after I wrote seven pages, I realised I better break it in half as I did not want to bore you too much!), there are some very real and tangible reasons to use an outsourced payroll provider. The employer needs to decide if the advantages outweigh any disadvantages and if, overall, it provides the payroll the business needs (even if outsourced). In the next article, I will be talking about some disadvantages of using an outsourced payroll provider, so it balances the two viewpoints. I am hoping that both articles used together will give a set of guidelines or insights in deciding to use an outsourced payroll provider.

NZPPA supporting NZ payroll since 2007!