5 Situations Where Outsourcing Payroll Doesn’t Make Sense

Man holding up a tablet with payroll graphs projected above it.

Payroll management can be a significant challenge for HR employees, and tends to occupy an enormous number of work hours every month. According to research by MHR, employers waste an average of 100 hours or more over the course of each year, just managing payroll. For many companies, the clear solution is to outsource payroll.

Outsourcing payroll can save you both time and money, because you won’t have to hire employees with specific skills in payroll management. It can also give you access to expert knowledge about the rules and regulations around payroll, which have mushroomed in recent years.

The decision to outsource payroll can be a lifesaver for some companies, especially those which are relatively small, have straightforward compensation systems, and have a fairly unchanging workforce. But for others, it’s not always so clear if outsourcing payroll is a good idea.

What’s more, thanks to today’s payroll automation solutions, handling payroll in-house might be easier than you realise. These tools consolidate data sources, streamline workflows and dispatch reports and payments as needed, while reducing friction and the risks of manual errors and privacy breaches. As a result, HR employees are freed from the burden of tedious data entry, cross-referencing, and contending with an external service provider’s lag times.

Here are five circumstances when outsourcing might not be the best decision.

Your company data is highly sensitive

Company payroll data is always potentially sensitive, because it includes personal identifying information, employee bank details, and, of course, how much they earn. That’s why it’s always vital to work with payroll companies that have robust security protocols.

But in some companies, the risks of exposing employee information are even higher, such as in law enforcement, healthcare, or finance. In those situations, it’s not always sensible to rely on an outsourcing company. Even if they are vigilantly careful, the risk of a data breach grows every time another person is given access.

Outsourcing payroll also requires you to send information back and forth to an external party, and every journey the data takes is another opportunity for hackers to hijack it. Sometimes the risks are so high, you have to wonder if outsourcing payroll might or might not be a good idea.

Your company is scaling fast

Outsourcing payroll can be a good approach for both large and small businesses. Large organisations can benefit from delegating the massive workload of payroll for so many workers, while small businesses may struggle to support enough skilled HR personnel to handle payroll.

But for companies that are growing quickly and/or seeing rapid turnover among the workforce, it’s not always such a wise solution. The more people you have joining or leaving your company every payment cycle, the more information you’ll need to send back and forth to your outsourcing company.

This means a greater risk of data sync errors, increased security risks, and more frustration for your HR people who are trying to focus on other tasks.

You use complex compensation or benefits structures

When you outsource payroll, it can give you more time to focus on core HR competencies. However, that might be offset by the time you have to spend explaining your payroll details to the outsourcing company.

When you have a complicated compensation setup, like one that includes different overtime payments, bonuses, or deductions for unexpected items, you’ll have to make sure that your payroll bureau service fully understands it. The same goes for businesses with sophisticated benefits protocols. What’s more, most outsourcing companies have standardised solutions that can’t always accommodate complex payroll calculation needs.

The more complex your formulas are for benefits and wages, the more data you’ll need to gather to process payroll accurately. This data is often scattered across multiple sources, so you’ll have to collect it, and possibly reformat it to work with the payroll service’s tech tools. Once you’re carrying out all this work, the outsourced team may not save you that much time.

You need control over your financial data

One of the major benefits of outsourcing payroll is that it removes the burden from your HR team’s shoulders. But along with it goes visibility into and control over payroll processing and decision-making. If mistakes arise, it will be harder to correct them, because you won’t have access to the system. In the case of PAYE reporting, this could result in a fine.

Payroll outsourcing companies also allow you less flexibility to make changes if and when you need to. They tend to have rigid deadlines for payroll data, which are far in advance of the actual date that salaries are paid, leaving you less time to adjust hours or other factors that affect compensation.

If your employees’ monthly salaries are relatively consistent and there aren’t many different data points that affect calculations, this might not be a problem. However, for businesses that calculate pay pro rata, carry out many deductions, and/or have many gig workers, the loss of flexibility can be a serious handicap.

You’re highly concerned about reducing errors

In theory, outsourcing payroll should make payroll calculations more accurate. After all, you’ll be working with experts who spend all their time on the intricacies of payroll processes and regulations.

It’s true that payroll agencies probably make fewer mistakes around compliance, but where there are manual processes, there are often manual errors.

If your service provider relies on manual calculations, you have to manually gather data for them, or they need to manually populate their tech stack because it doesn’t integrate with your in-house tech, the risk of errors hasn’t gone away. In fact, the risk is probably higher than when payroll was in-house, because now there are more people manually moving data around.

Outsourcing payroll isn’t always a great idea

Depending on your business’ security profile, compensation setup, pace of growth, and more, the decision to outsource payroll might not be the best choice. Although outsourcing payroll can bring many benefits, it can also bring many drawbacks. Each organisation needs to perform their own cost-benefit analysis, and your needs are likely to change over time.