There are many roads to outsourcing. For instance, you can outsource 1 aspect of a business function to a service provider and do the remaining tasks in-house. Or, you can outsource the entire function to the provider. The latter option is called “managed service.” When payroll is the function being fully outsourced, the practice is known as “managed payroll.” Managed payroll is when the employer outsources the vast majority of its payroll responsibilities to an external provider — which basically becomes the employer’s payroll department. Sometimes, managed payroll is referred to as “fully outsourced,” because of the significant extent to which the employer relies on the service provider.
The specifics vary by employer-provider agreement. Usually, at a minimum, the provider processes the employer’s payroll from start to finish. Many providers handle other duties besides payroll processing.
Some providers offer additional business process outsourcing (BPO) services, along with payroll. For example, they may perform payroll and benefits administration. Fundamentally though, their purpose is to manage their client’s payroll. Note that this does not mean the employer will not have any payroll responsibilities.
In a 2021 survey, “53% of respondents said their departments regularly used a payroll processing service.” Although this survey data does not reveal how many of those employers fully outsource, it demonstrates just how popular payroll outsourcing is. Moreover, 54% of respondents “said their HR departments used a benefits outsourcing firm or consultant on a regular basis.” Notably, a 2020 global survey by Deloitte found that:
Despite the momentum of payroll outsourcing, that does not mean it is suitable for every employer. The same goes for managed payroll — meaning full payroll outsourcing.
Managed payroll may be appropriate in the following situations:
While these are all good reasons to consider managed payroll, many employers choose to not go this route.
For any number of reasons, an employer may opt to do payroll in-house instead of contracting with a managed payroll provider. As mentioned earlier, employers in the Deloitte survey listed compliance, accuracy, and self-service capabilities as areas needing the most improvement among their payroll providers. Some employers keep payroll in-house to avoid these shortcomings.
If you use a managed payroll provider, you should monitor their performance.
There’s also the matter of monitoring the provider's performance, which may or may not be up to par. According to the Deloitte survey, most larger employers (81%) are primarily using service level agreements (SLAs) to monitor their payroll provider’s performance. However, most smaller employers (59%) are not doing so — which puts them at risk of being liable for errors the provider makes. Therefore, if you use a managed payroll provider, you should monitor their performance. If you don’t want to have to worry about the provider’s performance, then you’re likely better off keeping your payroll in-house. In this case, it’s essential that you utilize payroll software, which can also reduce the need for managed payroll.
Due to advancements in payroll technologies, employers can accomplish their payroll obligations much easier than in the past. For example, modern payroll software:
Notice that payroll software helps with the 3 improvement areas employers cited in the Deloitte survey regarding their payroll providers: compliance, accuracy, and self-service capabilities. Although you still need someone qualified to execute payroll, the right technology via a payroll vendor can vastly reduce the amount (and complexity) of work that needs to be done. Having said that, managed payroll is ideal for some employers, such as those lacking the proper onsite resources. If you’re leaning toward this option, make sure you perform due diligence before hiring a managed payroll provider.
This article is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance. TriNet is the single-employer sponsor of all its benefit plans, which does not include voluntary benefits that are not ERISA-covered group health insurance plans and enrollment is voluntary. Official plan documents always control and TriNet reserves the right to amend the benefit plans or change the offerings and deadlines.
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