Slipping out: on the face of it, outsourcing the payroll function makes a lot of sense, because it allows companies to focus on their core activities safe in the knowledge that expert providers are on the case. But can an employer ever truly abdicate its responsibility for paying staff properly?

Author:Hayward, Cathy
Position:Payroll Outsourcing

The sight of the finance director wandering into the payroll department to make some last-minute P60 adjustments is becoming increasingly rare, now that more and more organisations are outsourcing at least part of the function.

Payroll may be an onerous, time-critical, non-core function, but it is crucial to get the process right because mistakes can be costly. According to a survey by IT services provider CMG, almost half of all employees have been paid too much--and a third of these fail to tell their employer about it. A third of the errors are for over 250 [pounds sterling].

There are three main options available for managing payroll: retaining it in-house, farming out the entire function or outsourcing certain parts of the process. Private-sector firms that have a high staff turnover and operate complex bonus and overtime arrangements are likely to run the function either fully in-house or use an application service provider (ASP) or bureau service. With the latter option the client retains its payroll department but outsources part of the function--anything from payslip printing to using the mainframe, software and technical support--to a provider such as Rebus HR or ICS Computing. Some companies, such as Ikea, choose application-hosted payroll, while others, including Tesco, manage their own mainframe but pay a licence fee to use third-party payroll software. Organisations with lower staff turnover and a more straightforward payroll system, including local authorities and other public-sector bodies, tend to choose a fully managed service where the entire process is taken off their hands, although someone remains in-house to manage the contract.

However sophisticated the payroll software or capable the third-party provider, the client can never outsource its obligations, argues John Rutherford, chief executive of payroll software developer Rutherford Webb. "The employer is the one with the contract with the employee, so it is the employer's responsibility to pay its staff correctly," he says.

But getting someone else to take responsibility for payroll is the key reason why many firms choose to outsource the function. "It's the convenience factor," argues Alan Foley, sales director of the payroll division at ICS Computing. "Through a service-level agreement with a third party you know exactly what to expect from your payroll function. It's the desire for peace of mind that leads most companies to outsource"

Sheila Allum, a partner at...

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