Human Resource's Pay Role

Human resources directors are involved with payroll regardless of who processes it because many employment actions affect how workers are paid.

"Even when you outsource payroll, your payroll responsibilities do not totally go away," says Steve Larson, a senior consultant for Bethesda, Md.-based consulting firm Watson Wyatt. "There's a lot of interaction that's still required."

New hires, promotions, benefits selections-HR must communicate these and other changes to an in-house payroll department or an outside vendor to ensure that payroll-system data is accurate and up-to-date.

In addition, HR must make sure the vendor is living up to the terms of the contract and must handle employee problems and complaints, such as missing checks, Larson says.

Even when payroll is outsourced, "somebody in-house becomes the . liaison between the company and the outsourcing firm," says Farsheed Ferdowsi, president and CEO of PayMaxx Inc., a payroll-services firm based in Franklin, Tenn.

Most employers that outsource payroll still perform in-house "source to gross preparation," which is the entry of data-pay rates, Social Security numbers, W-4 elections and more-necessary to calculate each employee's gross pay. Only 13 percent of respondents outsource this step, according to a 2003 survey of 2,367 members by the American Payroll Association.

Most people in human resources will tell you that payroll is a thankless chore. You hear complaints when things go wrong but get no compliments for a job well done. The work is constant, detailed and rife with possibilities for error.

"I suspect ever since the first payroll was processed, someone realized how painful it was and looked for a way to outsource it," says Steve Larson, a senior consultant in the Miami office of HR consulting firm Watson Wyatt Worldwide.

It's no wonder, then, that payroll outsourcing is going strong after 50 years. Payroll service firms can handle almost everything, from calculating payroll deductions to filing tax reports, freeing up HR for other, more-strategic matters.

But outsourcing isn't for everyone. The largest companies can afford their own computer systems and staff, and some employers' payrolls are too complicated for many vendors' standardized systems. Others have found that outsourcing payroll only partially is the best solution for them.

Whether to keep payroll in-house or outsource it-in whole or in part-depends primarily on an employer's size and expertise as well as cost and technology. Here's a guide to help you decide which way to go.

Market Still Growing

Outsourcing payroll allows many employers, especially small and medium-sized ones, to concentrate on their core business. That's also true for HR staff members, who can devote more time to their core duties. (HR's role doesn't magically disappear, though; see "HR's Pay Role".)

"There is little about payroll that can be considered strategic, so as HR reduces head count and looks for services to push outside, payroll is one of the top ones to get rid of," Larson says.

In fact, payroll is one of the most commonly outsourced HR functions. Thirty-five percent of employers outsource it partially and 13 percent outsource it completely, according to a survey released in July 2004 by the Society for Human Resource Management of 298 of its members.

Smaller businesses of up to a few thousand employees have long farmed out payroll, but bigger employers are getting into the act, payroll vendors say.

"What we've seen in the past two years is a move toward large employers [3,000 to 50,000 employees] outsourcing more," says Greg Secord, vice president of marketing and business development for Roseland, N.J.-based ADP Inc.'s national account services.

Historically, big-company payrolls were too complex for vendors to handle, explains Brenda Sural, national payroll practice leader at Hewitt Associates, an HR consulting and outsourcing firm based in Lincolnshire, Ill. But that's changing with advances in technology.

"Providers are able to more easily build systems that are flexible and able to accommodate the complexities of a large employer payroll," Sural says.

Still, most clients of payroll firms are small employers that lack the staff, time and expertise for the duty. Fifty-eight percent of companies with fewer than 500 employees outsource payroll, compared with 28 percent of companies with 10,000 or more employees, according to a survey published in July 2004 by the San Antonio-based American Payroll Association (APA).