You can pay workers directly or through a third party. Learn the difference between company payroll and third party payroll and the pros and cons for each.
In the realm of workforce compensation, the method of disbursing salaries holds significant financial and operational implications. This article delves into the nuances of two primary approaches: direct in-house payroll systems and outsourced third-party payroll services. Understanding the distinctions and evaluating the advantages and disadvantages of each is crucial for optimising the financial health of a company.
Constituting a substantial portion, ranging from 20% to 52% in certain sectors, of a company's operational expenses, payroll administration emerges as a pivotal and resource-intensive function. This financial commitment underscores the necessity for businesses, particularly small enterprises in Kenya, to meticulously navigate payroll complexities.
Recognizing the challenges faced by smaller entities, an increasing number are turning to third-party payroll services as a strategic solution. This shift prompts critical questions: When is the utilisation of third-party payroll beneficial, and how does it diverge from in-house payroll management? Furthermore, what key considerations surround the adoption of third-party payroll services?
Join us as we unravel the intricacies of these payroll methodologies, exploring the nuances that drive businesses toward informed decisions in their pursuit of streamlined and efficient payroll management.
What is third party payroll?
Third party payroll is a payroll that is processed and administered by a company other than the one the employees work for. This other company is the third party in this employment relationship, hence the term ‘third party payroll.’
Payroll is the process of paying your employees, which entails many different activities. So in this arrangement, you as the primary employer outsources the payroll function to a third party company.
As the primary employer, you will remit a specific monthly amount to the third-party payroll firm, covering the salaries of the employees on your staff who are managed by the third party.
Among the payroll processes you outsource to a third party payroll firm are:
- Training and onboarding new employees,
- Tracking the hours worked,
- Recording overtime hours worked, leave days accrued, and bonuses and vacation pay earned,
- Computing taxes due,
- Calculating net pay,
- Disbursing salaries.
As evident, payroll processing involves more than simply depositing salaries into employees' bank accounts and M-Pesa mobile money wallets.These processes require a staff of their own and a significant investment in software, hardware, and office space.
To cut costs and focus more on their core business, many companies choose to outsource the entire payroll function to specialised third-party firms.
What is the difference between company payroll and third party payroll?
With a company's payroll, the processing is conducted in-house by the company's staff, whereas in third-party payroll, the processing is delegated to an external firm
Outsourcing payroll is driven by different motives for each company.Small businesses might not have the in-house expertise to manage payroll efficiently,while larger enterprises opt for this approach to cut costs.
The best example of business outsourcing can be found in FMCG sales. Manufacturers of fast moving consumer goods now largely outsource the entire sales function to sales and merchandising agencies.
As well as the sales reps, the agency will also directly employ or process payroll for merchandisers who work in supermarkets filling shelves with the manufacturers products.
According to estimates, outsourcing the function to a third party can result in savings of up to 20% on your payroll expenses. This is a compelling reason to outsource payroll and many businesses simply can’t resist.
Let’s summarise the benefits of outsourcing payroll to a third party:
Advantages of using third party payroll.
Here’s why you should consider hiring a third party payroll provider:
1. Lowers staffing costs.
Processing payroll in-house means you have to hire extra staff. This in effect adds an entire department for which you also need office space, furniture, computers, and software.
Given their specialisation and handling of payroll for multiple companies, third-party payroll providers enjoy economies of scale. These providers often employ innovative strategies to reduce their operational costs.
However, one of the most significant cost-saving advantages in this arrangement is that third-party employers can provide more economical salary packages. These are compensation levels that might be challenging for you to offer directly without risking potential harm to your reputation.
Third party recruiters also offer way fewer benefits, typically excluding such things as staff lunch, housing loans, vehicle loans, company cars, and medical aid. Since some do not allow their workers to unionise, third party employers have no one to hold them to account and can get away with paying lower wages than the average for people working in the same industries.
2. Improves compliance.
Third party payroll companies are specialists in human resource management. Unlike the average business owner who is primarily an entrepreneur, these companies are run by human resources professionals with a deep knowledge of labour laws.
The net effect on your business is improved compliance. You can rely on this third party to ensure you don’t run afoul of any labour laws.
Speaking of that:
3. Reduces liability.
If you hand over the payroll function to a third party company, you are also effectively passing liability for any breach of labour laws that your workers, unions, or the ministry of labour might raise.
If the third party company you have hired to manage payroll fails to pay workers on time, you will not be the one liable. Liability falls on them.
Employers face daily lawsuits in labour courts concerning unpaid wages and worker mistreatment cases. By not being liable for the employment conditions of workers, you can sidestep dealing with these issues.
4. Frees time to concentrate on core business.
Forget about the terribly distracting spectacle of defending a legal challenge from aggrieved employees; outsourcing payroll, and thus, passing liability to a third party; having payroll processed elsewhere frees you time to concentrate on your core business.
Sometimes functions like HR that are not directly tied to revenue can take away too much of your time as the business owner or manager. That can leave you with little time to provide services, sell your products, and attend to customer queries.
While there is a persuasive argument for outsourcing payroll, certain companies refrain from pursuing this path.
What factors influence their choice? Let's delve into their rationale.
Disadvantages of using third party payroll.
Here are some of the cons of handling payroll and staffing through a third party company:
1. Reduces data security.
If you handle a lot of customers’ personal information, outsourcing payroll to a third party company may compromise its security.
Workers in sectors such as banking manage confidential customer data, posing a potential risk to the personal and financial security of clients should it be mishandled or accessed by unauthorised individuals.
Since you don’t directly employ your workers, finding people that are the right fit for the sensitive nature of your business may prove tricky. Removing and replacing bad apples is not as easy either.
On the contrary, if you were in charge of payroll and employed your workers directly, you would deal with such issues with speed and agility.
2. Loss of control.
While outsourcing payroll allows you to avoid liability for many labour related issues, it however takes away a measure of the business’s control from you.
For example, it may mean you can’t fully determine the quality, qualifications, and experience of the people working for you. And even if you can, since you don’t pay them or determine their salary you are powerless if the good ones choose to leave for greener pastures.
This can have severe implications for your business, including:
3. Service quality may decline.
Workers find it hard to develop an attachment to your company or enjoy their job with any passion if they know you are technically not their employer. They may feel they are only there for a time, until they are assigned to another company. Or worse, fired.
Where employees feel like outsiders, their commitment to your business’s cause can also be doubted. You can’t rely on them to put 110% into their jobs.
For instance, if you have to trade during busy holidays, third party employees will usually choose not to avail themselves because the law does not obligate them.
Consequently, the excellence of your service may not reach its full potential. In cases where third-party workers are dissatisfied with their employment conditions, they may simply fulfil their duties mechanically, investing minimal effort to secure their paycheck.
What does this all mean for the workers?
Unfortunately, workers in a third-party employment arrangement often experience unfavourable results.
Employees compensated through third-party payroll firms frequently express low job satisfaction, attributing it to meager wages and a lack of job security due to short-term contracts that rarely transition into full-time positions, if renewed at all.
A common sentiment among these workers is the feeling of being treated as outsiders in their workplace. This is exacerbated by the challenge of collaborating with colleagues directly employed by the company, who earn considerably more for similar job roles.
Given the pros and cons, how should you proceed with third-party payroll services?
When should you use third party payroll?
You should hire a third payroll provider if you lack the technical skills and resources to process payroll in-house. In other words, consider hiring a third party if you are experiencing challenges processing and making payroll.
Instead of dealing with payroll errors every month and paying workers late, it may be best to have a firm specialised in payroll management take over this function.
To prevent a drop in service quality, you can look to retain some oversight in the quality of the workers hired and how much they are paid.
You can also come up with ways of making the third party employees feel as if they are part of the team, like providing them with free staff uniforms and lunch and including them in end-of-year parties.
Automate salary disbursement with an Intasend business account.
Should the drawbacks of hiring a third-party payroll processor, highlighted in this article, give you pause, you can always stick with company payroll.
To prevent errors, save money, and improve efficiency, you can invest in a payroll software that automates the entire process. With that sorted, a business disbursements solution like what Intasend offers can help with salary disbursement.
An Intasend business account takes the pain out of salary disbursement. With a single request for which you only need to upload an excel sheet with your employees and their net salaries and banking details, you can disburse salaries for up to 5,000 people with one request.
Intasend supports direct bank deposits and M-Pesa payments among other disbursement methods. You can manage your salary disbursements as well as other business payments and make payment requests to clients directly from your Intasend digital wallet.
Additionally, using the same digital wallet, you can request a virtual Mastercard or Visa debit card for seamless online business transactions
Sign up for an Intasend business account today and enjoy fast and secure salary disbursements and business payments.
