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Payroll Outsourcing Explained

Updated: Aug 30, 2022

Imagine this: the in-house payroll personnel isn't up-to-date on the knowledge of statutory requirements. They are also behind in processing payroll resulting in late salaries for employees. Thank goodness it's all over, right? Wrong. There are always repercussions for a minor mistake in payroll.

  • Employee dissatisfaction

Everyone has commitments - loans, mortgages, and cars to pay off, families to support. Late salaries, especially when they are constant, causes stress, anguish and encourages talent to look elsewhere.

  • Time Wasted

Minor mistakes can be annoying to find when you have a large amount of data. Not to mention the follow-ups, corrections, adjustments, and contributions to be properly calculated again. It is hard to avoid since, in many small companies, the payroll person could also be doing strategy, HR, and administrative tasks.

  • Penalties

Employment legislation and taxes may frequently shift, but payroll analysts have to keep up with them. But why? You may ask. Let's take the changes from KWSP during the pandemic, for example. The employee statutory contribution rate shifted from 11 percent to seven (7) percent, and now 11 percent to nine (9) percent for 2021. Not to mention the extension of contribution payment dates to ease the burden for employers during the pandemic.

  • Marred reputation

All of these blunders may inevitably spoil the company's reputation. Even just one detrimental mistake can damage the company's credibility and invite negative criticism from the public.

With Millennials and Gen Ys coming into the job market and becoming the dominating workforce, transparency becomes a given (not that it's a bad thing). Thus, HR teams have to ensure clarity in payroll reporting, accurate data, and employee data calculation. For example, in Malaysia, payroll encompasses various aspects. It ranges from the statutory requirements (EPF, SOCSO, EIS), insurance, claims, etc. It can be very complicated when considering the tax laws, legislative developments, and labor laws (i.e. EA / IR). That is why even the best of payroll analysts can get headaches during payroll season.

Outsourcing Payroll

Cue in the magic that is outsourcing. What exactly is it? In a nutshell, when a company engages with an external party to operate most, if not all, payroll activities.

What can they do?

What analysts do in payroll outsourcing depends on the client company. It can go from but is not limited to, year-end reports, employee payslip generation, monthly calculations, audit, etc.

Why outsource

Most companies have the misunderstanding that only MNCs can outsource their payroll. But that is not quite the case. It depends on the business needs of the company. So theoretically, anyone could have a reason to outsource their payroll.

  • Expertise in payroll processing and the software used (without which can cause late payments, leading to discontent in employees);

  • Time spent in managing payroll in-house;

  • Cost towards labor;

  • Relief from having the stress of crunching numbers every month and keeping up-to-date with legislation changes. E.g., when EPF changed during the pandemic back in 2020;

  • Focus on other parts of HR, like strategy and operations;

  • The tagline "Faster, Better, Cheaper" rings true in this case.

So, if you feel like these reasons resonate with you, why not start outsourcing your payroll? How exactly, you might ask. You could click here to be connected with a designated consultant and learn more about how you can make your payroll process better.

Otherwise, you could try these steps below:-

1. Needs

Determine what your company needs in terms of payroll. Some questions you could ask yourself or your team - Are most of your employees temporary, contracted, or permanent? How up-to-date are you with taxes and legislation? Do you have an expert at hand for all of this? Once you have finalized needs, wants, and nice-to-haves, you can start researching companies that fit your list.

2. Research

It is imperative that you, as a business owner or HR employee, do your research. The type of software used based on the size of the company is an important aspect to cover. For example, a larger payroll company would tailor the system to fit their clients' needs, making some functions irrelevant to smaller companies. They also tend to charge a larger premium for these services. Once you have made a list of companies based on pros, cons, cost, etc., you can start reaching out to them.

(Tip: You can do a needs assessment for a more comprehensive view of your priorities. It can be useful for comparison purposes too. Any inquiries, you can reach us here)

3. Connect

Connecting to a payroll service provider is pretty straightforward. You can go to their company website to seek advice. Ask as many relevant questions as you can to get a feel of the company. Remember, you will be working with them, and they will be handling your employee data. You have a right to be picky with who you want to work with.

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