Payroll processing: HR or finance-or third party vendor?

To manage a payroll system, there should be a steady interface between the human resource and finance departments

Most organisations today recognise the significance of having an efficient and robust payroll management system in place. The companies are able to leverage multiple benefits from such a system which include — budgeting and tracking of company finances allocated for payroll purposes; ensuring compensation related compliance with local laws; and providing employees with a seamless and confidential accessibility to their compensation details. Managing payroll system requires a steady interface between the human resource and finance departments. The finance department calculates taxes and oversees compliance requirements, while the HR department manages employee queries etc. Running an efficient payroll management system requires sustenance of a fine balance between these two strategic functions. However, payroll processing is not the core function of either HR or the finance department, as both functions have several other priorities to deal with. This brings us to the all important question — who is the real owner of payroll management function — human resource or finance? Or should it be an external vendor?

Establishing and maintaining an efficient payroll system is a complicated process. There are numerous activities to cover, and the decision to allocate these activities to a specific department is crucial. The activities involved in payroll processing can be classified under two main dimensions — managing employees and managing finances. Managing the employees’ salaries, incentives, rewards, queries or expectations requires the involvement of the human resource department with a view to ensuring that the employees are motivated and satisfied. Managing finances within the payroll system consists of being updated with the ever-changing regulatory environment, compliance with local laws, tax calculations and more. Allocating the entire payroll system to one department result in numerous inefficiencies within the organisation and can lead to incorrect reporting, decreased employee motivation and the failure to comply with local regulations can lead to penalties.

It is imperative that employees have a point of contact within the company who can address their grievances and other pertinent issues. The role played by the finance function to manage payroll processing involving calculation of taxes, being abreast with the latest development related to compliances is essentially something, most of which can be outsourced to a third-party vendor specialising in these areas.

Outsourcing of payroll function to a third-party vendor comes with its own set of risks and benefits. The vendor should be able to provide accurate payroll processing, have proper IT systems, disaster recovery systems, business continuity processes, be able to maintain employee confidentiality and provide error-free reporting. Outsourcing of payroll, if done properly can help the company reap several benefits such as accurate and error-free payroll processing, less interdependence between departments, better utilisation of workforce, maintain employee compensation confidentiality, adherence to local compliances and better service to employees. Most outsourcing vendors today have robust ERP packages, well qualified and trained staff and the ability to adapt to the dynamic regulatory environment, all of which can be beneficial to the company.

With many companies using external vendors to manage their payroll processing, manage compliance and provide salary details to employees, their HR function takes on its appropriate role of being the primary internal point of contact for employees. This model ensures that each department is focused on performing its core function, while the external vendor is able to take on management of the non-core functions, resulting in maximising operational efficiencies of these two departments within the company.