17 March 2023

Five risks of having your payroll outsourced

7 minute read


Nick Martindale

Nick Martindale

Nick Martindale is a freelance journalist and copywriter, with a strong interest in HR, benefits and payroll.




If you’re thinking of having your payroll outsourced, you will need to understand and assess any risks that may come with that. Outsourcing payroll may not be for every organisation, so it’s important to weigh up what’s right for you. If you do want to benefit from outsourced payroll, it’s vital you ensure that any risks are mitigated, so check with any potential provider that they are able to offer the necessary reassurance.  

The following are five risks you should be aware of, and how you can overcome them:  

1. Data gathering and authorisation

Even in an outsourced payroll arrangement, your own organisation will still need to be able to provide the supplier with accurate data around pay, hours worked, absence and new starters or joiners.  

If you have a dedicated in-house team that has an established way of working – particularly if this involves your own unique process that has been built up over many years – then it may be more appropriate for you to upgrade your payroll software rather than go down the outsourcing route. Ciphr, for instance, offers both services, so can assist you with whatever you decide.  

If, however, you can extract data from other systems – such as an HR, timesheet or time-and-attendance packages – and your payroll is currently being handled by an HR team that has plenty of other time pressures, it may be that choosing a payroll outsourcing company is the way to go. Information will be able to flow freely to the provider, meaning you will benefit from accurate and secure transfer of data. If this process has previously required manual processing, this will also free up significant amounts of time in the HR or payroll team.  

Make sure you check that any payroll outsourcing provider’s software can integrate with your HR system, so you can realise these efficiencies. This should also allow employees to extract information around pay, whether that’s staff accessing their payslips online through an HR system, or finance, procurement or employee benefits teams analysing this data for other purposes, such as gender pay gap reporting or assessing the amount of overtime.  

You’ll also need to check which the payroll outsourcing companies can act as an agent for HMRC, which will allow them to handle any reporting or compliance issues directly. It should also be a BACS1-approved bureau so it can perform transactions – such as paying employees – on your behalf.  

Whether you choose to outsource your payroll provision or upgrade your payroll software and continue to manage it in-house, it’s vital everyone in the process understands the process around the flow of information, including any cut-point for payroll data to be including in the next pay-run. 

2. Loss of control 

Any outsourced payroll arrangement inevitably means there will be a need to trust the provider in question, and the last you thing you want is to have to devote time and energy into checking calculations because you don’t trust them. Any errors can be costly and lead to employees not being paid the right amount, so it’s essential to find a provider you can trust. 

It’s a good idea here to check the company’s reputation – for example, on social media channels – as well as asking if you can speak to a customer, before signing up to any agreement. That should help you feel more comfortable about the decision to outsource your payroll, knowing you will be working with experts.  

Make sure, too, that any provider offers a dedicated point of contact who you can approach if there is an issue, so you can rest assured that you will be able to speak to someone who can resolve it. It’s also wise to check what kind of experience they have with coping with unusual situations, such as the introduction of a new salary sacrifice employee benefit, for instance.  

You’ll also need to establish what flexibility there is to review or update information once you have submitted data. New joiners or leavers will need to be added or taken off, while changes to salary will also affect the amount of money employees receive. Ciphr, for example, offers multiple review points, giving businesses control over the process while still allowing them to lose the administrative burden – but not all providers will do this.  

In some ways, you can get more security and control through outsourcing, even if it may not appear so initially. An outsourced payroll provider will ensure its staff are fully up to speed around all new legislation, including employment, tax and GDPR requirements, meaning you don’t need to worry about the risks of getting caught out or a particular individual leaving and taking vital knowledge with them. Make sure your provider has ISO 27001 accreditation, as this ensures it has adopted a best-practice approach toward information security.   

Another concern people may have would relate to the ease with which they could change arrangements should something unexpected occur, such as a merger or acquisition. Again, ask potential providers if they would be able to cope with this, and whether they could take on large numbers of additional staff or undertake multi-company processing.  

3. Longer cut-off times 

Linked to the need to be able to update information is the process around sending it over in the first place. Most outsourced providers will require this at least two weeks – and sometimes almost a month – in advance, as they will need time to accept and check data, process the payroll, and return the results for checking.  

But, the longer the lead-time, the more chance there is of employees not being paid correctly or having to wait another month to receive overtime payments. This will be particularly problematic in sectors where workers operate on casual arrangements or work a lot of overtime, and could lead to serious morale or staff retention issues. It’s also possible you could overpay someone who has left the business, and it could be tricky to recoup this once they have moved on. 

Try to seek clarity from the provider as to exactly when they require information by. Ciphr, for example, offers payroll cut-off dates much closer to pay day than the typical outsourced payroll provider, giving its clients more time to verify changes and improving the accuracy of pay-runs.

4. Lack of employee knowledge 

When you bring in an outsourced payroll company, it generally means employees no longer have direct access to payroll expertise in-house to answer any of their queries. Furthermore, over time, it’s likely that internal knowledge around payroll will dwindle, as people move on or those working in HR roles focus on other activities.  

It’s important that you can reassure staff that they will be able to get a response to any queries they may have. Ask any potential provider about their customer service, and, in particular, if your HR team will be able to contact a dedicated payroll administrator or customer success. Employees should also be able to access their payslips and P60s through the company’s HR software or other secure portal, which can resolve many queries, so make sure this is possible.  

Ciphr’s services, for instance, are managed by a UK-based team of expert payroll professionals, who are there to guide you through every step of the process.

5. Rising costs 

While the cost per employee, per transaction is often lower than having a dedicated, in-house resource, it’s understandable that you may be wary of just what your payroll outsourcing costs will be.  

There’s good reason for this; some providers will charge extra for services such tax-year-end processes, P45 or P60 production, or any upgrades or re-runs. New joiners or leavers can also attract extra fees, so the initial quoted price can be very different to what you end up paying.  

Make sure you get a full breakdown of what you will be charged for, and identify if there are any added costs you may incur. Ideally you would pay a fixed and all-inclusive rate so you know what the cost will be each month. This will help you carry out a full return-on-investment study ahead of entering into any arrangement, which should also factor in elements such as savings on people and IT resources, software fees, training and compliance. If you need help deciding if having your payroll outsourced will save your organisation money, take a look at Ciphr’s free outsourced payroll calculator.   

Finally, ensure you’re able to ramp service levels up and down if required. You may find the business suddenly grows or contracts, and it’s important to know that there is flexibility to change arrangements should that happen.  

Is choosing to have payroll outsourced right for your organisation?

It’s understandable that anyone considering the decision to have payroll outsourced may have a few questions and concerns, and it’s also the case that it won’t be right for everyone. Some organisations may have perfectly functional arrangements and just require a software upgrade or BACS support.

For others, though, it will make sense to move to payroll outsourcing, and this is when it’s vital to investigate any potential risks and seek clarity from providers around just what they can and cannot do. Not all providers are equal, but picking the right one will put you on the path towards finding the payroll set-up that best suits your business.

To find out more about how Ciphr can help your business manage its payroll needs, download our brochure or request a demo