• Protecting confidential payroll data is key to preventing fraud and potential data breaches.
• Payroll security strategies involve implementing access control systems and training employees in security best practices.
• At EmPower HR, we provide payroll and other HR management solutions to make your business safer and more efficient. Contact us to get started!

Payroll processing involves dealing with a trove of sensitive employee information. To keep confidential data safe and prevent fraud and potential data breaches, companies need to have an efficient payroll security strategy in place.

Yes, we know this can be a complex topic, so we’ve put together a guide with everything you need to know about payroll security. Read on to learn why you need to protect your payroll data, the most common types of payroll fraud, and practical steps to strengthen your payroll systems.

Let’s dive in!

What Is Payroll Security?

Payroll security involves all the processes that a business implements to safeguard the integrity, confidentiality, and availability of payroll data.

When paying salaries and managing employee benefits, companies get access to all kinds of personal information from their employees. This involves names, social security numbers, salaries, addresses, and bank account details. What’s more, they also handle data regarding bonuses, taxes, hours worked, and holidays.

So, payroll security is about ensuring that all this sensitive information is safe to:

• Protect employees 
• Maintain compliance with regulations
• Prevent unauthorized access or fraud

Why Does a Payroll System Need Security?

Payroll systems deal with two critical assets: employees’ salaries and other highly sensitive information. So, it’s not hard to imagine why they need to be protected.

Payroll security breaches can have a very negative impact on your business, from serious financial losses to damaging your brand’s reputation.

In 2023, the global average cost of a data breach was $4.45M

— IBM

Here are some of the main reasons why your payroll system needs to have strong security measures in place:

• To keep sensitive information confidential. Unauthorized access to payroll information could lead to identity theft, financial fraud, or other malicious activities.
• To prevent fraud. Payroll systems deal with financial transactions. Security measures help you avoid fraudulent activities, such as creating fake employees, altering salary figures, or redirecting funds.
• To stay compliant. There are several laws and regulations that protect employee data as well as financial information. Non-compliance could have legal consequences for your business, such as penalties and costly fines.
• To maintain trust. Employees trust you to handle their personal and financial information with care. A breach of payroll security can undermine this trust and hurt your company.
• To protect your business against cyber threats. Ransomware, phishing attacks, malware… your business is exposed to all kinds of digital risks and your payroll system needs to be protected.

The Common Types of Payroll Fraud

Payroll fraud occurs when someone illicitly manipulates payroll processes to gain financial benefits. This can take various forms, here are some of the most common:

• Ghost employees: It happens when fictitious individuals who don’t work for the company are added to its payroll system. The fraudster may create false identities or use the details of former employees.
• Time theft: Employees may manipulate timesheets, such as adding more hours worked or submitting fraudulent overtime claims.
• Salary fraud: Employees or administrators may manipulate salary figures, either by increasing their own pay or altering the salaries of colleagues.
• Employer Fraud: Employers may engage in fraud by misclassifying employees as independent contractors, underreporting payroll figures, or misrepresenting the nature of a worker’s duties to lower insurance premiums.
• Tax fraud: This includes underreporting income, falsely claiming tax credits, or manipulating tax withholding information.
• Workers’ Compensation fraud: Submitting fictitious or exaggerated injury or illness claims to obtain compensation benefits, as well as claiming that an injury occurred at work when it didn’t.

Who Is Leaking Payroll Information?

While payroll fraud often happens internally, payroll information leaks can also involve external actors. According to Verizon’s 2023 Data Breach Investigations Report…

“74% of all breaches include the human element, with people being involved either via Error, Privilege Misuse, Use of stolen credentials or Social Engineering.”

Potential sources of leaks may include:

a – External Hackers

No matter the size of your business, this is the most frequent cause of payroll information leaks. Following Verizon’s report…

83% of breaches involve external actors and nearly all of them are financially driven

External hackers may gain unauthorized access to a company’s payroll systems or take advantage of vulnerabilities in the network to steal payroll information. Also, through social engineering, they can manipulate or trick employees into disclosing sensitive information, including payroll details.

b – Internal Employees

Employees might leak payroll information accidentally, by sending sensitive data to the wrong recipients, leaving documents in public areas, or misplacing physical records. They can also fall victim to phishing attacks.

Finally, disgruntled employees may intentionally leak payroll information as a form of sabotage.

c – Third-Party Service Providers

Leaks may occur if your business outsources its payroll processing to a third-party service provider and the provider’s security measures are inadequate.

7 Tips to Protect Payroll Data

Now that you are aware of the main risks and threats that your business is exposed to, it’s time to see how to keep your data safe!

Here are 7 tips to improve the security of your payroll data:

1 – Implement Access Controls

Limit access to payroll systems and data to authorized personnel only. By implementing role-based access controls, you can ensure that employees have the minimum level of access necessary for their job responsibilities.

Make sure to regularly review and update access permissions.

2 – Encrypt Sensitive Data

Use encryption to protect sensitive payroll data both in transit and at rest. This guarantees that, even if unauthorized individuals gain access to your payroll data, it remains unreadable without the proper decryption keys.

3 – Regularly Update Software and Security Patches

Keep payroll software, operating systems, and security applications up to date with the latest patches and updates. That way, you can decrease vulnerabilities that could be exploited by hackers.

4 – Conduct Regular Audits and Monitoring

Perform regular audits of your payroll data and processes to identify any unusual activities or discrepancies. You should also implement monitoring systems that can detect and alert people to suspicious behavior, providing an early warning of potential security issues.

5 – Train Employees on Security Best Practices

Provide security awareness training to your employees, emphasizing the importance of safeguarding payroll data. Train them to recognize phishing attempts, use strong passwords, and follow secure data handling practices.

6 – Secure Physical Access to Data

If your payroll data is stored in physical form, such as paper documents or hard drives, ensure that physical access is restricted. Implement secure storage facilities, use locked cabinets, and establish procedures for keeping sensitive documents safe.

7 – Establish a Disaster Recovery Plan

Develop and regularly test a disaster recovery plan to ensure that your payroll processes can continue in the event of data loss or system failures.

Finally, back up your payroll data regularly, and store backups in a secure offsite location.

EmPower HR: Payroll With a Personal Touch

Processing payroll involves great attention to detail and handling sensitive employee information. There are just too many tasks to do and little room for error. But what if you could take that weight off your shoulders?

Outsourcing payroll and other HR functions to a trusted partner gives you peace of mind and more time to focus on the strategic side of your business.

At EmPower HR we provide payroll administration services that actually feel like having an in-house payroll specialist. We ensure that all your employees are paid correctly and on time, while keeping your payroll data safe and fully compliant.

Why to Choose EmPower HR for Payroll Administration

We know that managing payroll requires responsible and trustworthy partners. Here are a few reasons to choose EmPower HR:

• Have a payroll specialist available for you, without the associated costs of hiring one on-site.
• Amazing customer service. We are proud of the connections we build with clients and specialize in solving problems.
• Get customized solutions adapted to your business’ specific payroll needs and your sector’s regulations and standards.

Payroll Security Conclusions

Regardless of the size of your business, you need to have payroll security processes in place to ensure your most sensitive data is protected.

By keeping your payroll system safe, you can minimize the risk of fraudulent activities and protect against hackers or other digital threats.

At EmPower HR, we provide a full suite of payroll and HR services to help businesses manage administrative tasks more efficiently, while staying up to date with compliance and security requirements.

Contact us to improve your payroll process with a team of specialists by your side!

Related Links

• PEO Services: A Guide to Grow Your Company
• 9 HR Best Practices for Small Businesses
• It’s Compliance Not Rocket Science | Our HR Compliance Checklist Makes It Easy

Here are 5 of the toughest HR compliance challenges companies of all sizes face, with examples of compliance rules and recommended best practices to help you stay ahead of the compliance curve.

5 Toughest HR Compliance Issues Every HR Leader Should Know

We know that HR responsibilities fall way beyond throwing job-anniversary parties. From hiring to payroll, HR leaders handle a variety of compliance issues related to employees. So we’ve given you a birds eye view of some of the toughest HR compliance rules that, like Ross and Rachel, are just complicated.

1. Identifying the compliance requirements that apply to your business

Being compliant requires learning which laws apply to your organization and understanding what they require you to do. That’s easier said than done. While there’s no shortage of compliance rules that apply to all employers – employment taxes, wage garnishments, termination pay, and unemployment insurance, just to name a few — there are plenty of small, nitty gritty details that determine whether some rules apply to your business. 

Some HR compliance rules, like great modern art, are open to interpretation. Laws like the Family and Medical Leave Act and whether or not you are legally required to pay an intern are somewhat subjective and require some serious compliance expertise to master. (Did you know that your employees need to meet 3 qualifications before they’re eligible for FMLA leave?) 

The little complexities and ever-changing nature of compliance makes it difficult for even the best human resources professionals to know what rules actually apply to their business. One of the ways to sort through the madness is to pay attention to your business size. For example, some compliance laws only apply to businesses of 50+ employees. 

We’ve laid out the laundry list of compliance requirements for your business, whether it has 1 employee or over 100. Check out or checklist to help you determine what compliance laws apply to your business.

Download Now

2. Employee benefits regulations

Most companies offer their employees a laundry list of benefits – PTO, health insurance, tuition reimbursement, disability insurance and retirement savings – just to name a few. It can be confusing for compliance newbies to determine what benefits are good perks, and what ones are federally required. 

Employee benefits fall into two categories: those required by law (social security and medicare) and those an employer chooses to offer voluntarily (vacation time.)  Businesses are bound by federal law to offer certain employee benefits — and it takes some research to know which benefits a company has to provide its full-time workers. Federal mandatory employee benefits include:

• Social Security and Medicare
• Unemployment insurance
• Workers’ compensation insurance
• Family and Medical Leave Act (FMLA) protections

But what makes employee benefits compliance truly complex are the mix of federal and state laws that employers must adhere to. The following are just a few examples of the most complex mandatory benefit requirements.

Unemployment Insurance

Take unemployment insurance for example. Employers are required to contribute to unemployment insurance through payroll taxes at both the state and the federal level, to assist workers who lose their jobs. While this is a federally required benefit, since unemployment insurance is administered by individual states, the cost of this insurance and amount required for each employer varies from state to state. 

Disability Insurance

While disability insurance is not a mandatory federal benefit, it is one of the legally required benefits for employers in California, Hawaii, Rhode Island, New Jersey and New York.

Health Insurance

Under the Affordable Care Act, applicable large employers (ALEs) risk a potential assessment if they do not offer adequate and affordable coverage to their full-time employees and their dependents and at least one full-time employee receives a premium tax credit. (ALEs are companies with an average of 50 or more full-time employees, including full-time equivalents, during the prior calendar year.) The coverage should also meet minimum essential coverage requirements and minimum value.

3. Complying with wage laws

If everyone needs payroll, why is it so complicated? Payroll may appear simple, but it’s really a complex administrative function. For one, even a small error can ruin the whole process, and leave you with some pretty mad employees. (Don’t mess with payroll, people.) 

Here’s just a few reasons why payroll is complicated:

• Ever-changing payroll laws. It’s hard to hit a target that’s always moving. Your payroll team needs to be aware of any changes that are happening at the federal and state level. While making changes to payroll policies, it’s best to get the new policies validated by experienced officials or external payroll firms.
• Taxes. Between income tax, Social Security taxes, unemployment taxes and more – there’s just too many tax rules to stay on top of. Many companies are moving towards payroll management systems to automate their payroll calculations. Did we mention that you also need to have a list of voluntary deductions for each employee and reimbursements need to be accounted for? 
• Employee attendance calculations. Managing employee time off and attendance is another line item that goes into calculating payroll, and that can be hard to calculate manually. To streamline your operations, you can implement HR software with payroll, attendance, and time off features.

Here’s an HR pro tip: have you tried outsourcing your HR or using a PEO? Rely on the companies you partner with for employment-related compliance services to help with payroll. There are plenty of benefits to using a PEO and outsourcing your payroll function. If you’re thinking about outsourcing HR, get started with us and we’ll work with you to help manage HR.

4. Anti-discriminatory hiring processes

The recruiting landscape has officially shifted to the digital space. The shift to remote work in the past few years has created an influx in remote hiring and virtual interviews. But some challenges never change. HR leaders still need to be experts on recruiting compliance and help lead company execs to avoid being bested by changing regulations. 

It’s easy to fall into a verbal tripwire, especially in a Zoom meeting. Seemingly innocent questions — are you married? What church do you go to? — are seen as discriminatory and can land you in hot water with federal law. As with the job announcement itself, it is best to have interviewers steer clear of any questions or discussions that touch on the areas of race, religion, sexual orientation or any of the other topics covered by anti-discrimination law.

For HR professionals, the real challenge is making sure that everyone – from the executive team to newly-minted managers – know what they can and cannot do. Our advice? Try using compliance-approved interview scripts and distribute them to any interviewers that aren’t as HR savvy as you.

5. Correctly classifying workers

It’s no secret that classifying workers can be confusing and time-consuming. Federal and state laws do not define the terms full-time, part-time, or temporary employees, so it’s up to the employer to define these terms. For example, A full-time employee generally is defined as one who works a “normal work week,” which is generally 40 hours a week. But some companies define the work week as 37.5 hours or even 35 hours depending on the work day and meal schedule. HR leaders should be sure that full-time and part-time classifications are defined as part of a company-wide employment classification policy so that they are consistent throughout the organization. 

The main reason why correctly classifying workers is so tough is because members of the same team can be classified in many different ways. You could have several different classifications on your workforce including:

• Full-time employees
• Part-time employees
• Temporary and seasonal employees
• Independent contractors
• Statutory employees and non-employees
• Interns
• Volunteers

Clearly, classifying employees isn’t something you can generalize. Solidifying the definitions of employment classifications is critical because it defines your employees’ eligibility for benefits, overtime pay and their tax status.

Here are just a few examples of complex classifications: 

1099 Vs. W2 Employees

 A 1099 worker is an independent contractor, which means they’re technically not an employee. 1099 contractors may work part-time or full-time hours, which can make it easy to confuse them with your other W2 full-time employees. But it’s an important distinction to make because, as a result of the short-term nature of their employment, 1099 contracted employees generally do not receive any benefits and have to pay their own income taxes. 

HR leaders need to be sure that they don’t misclassify 1099 contractors vs. W2 employees. Besides DOL litigation costs, there are potential federal civil penalties of $2,074 per violation (generally one penalty per misclassified employee), state penalties (which will vary), and in some cases the potential for jail time.

Exempt Vs. Non Exempt

Although full-time, part-time and temporary employee classification are up to the employer to define, exempt and nonexempt classifications are governed by FLSA law, which includes minimum wage and rules for overtime pay. Whether an employee is exempt or non-exempt determines whether they are eligible for overtime pay. 

Nonexempt employees are typically hourly (with some exceptions.) Exempt employees are typically executives, managers, professionals, administrative staff, and/or outside sales whose job descriptions meet criteria for non-exempt status as defined by the U.S Department of Labor.It’s a tough compliance issue that can trip up even the best of HR leaders. But it’s important to get right because the penalties of misclassifying employees can be big. Wal-Mart misclassified 4,500 employees back in 2011, which ended up costing them $4.8 million in back wages. Ouch.

• What’s going to make the process straightforward and less clunky
• What’s going to make it easy and actually usable by your staff

Two significant aspects to look for when deciding if it’s worth outsourcing is the time it will take for implementation and the return on investment.

Payroll outsourcing is a common practice in the business world and refers to using third-party service providers to oversee and handle payroll’s administrative and compliance aspects. This means everything from filing payroll taxes to making payments on behalf of the company. In other words, your payroll provider has your back!

Let’s dive into the pros of considering this payroll outsourcing as an option:

Saves You And Your Staff Time

Studies conducted by Technology Advice show that 26% of small businesses spend an estimate of 5 hours monthly processing payroll manually.

Unifying the payroll process creates a smoother and less time-consuming workflow from beginning to end. This is not surprising as your employees now only have one system to clock in and clock out, request vacations, log sick days and receive accurate paychecks each pay period.

Reduces Costs

Return on investment is a crucial factor and the reason why your organization was set up in the first place. Statistics from Greenhouse show that businesses save an average of about $97,180 annually from outsourcing their payroll function.

This is expectedly linked to the fact that you’ll be reducing the amount of time spent on processing payroll manually. Let’s not forget the fact that you’ll have more time to focus on revenue-increasing and value-adding activities, rather than mundane payroll tasks.

Trusted Expertise

Your payroll provider will pay attention to intricate details and stay up to date on any legislative changes you might be missing, as the costs of making errors or not complying can be costly.

Regulatory bodies must know precisely what money went where. These types of payroll mistakes can be pretty tricky to identify and correct. Non-compliance comes with significant penalties like huge fines and other repercussions. Practice makes perfect, and as this is the specialty of the service providers, they know just what to look out for.

Though there are many pros to payroll outsourcing, there can be a few cons as well, such as:

Cost Of Payroll Services

A payroll services provider will definitely not be getting the tools and technological solutions for free. A good number of payroll services require a price ranging from $10 to $85 monthly on top of a per-employee monthly fee.

This does not include the cost of integration as well as any additional creative services either. Therefore, cost is definitely something to consider, although there’s every chance this cost would be lower than the cost of processing payroll manually for your organization.

Accountability

Though this is rare, packages and outsourced payroll providers do not come with a “100% accountability guarantee.” If the payroll service provider flops and cannot pay business taxes on time, this can hurt your organization and cause it to be vulnerable to fines and penalties.

Are you still contemplating whether it’s a splendid idea to outsource payroll? Consider the risks and benefits for your business carefully. Lurking issues like confidentiality and security protocols are understandable reasons why you might not buy the idea of outsourcing. The good thing is, this cause for concern can be rectified with the right service provider providing the right solutions for your business.

The flexible approach that PEOs provide will allow you to choose if they take on a few or all of the PEO services you need. The services consist of performance management, payroll, benefits administration, employee engagement, tax, risk management, compliance and other HR solutions.

Don’t get it twisted with employee leasing, which is different from PEO. Employee leasing involves a company supplying its workers to a client temporarily. Whereas on the other hand, PEO delivers administrative HR and compliance services to a client company and can also be the employer on record.

How A PEO Works

PEOs manage duties involved with the employment process, such as benefits administration, payroll, onboarding, and taxation on hiring employees. The PEO acts as the “Employer of Record” for insurance and tax purposes while taking responsibility for compliance. The client organization oversees daily employee-related duties, and the employees under the PEO communicate work duties and instructions with the client company. In some cases, PEOs also carry the name ‘co employers.’

The advantages of engaging with a great PEO are more pronounced with small companies that struggle with possessing HR expertise, capabilities, or top-notch systems. Coupled with the fact that they don’t have the luxury of spending a lot of time on transactional HR functions, they can’t really go wrong employing a PEO’s services.

What Are The Pros Of Engaging A PEO?

• Time-saving and faster market entry – staff can typically be deployed as soon as possible, which is a big relief, especially for a new company in an unfamiliar space. As the PEO supports recruiting strategy, onboarding, compliance, and tax duties, a lot of time can be saved. At the same time, the client organization focuses on taking advantage of great opportunities as they come — definitely a win-win.
• Potential lower costs – PEOs help organizations streamline as they grow and cut expenses, so they don’t have to hire this position. Also, the client organization gets good benefits deals from benefit brokers and avoids compliance penalties that can stem from ignorance.
• Limited risks and general compliance – This has to be one of the most sought-after benefits client organizations look out for when engaging PEOs. PEOs work with their clients’ to get guidance on adhering to various compliance issues. They can migrate any risk and liability issues as long as they follow their PEOs guidelines on employment, compensation, and tax.
• Enhanced Accreditation – In the world of PEO’s, there is a certification that PEOs can apply for called a certified PEO or CPEO. This certification means that the PEO has met the intense financial and reporting requirements set by the IRS. Certification ensures financial protections and tax benefits to clients of a certified PEO that clients of non-certified PEOs do not necessarily have. This can be a massive benefit within your business should you choose to go this route when selecting a provider.

What About Limitations?

When it comes to PEOs, the good outweighs the bad, as the whole idea of PEOs is to make life easier for small businesses. However, as a business owner, it is essential to look at both sides of the business model to make sure it’s the best decision.
Here are the cons:

• Less flexibility in benefits – With certain PEO providers, clients will have to accept the service packages offered by PEOs as they are the direct links to the service providers. There’s no variety, and this is limiting. Some outsourcing companies offer PEO as a product; however, they also offer other levels of services such as Administrative Services Only (ASO), where clients don’t need to use their benefits packages. This can provide a new level of flexibility that can be very beneficial. They can offer more benefits for even the smallest organization, which can be a massive plus among the employee base.
• Shared burdens – Though the PEO lifts some of the weight off the client company’s shoulders, liabilities still exist for the client company as this works as a co-employment relationship. This exposes the client company to mishaps that could happen down the line. Like the detective you are in your PEO selection process, doing your due diligence is vital by understanding their key offerings and establishing any liabilities present that could harm you down the line.
• Impersonal relationship – How the PEO relates with the client company’s employees would likely seem impersonal many times. Depending on how big the business is, employees often communicate with a representative when issues arise, rather than a dedicated and familiar face. Knowing this relationship is critical, you will want to ensure that you set clear expectations of relation etiquette for your PEO and staff to ensure a trusting relationship on both ends. Specific outsourcing organizations take immense pride in providing the best relationship management practices. This can be a great value add as it feels less like working with an external party and more like an extension of your HR department.

PEO costs vary depending on the type of services required, terms of the agreement, organization’s risk level, credit rating, and location. PEOs are assets to organizations when used in conjunction with internal HR teams to offer cheaper solutions to transactional HR tasks. That extra layer of safety they provide in terms of ensuring regulatory compliance makes them all the more worthwhile.

Have you ever wondered how HR functions got simplified even amid the chaos? The word is ‘automation.’ Automating your HR processes using technology will save time, ensure accuracy, and create space and time for HR to handle more complex functions. This saves some of the outsourcing costs as you can be sure only hard-to-tackle tasks are being outsourced.

Softwares have been developed to complete activities like payroll processing which have been true lifesavers. This not only ensures access to data on a secure platform anytime and anywhere, but it also makes you less reliant on traditional methods like Microsoft Excel, which is error-prone.

Streamlining Payroll Management Tasks

A badly implemented payroll process is like a poorly made sandwich. Once you’ve had it, it leaves a bad taste in your mouth and leaves you suspicious of future bites to come. This is the same for payroll management.

Payroll is one of the essential foundations in HR and organizational operations as it involves funds going in and out of the organization. An error here can lead to more paperwork and potentially difficult conversations with employees or vendors that you would rather avoid. To the delight of both employees and organizations, technology has efficiently advanced, providing businesses the benefits of lower cost and resource optimization while employees enjoy uninterrupted and efficient services.

Payroll stands as one of the most procedure-bound and legally demanding HR functions. Simplifying and breaking down the whole process will only bring advantages. Ways to streamline the process include:

Automating Workflow And Employee Involvement

As stated earlier, manual data isn’t the way to go as this method is time-consuming and susceptible to errors. A flowchart can help to re-evaluate your workflows while checking for unnecessary repetition. The merging of employee schedules and digital timesheets is another excellent way to reduce errors as this automatically pulls relevant data. Employee involvement can also be automated by including onboarding, employee hours, and employee scheduling in the process.

Going Paperless

Paper checks are becoming a thing of the past as they are prone to fraud and bad for the environment. Direct deposits are a better option as they ensure accuracy and protect sensitive data while reducing costs by running fewer payroll runs. For those employees who may be “unbankable”, pay cards are a safe and efficient way for employees to receive their payroll funds.

Having A Solid Control System

Errors are inevitable. Through the incorporation of checklists, it can help to prevent and reduce errors. The checklist should include the audit of payroll, compliance, checks, and balances. This would help in breaking down the process while catching mistakes in good time.

Integrating Time Tracking With Payroll

Integrating your time tracking and payroll into one system increases payroll accuracy as it will genuinely reflect time worked. This reduction in errors will save money and the headaches that come with inaccurate payroll information.

Streamlining payroll is just the beginning of finding efficiency and ease of use within the HR functions. Other ways you can streamline can be through:

Investing In Self-Service Portals

Prioritize getting an easygoing HR software that organizes and assists employees better by keeping relevant data and documents easy to find and access. This small but mighty change will eliminate those ongoing, never-ending back-and-forth email chains that everyone loves so much (just kidding!)

Cloud-Based Systems

Still harnessing the many benefits of technology, cloud computing is the way of the future and here to stay for all the right reasons. Not only does it require less storage space, but it is also easy to maintain and is accessible anywhere there’s an internet connection. That means asking for your vacation request while already on the beach sipping your favorite beverage (Oh yeah!)

Instant Connectivity And Interdepartmental Communication

Think instant messaging is not for corporate organizations? Think again. Softwares now have the instant messaging feature, which eases better communication between employees and teams. That means instead of sending an email and getting a reply the next day, you can send a chat message and get a response almost instantly.

Centralizing The HR Function

It becomes problematic when the HR department is scattered, especially if it has a global footprint. Not only will the repetition of tasks be eliminated, but when HR is centralized, it will prevent discrepancies in policies and procedures. HR can spend more time on more pressing and critical tasks that add strategic value to the company through smoother operations.

If the HR team of specialists does not work efficiently, this negatively affects all other organization departments. For this reason, streamlining HR processes, especially crucial areas like payroll, is essential. Streamlining will enable the organization to direct efforts properly while making cost-effective changes to drive the business forward.

Standard functions for outsourcing include but are not limited to:

• Talent acquisition strategy
• Training and development
• Compensation strategies
• Compliance assessments
• Technology solutions

Now the question is, how much would you need to pay? While the actual prices vary, there are widely accepted payment arrangements:

Fixed fee basis — where you make payments based on every employee managed. This can be a good arrangement if your full-time employee (FTE) number is not going to expanding

Percentage basis — where you pay a percentage typically within a range of every employee’s yearly salary.
A flat fee (pay-as-you-go) – This can offer you and your team a lot of flexibility based on the immediate needs you have

Hourly — If you only need a few hours of support per month, your HR outsourcing specialist can put work on various projects or tasks
By pay period, Monthly or Annually

Soft And Hard Costs Broken Down

A hard cost is paid directly to an outsourcing firm for services provided based on specific tasks. Hard costs typically include monthly vendor fees determined by how many employees you have and how many services your organization needs. For instance, your organization could be charged for a combination of employee screenings, manual auditing, and regulatory compliance efforts one particular month. In contrast, the next month, you might be charged for executive management training solely as this is the only service rendered.

Soft costs, on the other hand, are generally not attributed to the service provider. They are contributed to carrying out the outsourced HR functions leading to the proposed outcome. This can include training to learn specific processes, managing technology, software updates, licenses, research, administrative time to rectify lost productivity, and many others. These costs tend to involve what the service provider has to do in-house.

Factors That Affect Hard And Soft HR Costs

A combination of internal and external factors affects the costs of HR outsourcing. However, significant consideration will be the size. The greater your staff strength, the higher the volume of HR functions.

It is also essential to understand the HR functions you would need support by gauging your company’s situation. For example, if you have a fixed fee payroll structure being managed well by internal HR support, the change to outsourcing may not be significant to have any impact. The complexity of your HR concern is another consideration to note. It would not take too much input to develop job descriptions while providing strategic guidance on your workforce plan; however, on the other hand, analyzing a harassment lawsuit would require more intensity and expertise.

It would be a beneficial practice to compare costs and calculate the expenses of maintaining a separate infrastructure for your in-house HR employees. At the end of the day, it’s all about being able to keep your costs low. If outsourcing brings more benefits, you shouldn’t invest too much in having in-house infrastructure.

Managing Hard And Soft Costs Effectively

Soft and hard costs of outsourcing HR really depend on the level of support needed. Fortunately, outsourcing arrangements are flexible so that finance can control the service costs. You can effectively manage costs by noting:

• Month-to-month arrangement. Services can be added or removed based on your business needs and what your budget allows.
• Begin with a more extensive project like a general compliance assessment, then reduce the level of support you need based on the outcome. This will prevent paying for services that are not required.
• You can consider outsourcing temporarily for some high-level support to strengthen your team’s competencies for that period if some in-house employees handle HR activities.

The Unobvious Soft Costs

As you think about outsourcing your HR function, here are as equally important but not so obvious costs to consider when making this decision:

The gift of time — One question we rarely, if ever, ask ourselves is “what is our time worth?” If we really had to put a cost to it, what number would it be? Your time is valuable with operating a business because your time needs to be focused on high output and driving results. With outsourcing now in place, this leaves you being able to have up to 15% more time back in your day to manage more strategically important projects and business objectives. With time like this, you can really focus on the decisions that drive the company forward. Boom! Mic drop.

Peace of mind — Carrying the weight of a successful business on your shoulders is no easy feat. However, when you have the right team whose expertise aligns with the more complex areas’ needs, there is definitely a sense of relief that comes flooding in as you can rest assured you now have a “fixer” in your corner. With outsourcing HR, you can be at ease as any conflicts or day-to-day challenges will be managed professionally, with empathy and care for your number one asset, your people.

Clarity — Mental clarity and focus are definitely luxuries these days. With business operations moving at the speed of light, it feels that you make one decision to the next without taking a step back to look at the fuller picture. This can especially feel overwhelming when dealing with the day-to-day HR operations, employee relations, payroll, benefits, and compliance issues that always come at the worst times. Imagine what you can accomplish with the additional headspace to strategize and create a high-performing employee culture.

As with any critical decision, understanding the costs, advantages, and considerations the action can have is very vital. Identifying the following areas that could also benefit from this change will give you a future-looking vantage point that will be essential to the success of the decision for your business today and for tomorrow.

PEOs and PSPs are the most standard options used by different businesses out there but can interact with your business differently depending on your needs. In outsourcing options, one size does not fit all, so it’s critical to understand your needs first and align them to the right solutions provider.

Here are some of their differences in more detail to help you understand the nuances of the partnerships and identity which solution is best for your business:

Co-Employment

With a PEO, you enter into a co-employment agreement. What is a co-employment agreement? It allows you to share some of the responsibilities and liabilities of being an employer by controlling some of the daily decisions while the weight of the liabilities are taken on by the PEO.

At the same time, your PEO provider will handle many of the duties that an internal HR team would, along with managing any risks. The difference with a PSP is that they will only handle the functions responsible for timekeeping, tax remittance, and paying workers for that period.

Question to ask: Based on the growth over the next 12-24 months, does utilizing a PEO help or hinder my business operations?

Cost

If you compare PEOs to a PSP, the PEO will likely be the more expensive choice depending on other services you have with your provider. The difference being that the PEO is multifaceted and very much involved in every part of your business.
Whether it’s compliance or training, a PEO is sure to hit the ground running when you reach out. With a PSP, you may need to hire other HR consultants to support the department as their duties start and stop with the administration of everything payroll. Depending on your arrangement, there could be additional cost savings in other areas of your operations as an offset to any additional costs

Question to ask: Do the costs create an advantage that I can use for my business size and model for today or is this better used in the future?

Compensation Insurance

One key difference between PEOs and PSPs is how workers’ compensation insurance is handled. PEOs provide workers’ compensation insurance when you enter an agreement with them. If you choose a PSP, you will be responsible for managing that liability. Now PSPs may be able to provide options based on the relationships they have with insurance agents; however, you will be responsible for managing the worker’s compensation as a whole.

Question to ask: Based on your workforce’s makeup, what is a better situation to navigate these areas and costs?

Contract and Termination

It’s common practice for PSPs not to require contracts to use their payroll services, whereas PEOs would generally require a contract for a specific period. On the other hand, a PSP is more flexible and would typically allow you to opt-out of your agreement at any time because the service is from pay period to pay period.

Another element to consider is paying state unemployment tax. If a PEO is responsible for maintaining and settling your state unemployment tax, depending on the state you reside in, you have to pay at their rate since they are the employer of record. Making a switch mid-contract may cause inconsistencies which may result in paying a more considerable amount.

Question to ask: Can your business benefit from a payroll provider’s flexibility, or does it create too much risk?

You are in the best position to know which option sounds right for your business from weighing the differences. Obtaining the facts relating to the employer of record, worker’s compensation, regulation, contracts, how the costs between a PEO and PSP can help make an informed decision.

Quotes serve as a straightforward way to help you compare financial costs quickly, and by looking at the pros and cons, you will also be aware of the implications of using any of them. As your business grows and evolves, so will your needs, so ensuring you evaluate your external partners every year will be key to having the best operational framework for your operations and employees.

From this, fundamental questions such as, do we hire in-house? Who do we hire? What area do we focus on first? Who is going to manage the projects? The budget and people?

Very quickly, a small question around HR can lead down a rabbit hole of questions, concerns, legal implications, and the list goes on. Many intelligent leaders turn to HR outsourcing support to avoid complications, headaches, and errors. These companies are built and explicitly aligned to streamline functions while managing the HR lifecycle’s various elements.

What does outsourced HR look like?

By choosing to outsource HR functions, you are employing expert consultants to manage various HR areas and the employee lifecycle in your business. This typically includes services like:

• HR strategy in culture and engagement
• Payroll and benefits administration
• Maintaining legislative compliance for employment law
• HR Information System implementation and maintenance

This support creates the perfect avenue for small business owners to focus on more growth-centric areas that drive revenue and customer relations in order to take the business to the next level.

Benefits Of Outsourcing HR

The benefits of outsourcing HR areas vary from business to business. However, one thing that is true across the board is what outsourcing can bring to your business.

Hyperfocus on high-value activities – As a small business, time is money. You need to do a lot with a little, so every minute counts. Knowing that your HR department is taken care of, managers can funnel all their energy and smarts into your organization’s strategic areas to ensure you keep and grow your competitive advantage in the market.

Access to best in market solutions – Small organizations need to focus on the bottom line more than ever. Through the ability to save costs with your outsourced HR solutions, you can compete more fiercely with other small businesses and use those savings for additional revenue-generating activities such as business development and marketing.

Staying compliant with ever-changing laws – One day, you can be on the right side of employment law, and the next day, you’re not. Employment law can be fickle, and it can be even more of a challenge if you have employees in various states or geographical regions. With an outsourced HR function, those headaches would not be yours to bear.

Warning Signs You Need To Consider HR Outsourcing

Small businesses tend to have a do-it-yourself attitude as they see themselves as the best handlers of crucial tasks. While this may be fine for some areas, the organization eventually reaches a point where operations begin to feel the strain.

Employees’ stress levels are getting too high – If your employees struggle to maintain work-life balance or get short-tempered over simple tasks, this is a sign HR needs to step in and support. This type of behavior and workplace culture can harm productivity and can increase turnover.

Deteriorating customer service – Customers are vital to the success of your business. If the answers to their questions or problems experience a delay, this can lead to an increase in disgruntled customers and impact your bottom line. This is a symptom that the employees are too swamped to give customers quality time. With an external HR provider, you can ensure your team has clearly defined goals and performance development plans that will in turn make your customers feel like they’re number one.

Sales are taking a nosedive – Insufficient staffing and poor time management play a significant role in declining revenue. Having the right people resources as well as training to keep your team high performing is essential.

As a small business owner, you can’t afford to miss a beat. With all the facets of your business to worry about, HR doesn’t need to be one. Let the HR professionals focus on your people while you focus on the company.

Imagine being an online retailer. Maybe you employ someone to look after your website and other IT infrastructure. But if you want to create an app for customers, there is a greater likelihood of outsourcing that work than asking your employees to learn how to create an app. After all, it involves highly specialized skills, and the stakes are relatively high.

The same can be said of HR processes. Even if you employ a full-time HR representative, an HR expert must possess an extensive understanding of many processes and regulations, a number of which have costly consequences if unmastered.

Here are significant reasons why an organization should outsource its HR functions:

1. Save Money With Lower Administration Costs

When HR functions are outsourced, companies lower prices while still focusing on their core business and customer-facing duties. Studies have shown companies tend to save over 20 percent of regular expenses compared to keeping all human resources functions in-house. Furthermore, having the right service provider gives the confidence of knowing a seasoned expert is handling HR functions. Now that sounds like a win-win if I’ve ever heard of one. Being able to bring on specialists as you need is fundamental to having the right expertise and talent focused on your most prized gem – your business.

2. Ability To Offer More Services Due To Lower Limitations

Outsourcing all or some of the HR functions broadens a company’s horizons and often makes it possible to provide services and benefits that can’t be offered as a small business. HR experts typically have the opportunity to benefit from economies of scale since they work with multiple clients. This advantage can open up access to perks that the service provider can offer in turn.

3. Happier Employees

You may be thinking, “I have a highly qualified HR professional as an employee; what impact does outsourcing serve my business? Well, great question. The truth is, HR is stringent, specialized, and extensive. Even companies with HR professionals often find that outsourcing some HR functions is a significant necessity. Outsourcing ensures HR problems are not felt in other aspects of the business; this is suitable for risk mitigation. When you have an HR business partner to help build your culture while mitigating potential issues, the results can be very positive. A recent Oxford University study found that happier employees are 13% more productive, allowing the business to achieve objectives sooner, having a positive impact on their bottom line. Happy employees = Happy workplace = Successful business

4. Minimizing And Effectively Managing Risk

One central area where organizations can mitigate risk through outsourcing is employment and labor law. Employment and labor laws change frequently, and remaining up-to-date on laws and regulations that significantly impact the workplace can be a daunting task. Outsourced HR professionals have the duty to stay aware of various federal and state employment laws and further help businesses comply with these laws to avoid costly lawsuits brought on by employees. Also, they maintain and audit company policies and practices for the organization and its employees.

5. Streamlining Vital Functions

Efficient and productive employees are the drivers of a workplace. Outsourcing has the advantage of creating greater efficiency and simplification within HR Systems such as payroll administration and compliance management. These efficiencies further help employers and managers spend less time performing mundane tasks like paperwork (boring!) in comparison to dedicating more time to improving the efficiency and effectiveness of their employees.

6. Efficient Performance Management

With employee performance and development being more crucial than ever to maintain a competitive edge in your marketplace, outsourcing this HR function can ensure you facilitate, utilize, and measure performance with the top tools and metrics. HR experts can implement performance management plans to ensure employees act per company policies and procedures, resulting in successfully meeting business goals.

As our business landscape continues to change in unimaginable ways rapidly, organizations are pondering the value and need for HR outsourcing services. While there have been critics who argued on some demerits, the data is apparent that its key advantage is leaders’ ability to focus on their business truly. At the same time, the people piece remains in the best and most capable hands possible. Think about it, if you had to get open-heart surgery, would you want a general practitioner taking the lead or a cardiologist? Exactly.