By Adrienne Silla | Head of Advisory, Australian Payroll Association
Payroll outsourcing can be a very effective solution for some organisations.
For some businesses, outsourcing can provide access to specialist technology, experienced payroll professionals and established processes without having to maintain the same level of internal infrastructure.
But there is an important distinction that organisations sometimes overlook:
You can outsource the processing of payroll but you cannot outsource your responsibility for payroll compliance.
And that raises an important question for business leaders:
If your payroll is outsourced, who inside your organisation is responsible for knowing whether it is being done correctly?
Outsourcing changes the operating model, not the accountability
When a business appoints a payroll provider it is natural to expect the provider to manage the payroll process. The provider may calculate pay, process the payroll, manage employee changes, produce reports and handle many of the day-to-day activities that would otherwise sit within the organisation's payroll team. But the business remains the employer. That means the organisation still needs to understand its obligations and have appropriate oversight of the payroll process. This can be easy to lose sight of once payroll has been handed to a third party. The assumption can become: “Our payroll provider handles that.”
But what happens when an Award changes? What happens when an Enterprise Agreement is replaced? What happens when a new allowance is introduced or employees start working different patterns? Who checks that the payroll provider has interpreted those changes correctly? And perhaps most importantly who inside the business would know if something didn't look right?
The knowledge gap can be a significant risk
One of the biggest risks we see with payroll outsourcing is the gradual loss of internal payroll knowledge. An organisation may have had experienced payroll professionals before outsourcing. Over time, those employees leave or move into other roles and the business decides it no longer needs payroll expertise internally because the function has been outsourced. That can create a significant knowledge gap.
The organisation may still have people responsible for HR, finance or operations but they may not have the payroll expertise required to challenge the provider, understand complex Award requirements or identify when something doesn't look right. This creates an uncomfortable situation.
If the payroll provider says, “The payroll is compliant,” who within the organisation has the knowledge to independently assess that statement?
Your payroll provider isn't your compliance function
Another misconception is that the payroll provider is responsible for ensuring the organisation is compliant. The provider has contractual responsibilities under the outsourcing agreement but the employer's legal obligations do not simply disappear because payroll processing has been outsourced. If employees are underpaid, the consequences will still sit with the business. That could mean back payments, superannuation adjustments, interest, penalties, employee relations issues, reputational damage and significant remediation costs.
Consider a business that has been using an outsourced payroll provider for five years. During that time, an Award interpretation has been incorrect and employees have been underpaid. The fact that the payroll was processed by an external provider doesn't make the problem disappear. The organisation may still need to identify the issue, calculate what employees were owed, remediate the underpayments and address the underlying compliance problem. The longer an issue continues undetected, the more difficult and expensive remediation can become.
So, what should an organisation do?
If payroll is outsourced and there is no internal payroll expert, the answer shouldn't necessarily be to bring payroll back in-house. Outsourcing may still be the right operating model. But the organisation needs to replace the internal payroll capability it has removed with a strong compliance and governance framework. That framework should provide independent oversight of the payroll process and give business leaders confidence that payroll is operating as expected.
For example, organisations should consider having regular independent reviews of:
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Award and Enterprise Agreement interpretation
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Employee classifications and industrial instrument coverage
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Pay rates and rate changes
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Overtime, penalty rates and allowances
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Leave calculations and payments
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Superannuation
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PAYG withholding and STP reporting
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Termination payments
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Payroll system configuration
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Changes to legislation, Awards and Agreements
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Payroll controls, processes and exception reporting.
The frequency of those reviews should reflect the complexity and risk of the organisation. A highly complex workforce with multiple Awards and Enterprise Agreements will require a different level of oversight to a relatively straightforward workforce.
The important thing is that someone independent of the day-to-day payroll processing is checking the payroll.
What should you be asking?
Payroll outsourcing decisions are often focused on cost, technology, service levels and operational efficiency. Those are important considerations, but business leaders should also ask some less obvious questions.
Who inside our organisation understands payroll well enough to oversee the provider?
If that person left tomorrow, would we still have sufficient payroll knowledge?
How do we know our Awards and Enterprise Agreements are being interpreted correctly?
When was the last independent payroll compliance review?
How would we know if an issue had been occurring for the last three years?
What happens when legislation or an Award changes? Who is responsible for making sure the change is correctly reflected in our payroll?
And perhaps the most important question:
If something goes wrong, how quickly would we know?
These aren't questions intended to undermine the relationship with an outsourcing provider. They are questions about good governance.
A good payroll provider should be part of a strong control environment not the entire control environment.
Outsource the work, not the knowledge
Payroll outsourcing can absolutely work well. For some organisations, it can provide greater efficiency, specialist expertise and access to technology that would be difficult or expensive to maintain internally. But outsourcing should not mean that the organisation becomes completely dependent on an external provider to know whether its payroll is correct. At a minimum, there should be someone internally who understands payroll well enough to provide effective oversight. If that capability doesn't exist, then an alternative needs to be established through a structured compliance framework and regular independent review.
The goal isn't to duplicate the outsourced payroll team's work. It is to have sufficient knowledge and independent assurance to challenge, verify and oversee what is being delivered. Because when something goes wrong, the first question isn't likely to be, “Which payroll provider processed this?” The question will be:
“What did the organisation do to make sure its employees were being paid correctly?”
Outsourcing payroll can be a smart business decision. Outsourcing responsibility for payroll compliance isn't.
If your organisation has outsourced payroll and you're not sure whether you have the right level of internal knowledge, governance or independent assurance, the Australian Payroll Association can help review your current framework and identify where additional payroll compliance oversight may be needed.
