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Common misconceptions about contractor payroll

Jul 15, 2019

Mark Galloway
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Mark Galloway
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Contractor payroll is a complex business responsibility that can often appear confusing to employers unfamiliar with the different set of obligations that must be met when paying contractors vs. traditional employees. As such, it's common for organizations to hold misconceptions concerning internal and external capabilities, program models and cost when it comes to contractor payroll.

As the need for an agile and flexible workforce grows, more and more organizations are starting to outsource business responsibilities like contractor payroll to a trusted vendor that will manage workers’ wages, bonuses, and deductions as well as provide support during the length of a worker’s assignment(s).

If your organization is considering outsourcing your contractor payroll program, the information below will help provide insights on how to pay contractors and help gain clarity into any misconceptions.

How do I pay a contractor?

Contingent workers can go by many different names - temporary workers, gig workers, contingent labor, Independent Contractors, freelancers, temporary talent, contractors or pre-identified contractors; yet they all refer to the same type of non-traditional worker: the contingent worker.

However, depending on the method in which the worker is engaged to perform the work - whether directly sourced through the company itself or by way of a third party, there exists separate obligations to workers when it comes to payroll. 

In the United States, contractor payroll refers to the tasks a company must execute to ensure temporary W2 Workers and 1099 Independent Contractors (ICs) are paid correctly and on time in accordance with their contract or Statement of Work (SOW).  

Common misconceptions about contractor payroll

It’s common for many organizations assume internal resources such as HR and Accounting Departments have the technology and human capability to pay contractors - as these functions are responsible for traditional employee payroll. However, contractor payroll stats show organizations that outsource their contractor payroll program save 18 per cent on costs over employers who use internal resources.

Below is a list of other misconceptions associated with outsourcing contractor payroll and the facts surrounding the payroll function:

Misconception:"We don’t need help...”

For some organizations, like a small business, operating an internal contractor payroll program may be the best strategy; however for most others that operate a larger contingent workforce, in-house teams may lack the knowledge on the many diverse HR, Procurement and labor market topics that a successful payroll program requires.

In-house teams are often required to maintain great service levels, through both routine and exceptional requirements (like visa’s or unusual classification scenarios), across the challenges of vacation, turnover and spikes in contingent program office activity.  

Candidates, too, have expectations for issues and service management that are typically much higher than traditional vendors or employees.  Failure to meet these expectations will often result in turnover as these talented contractors bring their niche skills and experience somewhere else.

Fact

In-house teams typically lack compliance and contingent workforce knowledge required to pay contractors without risk.

A contractor payroll model built by an experienced vendor will deliver solutions that mitigate these issues and provide a consistent candidate experience across an entire organization all from one platform. 

Misconception: “It will cost less if we do it in-house..."

It’s common for organizations to focus on the fee charged by a 3rd party provider, rather than taking into consideration their own costs of delivery when keeping contractor payroll in-house or partnering with a low fee provider.  

Fact

Program fees are generally less than 5 per cent of the overall worker costs (and sometimes below 2 per cent for high rate contractors), making the organization’s ability to negotiate rates and properly categorize workers the most important factor in determining overall program costs and value for money.   

Procom research has identified that client sourced contractors are frequently 4-11 per cent more expensive on a pay rate basis than competitively sources contractors.

Typically, this will happen when there is a lower focus on contractor pay rates and negotiation, which is common in client run payroll programs and can be a major driver of both short-term and long-term savings that dwarfs savings on the payroll fee itself.  

Misconception: “One size fits all...”

Choosing a one size fits all payroll provider and model can sound appealing, yet there are disadvantages as well advantages to this approach.  However, from a price, program features and compliance perspective, it is often more strategic to specialize by location (country or territory requirements) and type of work (office work vs. safety sensitive roles vs. specialized job requirements).   

Fact

While a one size fits all approach can sound appealing, yet it can be problematic when it comes to assessing best pricing and sourcing niche contract management requirements.

Misconception: “Price is all that matters...”

Payroll fees typically represent a small percentage of the overall cost.  A client organization’s internal overhead costs and contractor pay rates drive a much larger aspect of the overall cost structure, as well as any exceptional costs triggered by compliance issues or legal claims.   Paying for a high-quality contingent workforce payroll program specialist is often a long-term driver of improving program satisfaction and lowering total cost.  

Fact

Saving on costs is a consistent factor in contingent workforce management, with organizations ranking contingent workforce costs as a top five spend category; however, cost management doesn’t just include contractor payroll models -- but the total costs of the overall program. 

Benefits of outsourcing contractor payroll

 Outsourcing payroll not only gains access to the types of technologies and expertise that reduces overall cost and risks associated with operating a contingent workforce, it also frees up time for employers to focus on their organization’s core business objectives.

The vendor partner will also identify and implement internal measures to protect organizations from serious risks like fines, penalties and negative employer branding.

Are you interested into gaining deeper insights into saving on contingent worker payroll costs and solutions? 

View our free case study to learn how Procom's payroll and rate negotiation services helped one client partner achieve cost savings and more:

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