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Common misconceptions about contractor payrolling

Jul 15, 2019

Mark Galloway
Mark Galloway

In today’s highly competitive business climate, strategic organizations must harness resources that can quickly and cost effectively bring on-demand talent into their workforce. Similarly, when peak worker demands ebb, employers will also need the flexibility to downsize and offboard these types of non-traditional talent.

It’s estimated that by 2050, 50 per cent of the U.S. workforce alone will be made up of contingent workers. Further more, According to an Oxford Economics survey, 83 per cent of executives reported an increase in usage of contingent labor to meet business objectives. 

As the need for an agile and flexible workforce grows, many organizations are turning to methods like outsourcing employer responsibilities like contractor payrolling to a trusted vendor who will manage workers’ wages, bonuses, and deductions, as well as provide support during the length of a worker’s assignment(s). The client partner will also identify and implement internal measures to protect organizations from serious risks like unforgiving fines, penalties and negative employer branding. 

However, it’s common for many organizations to think it’s better to let their own HR and accounting departments handle contractor payrolling. After all, they do so for traditional employees, right? Payroll stats disagree, stating companies that outsource payroll save 18 per cent on costs over organizations that tackle it themselves.  Outsourcing contractor payrolling 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.

Below is a list of other misconceptions associated with outsourcing contractor payrolling, and the real fact surrounding the payroll function:

"We don’t need help...”

While running contractor payrolling in-house might be the right choice for some organizations, many struggle with building and maintaining an in-house team that's knowledgeable on the many diverse HR, procurement and labor market topics that a solid payrolling program requires.  In-house teams sometimes are challenged 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.  

Likewise, candidates, too, have expectations for issues and service management that are typically much higher than traditional vendors or employees.  Fail to meet these expectations, and turnover will likely occur as these talented individuals bring their work somewhere else.  A contractor payrolling 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. 

“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, failing to consider their own costs of delivery when keeping contractor payrolling in-house or partnering with a low fee provider.  

When, in 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 payrate basis than competitively sources contractors.

Typically, this is due to the lower focus on contractor payrates and negotiation that’s 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.  

“One size fits all...”

Going with a one size fits all payroll provider can sound appealing, but it can come with trade-offs.  From a price, program features and compliance perspective, it can often make sense to specialize by location (country or territory requirements) and type of work (office work vs. safety sensitive roles vs. specialized job requirements).   

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

“Price is all that matters...”

Perhaps surprisingly, payrolling fees typically represent a small percentage of the overall cost.  A client organization’s internal overhead costs and contractor payrates drive a much larger aspect of the overall cost structure, not to mention 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.  

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 payrolling models -- but the total costs of the overall program. 

As an organization’s use of contingent workers increases, so too, do the risks associated with temporary talent. Yet, risk is one of the most talked about, but least understood areas in contingent workforce management.  

Does your organization have a solid framework for identifying contingent worker risk? Download our  free Checklist on CW risk factors:


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Mark Galloway
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