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Which is the best payrolling option to manage pre-identified contractors?

Mar 16, 2020

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In today’s competitive business climate, organizations need an agile workforce that can execute strategies and achieve corporate goals quickly and efficiently. Yet, employers must also be responsible for managing their workers’ wages, bonuses, and deductions as well as provide support during the length of a worker’s assignment(s).

It’s a complex, time consuming process, and staying on top of the frequent changes to legislation can be problematic. Any oversights will result in non-compliance, which could lead to serious fines and negative employer branding.

To stay compliant and competitive, growing organizations will typically shift from a ‘direct contractor payrolling model’ to a third-party payrolling model, either built around the selection of a dedicated supplier or through informal referrals to a variety of vendors.

But which model is the best option for bringing qualified talent quickly and cost effectively into your contingent workforce? Depending on your organization’s acquisition needs, below is a list of payrolling models to consider:

Direct/No Payroller
Risk level: High

Some organizations choose to run their contingent worker contracting and payroll functions internally, with responsibility spread out over a variety of departments-- from HR, to procurement to accounting/AP, but that isn’t always the most efficient approach.

This model involves the client company directly handling all aspects of their contractor's engagement, onboarding and payment duties, with coordination responsibilities often placed on the individual hiring manager that is engaging the contingent worker.

How does the process work?
The client company is responsible for managing all aspects of the payroll process, including:

• The administration of tax and benefits forms
• Payroll deductions
• Submission to government agencies 

Why would organizations use a Direct/No Payroller model?
The organization may prefer to manage the payroll process internally due to perceived cost savings over hiring an outsourced provider.

There is a higher level of risk with this model since employee/contractor regulations and categorizations may change frequently. There is no structure in place to help manage contingent workforce costs or address compliance or risk management issues specific to these types of workers. It can be difficult for busy HR professionals to stay up-to-date with current laws, particularly for organizations with operations in multiple jurisdictions or those who employ exempt/non-exempt, seasonal, contract or part-time workers. Government non-compliance fines can be significant and unforgiving.

Informal/Semi-structured Payroll Referral Program
Risk Level: Moderate (Costly)

This model is often not an ‘official’ company mandate – instead, it usually involves individual hiring managers referring the contingent worker to an existing approved staffing vendor. This process unburdens the hiring manager from having to manage the contracting and payroll onboarding tasks internally.

How does the process work?
Hiring managers typically select organizations they have an existing working relationship with, resulting in simplified onboarding that speeds up the hiring process.

Why would an organization use an Informal/Semi-structured Payroll Referral Program?
The trusted vendor has also likely been onboarded through the organization’s procurement process, and already has all necessary legal agreements in place and meets jurisdiction-specific compliance requirements, such as valid business licenses, tax remittance capabilities, pay schedules, employee categories or a particular aspect of payroll calculations (insurance, workers’ compensation, etc.).

Though this model is generally faster and easier for hiring managers, it’s difficult for the organization to track and manage its corporate spending of directly-sourced contingent labor. Likewise, the use of multiple staffing vendors results in legal and compliance inconsistency between contingent labor engagements as well as service levels and individual worker management.  

The organization typically doesn’t use structured pricing models or pay rates. Additionally, using multiple vendors results in difficulty negotiating high-volume flat and/or preferred fees for the hiring process, resulting in the potential for abusive vendor pricing.

Single, Dedicated Payroller
Risk Level: Low 

This model involves a single outsourced service provider responsible for managing an organization’s entire payroll record, keeping process across all jurisdictions where that company employs workers.

How does the process work?
It represents the company’s decision to treat contingent labor hiring and management as a corporate priority, and offers benefits around:

• Streamlining operations
• Enforcement of established spend approval processes
• Consistency in record keeping through a single vendor
• Securing the lowest possible price for the service 

Why would an organization use a Single, Dedicated Payroller? 
This model can be especially advantageous for employers who may operate in multiple domestic or international jurisdictions.

This model lowers an organization’s risk by incorporating a single point of accountability and audit for all of the compliance activities related to contingent worker onboarding and management and decreases the likelihood of overlooked short-term, contract or seasonal workforce records and worker misclassification.

There is no scenario that is completely risk free; whichever model your organization chooses to go with, it’s crucial to know the benefits and risks associated with each. Does your organization have a solid framework for identifying contingent worker risk? Download our free Checklist on CW risk factors:
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