The Pitfalls of Outsourcing: Why Global Payroll Compliance Demands In-House Oversight

One of the most daunting tasks in global payroll operations is compliance. It is not just about having solid processes and robust software — it is about ensuring adherence to a labyrinth of regulations in multiple jurisdictions.

The challenges of compliance in global payroll are well known:
1.    complexity and diversity,
2.    legal and financial exposure,
3.    resource constraints,
4.    regulatory updates,
5.    as well as data security and privacy.

In a global payroll setting, companies usually do not run their payroll operations in house but with the help of vendors. These, in turn, are experts in local legislation and provide their clients with updates as well as maintain the payroll software in compliance.

Well, actually, this might not always be the case.

While it might be tempting to leave it with the experts, there is a number of reasons this might not be the best option:
1.    The vendor might not have been contracted to provide legal updates.
2.    The vendor might have missed a legal update, not implemented it correctly or deemed it irrelevant to the client’s account.
3.    The vendor, especially small, local companies, might not use a proper payroll software but use Excel instead (happens more often than you think) and compliance would rely on Excel formulas (that can be damaged) and/or on the payroll specialist themselves (single point of failure).
4.    Regulations applicable to a given company might go beyond the vendor’s usual scope: the vendor will monitor legislative updates but will not monitor changes in the collective labour agreement.

But I hear you say: “If the vendor missed something, surely they can be made accountable for it”. Well, again, this might not always be the case.

In practice, there are a number of reasons why holding the vendor accountable might prove to be an arduous task and, even if done with success, might not resolve the issue caused by non-compliance:
1.    The vendor contract might not have provisions for such accountability. Then matters are down to local business regulations and courts.
2.    Local regulations often hold the client accountable, even it is the vendor who made the mistake.
3.    The client will still have to face the repercussions in terms of legal exposure, financial exposure, employer branding and employee engagement. Imagine telling a former employee terminated for disciplinary reasons that the payroll vendor made a mistake on their last payslip. They will sue you to labour court faster than you can say “settlement”.
4.    In extreme cases, the conflict over accountability might deteriorate to a point where the vendor decides to stop providing their services and exit the business relationship. Here again, the contract might only have provisions for a very short notice period that will not allow the client to contract another vendor in time.

The risk compounds itself especially when working with a multitude of small, local companies. This scenario is particularly frequent in organisations that centralise their payroll operations in an SSC using the “lift and shift” approach. While this methodology unquestionably has its advantages, it often leads to an initial stage during which a newly formed central team has to manage a disparate collection of legacy vendors taken over from the local teams, each with their own contract, SOW, methodology, tools, turnaround times, and, more often than not, language.

Conclusion: while vendors can take over a number of aspects of the payroll process, compliance should remain at least a shared responsibility between client and vendor. With both parties watching out for regulatory changes, the risk of non-compliance is significantly reduced.