Explore outsourcing in HR and Payroll
The rise of cloud technology, among other advancements, in the early 21st century further accelerated this trend.
The COVID-19 epidemic prompted major changes to tax and employment laws, increasing compliance challenges for employers. Even after the COVID-19 pandemic, HR functions and payroll are still evolving rapidly, especially with the integration of generative AI (AI). In the meantime, states are increasingly focusing their attention on laws relating to pay transparency and minimum wages.
In an expert discussion, experts from top 10 advisory tax assurance firm examined both the benefits and complexity of outsourcing HR and payroll function. They highlighted why many companies are opting for this approach amid ongoing regulatory changes, expansions, and other evolving needs.
Reasons and benefits
Gillian Florentine, a director with Baker Tilly’s Human Resources consulting team, explained that when outsourcing HR and payroll functions, there are generally two main approaches: project-based outsourcing and recurring support. She said that recurring outsourcing involves ongoing support for HR and payroll functions which can be more cost-effective for small to mid-sized businesses (SMB) that do not have the capacity to hire full-time staff for these roles.
Florentine added that outsourcing also offers reliable backup support. The outsourcing firm can fill in for a full-time employee on leave of HR or payroll, ensuring continuity. “The backup nature of outsourcing is pretty desirable…especially in the SMB demographic,” she said.
Deanna Kempinski, a senior manager with Baker Tilly’s Human Resources consulting team, noted that project-based outsourcing has a definitive start and stop period involving tasks such as updating or creating employee handbooks, refreshing job descriptions, or conducting compensation studies. She said that there are many reasons a business might outsource HR and payroll projects, including lacking the bandwidth internally to do the work themselves.
Kempinski added that a fair amount of project work is in the compensation space. “A lot of times, organizations just don’t have the expertise in-house to do a full-out compensation study with access to market data,” she said.
Challenges and solutions
Outsourcing HR and payroll functions present benefits for organizations, but challenges may also arise. Florentine said that leaders often have difficulty imagining how remote support would work with their employees, especially because many are already operating in hybrid or remote modes since COVID-19. “How do you actually support the people if you’re not co-located with them…physically?” she questioned.
To address this, Florentine suggested outsourcing providers offer virtual office hours through platforms like Zoom or Webex, simulating in-office interactions and ensuring accessibility.
Another challenge Florentine stressed is the hesitation employees may feel when approaching HR due to existing relationships within the organization. She said that outsourcing has many benefits, including the neutrality of third party providers. As external entities, they remain impartial, which helps in resolving issues fairly and is appreciated by both employees and management.
“We really are a neutral third party to come and help resolve issues that might not otherwise be uncovered in the business,” Florentine said.
Kempinski noted that the nature of project-based work often involves addressing specific needs, which can differ from recurring tasks. She said that challenges may arise when a leader engages in a project without securing buy-in from other stakeholders, leading to delays in obtaining necessary information, completing requests, or general responsiveness, which can extend timelines and complicate project completion.
“But generally, we’re not seeing too much pushback on the project side…because it’s…a different thing that they’re looking for,” Kempinski said.
Assessing the need for outsourcing
When it comes to determining the need for outsourcing, Florentine stated that payroll becomes a necessity after the first employee is hired. She said that owners of businesses must decide if they want to manage payroll in-house or outsource, taking into consideration factors such as organizational size and complexity. Expanding business operations is also a factor since multi-state hiring adds further complications due to varying state regulations.
Florentine advised businesses to evaluate their size, complexity, and growth trajectory to determine if outsourcing is appropriate. Consider their internal expertise and resources. A cost-benefit analysis should factor in potential savings, compliance improvements, and a strategic focus on core activities.
On the project side, Kempinski said organizations may need to outsource due to anticipated staff changes, such as retirements, or to enhance skills and technology. Taking advantage of these third-party services can provide greater expertise and connectivity, helping businesses adapt and advance.
“So, I think that trajectory of your business and…where you want to take it could influence the decision too,” she said.
“And you can find that sometimes…outsourcing the project, or complete functions altogether, better solve long-term for where the company wants to go,” Florentine added.
Selecting an outsourcing partner
Choosing an outsourcing partner can be a challenging process. Florentine and Kempinski both emphasize that companies should evaluate such factors as expertise, responsiveness and having a single-point of contact to ensure success. Florentine compared marriage and business partnerships, stressing that it is important to consider long-term compatibility before making a decision. It is important to choose a vendor who offers good service and value. “Those are the things that, if I’m sitting in the C-suite or executive or business owner seat that I’m thinking about, if I’m going to buy those services,” Florentine reasoned.
Kempinski highlighted the importance of choosing partners who provide innovative solutions instead of simply replicating existing processes. “Think about ways to improve,” she advised.
During the request for proposal (RFP) process, she suggested looking for vendors who propose enhancements to processes, such as streamlined payroll and increased employee engagement. Additionally, Kempinski emphasized the need to ask vendors how they would tackle specific problems or pain points during the vetting process to ensure they can offer effective solutions.
Florentine noted that large firms typically have an RFP process to define their needs, but many SMBs do not, which can lead to unclear expectations and challenges in defining the scope of work. Whether formalized or not, critically assessing what is needed before engaging with vendors is a crucial first step.
Implementation and transition
The initial steps transitioning to outsourcing can vary depending on whether the company is starting from scratch or already has existing operations. Florentine recommended prioritizing tasks such as establishing payroll accounts, and onboarding paperwork for new setups. Kempinski said that for projects, it is important to have full agreement on scope of work, and to customize the plan according to client needs. She explained that flexibility is key, allowing for a phased implementation, if necessary, which should begin with a clear understanding of the client’s requirements and adjust as needed based on discussions.
Managing the outsourcing relationship
Florentine and Kempinski explained that effective communication is key to managing a successful outsourcing partnership, especially when working remotely. Florentine recommended regular meetings, clear documentation and proactive updates to maintain alignment. She also said that monitoring performance involves setting expectations and reviewing outcomes against metrics.
Florentine emphasized the advantage of making a phone call to communicate an issue, which may take more time to resolve through multiple emails. She said that sometimes, a problem can be resolved in two minutes. Kempinski explained that weekly or biweekly project check-ins can help manage complexity. She explained that once the necessary information is gathered, the team can proceed independently, providing drafts and final deliverables for client feedback.
Legal and compliance considerations
When outsourcing HR and payroll functions, Florentine stated that companies must be aware of legal compliance considerations. She stressed that engaging with a third party does not eliminate employer responsibilities and circled back to the importance of communication between the business and the third party to ensure both parties are aligned.
Florentine also took the time to explain a key distinction between outsourcing to a Professional Employer Organization (PEO) and other third-party firms. She noted that PEOs enter into a co-employer relationship, issuing W-2 forms under their Employer Identification Number (EIN), while non-PEO firms allow companies to retain control over their staff and issue W-2 forms under their own EIN.
Florentine cautioned that this difference could impact customization and flexibility in HR and payroll processes.
Data security when working with a third party
Data security is a critical factor to consider when outsourcing HR and payroll functions because of the sensitive personal and health-related information involved. Florentine recommended that companies use secure platforms such as Huddle to exchange information, and restrict access only to authorized personnel. She also recommended using secure email protocols to protect communications.
Additionally, Kempinski highlighted that firms prioritize confidentiality in proposals and engagement letters, and that employees receive extensive training on data security to safeguard sensitive information. She also encouraged organizations collaborating with third parties to utilize secure servers for information sharing and to verify that providers have similar security measures in place.
Emerging trends in 2025
Florentine and Kempinski discussed a few trends that emerged in HR and payroll outsourcing in 2025. Florentine stated that business leaders are increasingly focused workforce planning, upskilling and reskilling their employees to adapt to AI and automation. They seek cost-effective solutions for day-to-day tasks while reconfiguring existing roles to meet new demands.
Kempinski stated that compensation remains a significant topic, with a broader focus on total rewards, including time off, leave options, and flexible work schedules. Pay transparency legislation is causing organizations to reassess compensation structures and philosophies. This leads to more questions by employees.
