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What are the benefits of outsourcing contractor payroll?

Outsourcing your organization’s contractor payroll responsibilities comes with benefits that range from cost savings and rate negotiation services to alleviating administrative burdens and risk mitigation. 

Thousands of organizations rely on freelancers, Independent Contractors, temporary workers or gig-workers to scale their workforce. Also known as contingent workers, these individuals can be an economical staffing solution, especially when working on short-term projects.

Avoiding the potential pitfalls of contractor payroll

However, managing contractor payroll in-house can be inefficient and may expose your organization to substantial liability. Even if mismanaged contractor payroll practices do not result in a multi-million dollar lawsuit, inefficiencies can still negatively impact your organization’s bottom line.

In order to avoid the potential pitfalls associated with contractor payroll, many a popular solution is to outsource this responsibility. Outsourcing can not only help your organization mitigate risks, but it also offers substantial benefits when compared to in-house contractor payroll management.

Dangers of Mismanaged Contractor Payroll Programs

Before discussing the benefits of outsourced contractor payroll solutions, it is essential to understand the risks of a self-managed program. The dangers of a mismanaged contractor payroll program include:

Excess Costs

While in-house contractor payroll programs may seem like a more cost-effective option, the opposite is often true. Between administrative burdens and concerns about being overcharged for talent, self-managed programs could be costing your company millions each year. This is compounded if your organization is faced with an IC-related lawsuit.

Liability due to Worker Misclassification

Worker misclassification occurs when your organization incorrectly identifies the relationship between it and a contingent worker. The classification process involves much more than simply differentiating between temporary W2 workers and 1099 independent contractors. Other important classification influencers include things such as overtime eligibility and workers’ compensation eligibility.

Misclassification can result in hefty penalties, back payments to affected workers, and costly litigation. The classification of contingent workers should be conducted during onboarding. However, your organization should recheck its classification throughout the active contract management process to ensure that the nature of the partnership has not evolved.

Process Inefficiencies

The primary source of process inefficiencies occurs as a result of reliance upon direct and indirect suppliers. While using these suppliers is a normal part of contingent worker acquisition, this partnership also creates counterparty risks that are unseen in traditional employee-employer relationships.

Counterparty risks can be broken down into more specific categories, including solvency risk, inherited liability from weak operational controls, and vicarious liability due to poor labor law compliance practices.

Advantages of Outsourcing Contractor Payroll

An experienced contractor payroll services provider can insulate your organization from the above-described risks. By partnering with a third-party provider that specializes in robust contractor management solutions, your organization can take advantage of the following benefits:

Cost Savings

Like virtually every other, your organization is always searching for ways to eliminate excess expenses and reduce costs. However, there is a good chance that you are overpaying for your talent. If you are being overcharged by only 10%, that can translate to several million dollars over the course of a year.

Much of this waste occurs because the pay grade of pre-identified workers is not being negotiated to market rates. This waste is compounded by excessive talent agency fees.

An outsourced contractor payroll provider can implement direct sourcing solutions. This gives your organization access to top talent by leveraging the power of your company’s brand. They can also utilize a proven rate negotiation methodology to drive savings without disruption. The result is a cost savings of 8%-15% on pre-identified contractor spend.

Rate Negotiation

An experienced contractor payroll service provider will engage in data-driven rate negotiation practices. The purpose is to eliminate waste and prevent your organization from paying over-market rates.

Examples of rate negotiations

For instance, let’s say that your company needs to hire a developer. When handling contractor payroll in-house, you may identify a reputable developer and ask them their rate. For the purposes of this scenario, let’s assume that their rate is $120 hourly. While this may appear to be an equitable compensation level for the required project, the current market rates may be $90 hourly, meaning that you are drastically overpaying.

If you hire the developer for $120 an hour and they are contracted to work on a project for roughly 1,000 hours, you will have paid them approximately $120,000 for that contract lifecycle. Had you instead used a payroll provider that offers direct sourcing services, you could have hired a developer with comparable talent for 25% cheaper. This would result in savings of approximately $30,000.

Risk Mitigation

Risk mitigation is by far one of the most significant advantages of outsourcing contractor payroll. There are a variety of inherent risks associated with using contingent workers. While there is no way to eliminate these risks entirely, an experienced outsourced contractor payroll firm will be able to drastically reduce them by implementing current best practices. A few of the risks associated with self-managing contractor payroll include fraud, compliance concerns, and the potential for lawsuits.

In particular, fraud has become increasingly prevalent among “talent agencies.” Some unscrupulous companies will send over fake resumes and create fictitious “candidates.” They will then outsource work to other nations such as India and pocket a large percentage of the fees.

The top contractor payroll providers will evaluate ICs using technology that has been validated by a third party. This technology will make intelligent recommendations based on current legislation, precedent-setting court rulings, and other relevant factors. This evaluation process drastically reduces your organization’s vicarious liability and will even indemnify it from certain legal action.

Less Administrative Burden

Outsourcing contractor payroll will also reduce administrative burden. Your organization’s fiscal and HR departments will be able to focus their efforts on the needs of full-time employees while the outsourced service provider handles all responsibilities related to contingent workers. This will improve morale within these vital departments while also enhancing their productivity. These benefits will trickle down to line-level employees as well because your HR staff will be able to continually improve upon in-house practices.

A great payroll partner will provide comprehensive contractor payroll solutions that offer a full suite of MSP, SOW compliance and direct sourcing services. 

RFP Checklist for pre-identified contractor payroll vendor selection

Are you getting the most out of your contractor payroll program? Every organization’s needs are different, but there are several crucial elements to keep in mind when evaluating a contractor payroll program. These include:

  • Infrastructure and expertise
  • Worker management
  • Onboarding
  • Rate management

However, there are other, less obvious criteria that still make a big difference in cost, compliance and satisfaction. 

If you’re evaluating a new contractor payroll provider or would like a tool for assessing whether you’re getting the most out of your current program, download your detailed RFP Checklist for pre-identified payroll vendor selection below:


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