A guide to the payroll process and compliance in Malaysia

payroll process and compliance regulations

A guide to the payroll process and compliance in Malaysia

Guide: The payroll process and compliance regulations in Malaysia

With Malaysia’s strategic location, market competitiveness, skilled multilingual talent pool and world-class technology capabilities, it’s easy to see why so many companies choose to establish operations there.

If your company is considering expanding into Malaysia, one of the keys to success is to understand the payroll process and compliance regulations from the outset. The last thing you want is for your newly established operation to attract the wrong kind of attention from government auditors.

That’s why we’ve prepared a helpful guide to the payroll process and compliance regulations your company needs to know when starting out in Malaysia.

Payroll process and compliance essentials in Malaysia

Before we examine some common payroll compliance challenges in Malaysia, it’s useful to understand the essentials of the payroll process and the main compliance considerations. Let’s start with a primer on the fundamentals of payroll in Malaysia.

Working conditions and wages
  • Working hours: Malaysia has an eight-hour workday with an average working week of no longer than 48 hours, and (most commonly) one day off per week. Government protection provisions prevent women from working in the industrial or agricultural sectors between the hours of 10pm and 5am. Women must also have at least 11 consecutive hours off work between each shift.
  • Pay cycles: salaries in Malaysia are typically paid monthly.
  • Minimum wages: Nationally, the minimum wage is RM1,100, except for areas under 56 city and municipal councils where the minimum wage is RM1,200. Our team of payroll experts here at BoardRoom can advise you on the relevant government guidelines that apply to your employees.
  • Overtime, rest day and holiday pay rates: Employees covered by the Employment Act 1955 (“EA 1955”) should be paid overtime at 1.5 times their hourly pay rate. Rest days are paid at two times, and public holidays at three times the hourly pay rate. However, the EA 1955 only applies to:
    • employees whose monthly salary does not exceed RM2,000;
    • employees within the private sector;
    • employees working in Peninsular Malaysia or the Federal Territory of Labuan; and
    • employees (irrespective of salary) involved in manual labour, operating or driving transport vehicles and domestic servants.

For non EA 1955 employees, employers can stipulate relevant provisions relating to overtime rates within their employment contracts.

Income tax
  • Withholding tax: Malaysia has a monthly tax deduction (MTD) system requiring employers to deduct withholding tax at source. Each month, employers must then send this tax to the Inland Revenue Board (IRB) of Malaysia on behalf of their employees.
  • Income tax rates: the maximum income tax rate in Malaysia is 30%, which applies to those with incomes greater than MYR 2,000,000 or ‘non-residents’. Employees who work between 60–182 days per year in Malaysia are considered ‘non-residents’, irrespective of their actual citizenship status.
  • Tax clearing and tax filing: employees must complete their tax clearing and filing at year-end before April. The financial year in Malaysia runs from 1 January to 31 December.
international payroll processing companies
Holidays and leave
  • Paid public holidays: Employees are entitled to be paid for 11 gazetted public holidays per year. Of these 11 days, five must be:

1. Hari Kebangsaan or National Day;
2. Birthday of Yang di-Pertuan Agong;
3. Birthday of the Ruler or Yang di-Pertua Negeri or Federal Territory day (varies per state);
4. Labour Day; and
5. Malaysia Day (16 September).

The remaining six paid public holidays are chosen at the discretion of the employer from the following list and these must be communicated to employees either via written notice or as stated in their employment contracts:

  • Birthday of the Prophet Muhammad (s.a.w);
  • Chinese New Year (2 days, except 1 day in the states of Terengganu and Kelantan);
  • Vesak Day;
  • Hari Raya Puasa (2 days);
  • Hari Raya Haji (1 day, except 2 days in the states of Terengganu and Kelantan);
  • Deepavali;
  • Christmas Day; and
  • Awal Muharam.

However, the government can declare additional ad hoc, paid public holidays throughout the year. If these days are declared at short notice, employers can nominate a replacement day.

In addition, there are a number of state based holidays observed around the country. However, employers are not required to pay employees for these holidays unless they have selected them to be included in their list of paid public holidays for their employees.

  • Compulsory annual leave entitlements: employees are typically entitled to between 8-16 days of paid annual leave, depending on their length of service with the company.
  • Compulsory sick leave entitlements: Employees are entitled to between 14-22 days of paid sick leave, depending on their length of service with the company.
  • Compulsory maternity leave entitlements: New mothers are entitled to 60 consecutive days of paid leave for each of their first five children.
  • Optional leave entitlements: employees can also apply for the following optional leave types, which are typically unpaid and subject to employer approval:
    • compassionate/bereavement leave;
    • marriage leave; and
    • study leave.
  • Paternity leave: most employers also offer 1-3 days of paid paternity leave, but this is not a statutory requirement.
Social security and statutory contributions
  • Employees’ Provident Fund (EPF): employers and most employees (Malaysian citizens or permanent residents only) must contribute to the EPF retirement benefits scheme. The EPF contribution rate for employees varies depending on their monthly salary, whereas the employer contribution is 12%.
  • Social Security Organisation (SOCSO): employers must contribute to Malaysia’s mandatory social insurance schemes, which are administered by SOCSO. There are two schemes:
    • The Employment Injury Insurance Scheme (EIIS) provides cover for employees who experience work-related injuries or diseases. The EIIS applies to all Malaysian citizens, permanent residents, and foreign workers (excluding domestic servants).
    • The Invalidity Pension Schemes (IPS) provides cover for employees who experience invalidity or die from causes unrelated to their work.

Employers must make a monthly contribution to SOCSO on behalf of each eligible employee.

  • Employment Insurance Scheme (EIS): employers are required to make monthly contributions for each employee. The EIS provides financial assistance to workers who have lost their job while they seek new employment.
  • Human Resources Development Fund (HRDF) Levy: this is a compulsory levy paid by employers with 10 or more employees (Malaysian citizens only) working in the manufacturing, services, mining and quarrying sectors. The levy rate is 1% of each eligible employee’s monthly wage. It allows companies registered with the HRDF to receive financial assistance when they participate in specific training and upskilling programs delivered by HRDF training providers.
  • Other contributions>: some employees may also be required to make student loan repayments to the National Higher Education Fund Corporation, or make donations known as Zakat to fulfil their religious obligations.
payroll Malaysia

Common payroll compliance issues to be aware of in Malaysia

Payroll errors can result in your company needing to pay expensive fines. They can also cause reputational damage and employee dissatisfaction. To help you avoid unpleasant situations, here are some common payroll compliance issues to be aware of in Malaysia:

  • Late MTD payments: the Inland Revenue Board (IRB) imposes penalties if employers fail to pay monthly employee income tax withholdings by the 15th of each month.
  • Failing to include perquisites, benefits-in-kind or equity incentives in compensation reporting: sometimes these benefits are not paid through payroll, which means they can be easily overlooked in compensation reporting.
  • Incorrect classification of employees: Foreign workers, non-residents and secondees are often classified incorrectly during payroll data system entry. As a result, your company might underpay these employees and deduct the wrong income tax amounts.
  • Failing to stay up-to-date with regulation changes impacting payroll: In Malaysia, there are four regulatory bodies that influence payroll processing rules which makes it more of a challenge staying up-to-date with payroll requirements.
  • Overlooking cultural norms: It’s common in Malaysian payroll processing to include ‘13th-month pay’ – a single annual payment on top of an employee’s total annual wage. This payment isn’t mandatory and would not be considered non-compliance if you did not adhere to it, but it is the cultural norm that could impact employee satisfaction.
payroll processing companies

Want expert help in processing your company’s payroll in Malaysia?

Our team of payroll experts can guide you through the complexities of the payroll process in Malaysia to help make your business expansion more successful. We can set up your company’s payroll so that you get it right the first time, every time.

It doesn’t matter whether you are a large multinational corporation or a fast-growing SME. Outsourcing to an international payroll processing company like BoardRoom ensures your company has an efficient, accurate and compliant payroll process right from the start.

Speak to our team of specialists today about how outsourcing payroll can give you more time to focus on what really matters: your company’s growth and profitability.

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10 advantages of outsourcing your payroll services

advantages of outsourcing payroll services

10 advantages of outsourcing your payroll services

10 advantages of outsourcing your payroll services

Outsourcing is the key to making your payroll process seamless. It means everyone gets paid the right amount at the right time, every time.

All too often HR professionals find themselves spending far too much time processing pay runs at the expense of dedicating time to strategy and higher-value tasks.

Payroll is a time-intensive process – not just because you need to complete the necessary process tasks, but also because you need to ensure compliance with tax and legislative requirements.

The key advantage of outsourcing payroll services is that you can get back your time to focus on what really matters: the strategic business drivers that grow your company and culture.

Here are the top ten benefits your company stands to gain by outsourcing your payroll.

01 Save time

Outsourcing payroll is the low-hanging fruit for increasing company efficiency. Instead of spending hours every pay cycle on payroll processing, an administratively heavy task, HR teams can focus on achieving more strategic objectives, like increasing employee engagement to boost organisational productivity.

02 Reduce costs

Saving time also saves you money, which can come in the form of a lower wage bill. For example, as companies scale, they can save money by outsourcing payroll instead of spending it on expanding in-house HR teams purely  to manage a growing payroll. You may also see savings to your business from not needing to maintain cloud security for your payroll software or manage paperwork.

how to outsource payroll

03 Minimise compliance and regulatory risks

Regulatory changes that affect payroll happen at break-neck speeds, which can make staying compliant a challenging, time-consuming process. In Malaysia, four regulatory bodies develop payroll processing rules. They each issue notifications when a change to the law is made and your company needs to ensure that these changes are accurately translated into payroll formulas.

It is easy to make mistakes when updating payroll formulas, especially if they involve IF, AND, OR logical functions. If the formula is wrong, payroll is calculated incorrectly which can cause problems like under or over paying wages and tax. Chances are, you may not even realise that an error has occurred until after receiving an expensive non-compliance fine.

Outsourcing your payroll to a specialist service provider, like our team of experts here at BoardRoom, can minimise your exposure to these compliance and regulatory risks because we take care of it all for you, including updating payroll formulas correctly.

04 Gain access to specialised, local knowledge

Having a dedicated team of professionals with local knowledge of Malaysia’s labour laws is essential for your company. It means your business can take advantage of the team’s years of payroll experience without being exposed to the strict protocols and multi-level cross-checking that they’re subject to.

This is especially beneficial for companies that operate in different states or across multiple countries because an external partner will work with you to ensure compliance in each area, freeing up your in-house HR team.

05 Build payroll continuity

Some companies operate payroll systems that require staff to be on-site in order to process payroll. If the unexpected happens, as an example; your payroll staff can’t get to the office to perform their duties, or a key member of your team responsible for payroll approval resigns, how will your employees get paid? Outsourcing payroll to an expert provider guarantees payroll continuity so that your employees are paid on time, every time.

06 Enhance data security and protection

Data security is crucial for payroll processing because of the incredibly sensitive information involved such as employees’ personal data and compensation details. In Malaysia, HR departments must adhere to local laws such as the Personal Data Protection Act 2010 (“PDPA”).

If your company has limited time and budget resources, it can be challenging to maintain an appropriate level of data security and protection in-house. For one, in-house teams need to keep pace with ever-evolving cybersecurity threats. Secondly, your company is more exposed to payroll fraud when payroll is processed in-house. Third, in-house teams may not have the appropriate protocols to ensure that data is backed up regularly.

Quality payroll outsourcing providers store their data on highly secure cloud-based servers using state-of-the-art encryption. They perform regular backups to ensure that data is protected. Data protection and security are top priorities for us at BoardRoom, which is why our data centres have achieved ISO27001, and our cloud hosting has SOC 2 certification.

outsource-your-payroll

07 Reduce stress

Getting your employees paid accurately and on time is critical to the success of your company. And as every HR professional knows, there is no room for error when it comes to payroll. However, managing payroll effectively can be challenging for in-house teams when they are trying to keep up with local regulatory compliance while simultaneously managing the needs of a growing workforce. This is especially true if your company operates in  multiple countries across the APAC Region.

Our team of payroll experts here at BoardRoom will take care of payroll management for you, ensuring that pay runs are efficient, accurate and compliant. Our team has worked across multiple industries, countries and situations, so you can rest assured knowing that your payroll is in the best of hands. Ultimately, this means less stress for your HR teams.

08 Increase flexibility

Another advantage of outsourcing payroll services is that you can stay flexible in rapidly changing business environments. Outsourcing allows you to quickly scale your payroll service requirements as needed, instead of having to recruit, onboard, train and retain additional in-house staff.

09 Gain access to a pool of payroll knowledge experts

As the saying goes, ‘two heads are better than one’. Outsourcing to a professional payroll service provider gives your company access to a pool of payroll knowledge specialists without the expense of retaining them in-house. Our team of experienced payroll experts have managed payroll for businesses of all sizes, types and industries across the APAC Region. Take advantage of their vast experience and knowledge to really build your business so you can take it to the next level.

10 Integrate knowledge with value-add services

The best payroll outsourcing vendors are not only experts in all things payroll, but also offer a variety of integrated, value-add corporate services, including:

By consolidating all your back office functions into one vendor you stand to gain greater efficiencies and business productivity.

Outsourcing makes payroll easy

Spend less time sorting out pay runs and more time on your company’s growth and profitability by outsourcing your payroll function to our team of BoardRoom payroll experts.

Whether you are a large multinational corporation or a fast-growing SME, our team makes processing your payroll in Malaysia and across the APAC region easy.

So if you want efficient, accurate, compliant payroll processing, speak to our payroll specialists today about how to outsource your company’s payroll function.

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Two Ways to Directly Boost Your HR Efficiency in Malaysia

Payroll outsourcing in Malaysia

Two Ways to Directly Boost Your HR Efficiency in Malaysia

Two Ways to Directly Boost Your HR Efficiency in Malaysia

An essential part of any organisation, the modern HR team is now responsible for more than just administrative work. On top of handling traditional roles like payroll processing and recruitment, HR teams are also expected to lead talent driven activities such as training and employee engagement.

Even the most seasoned HR departments can struggle with juggling the time-consuming administrative tasks and maintaining a high-performing workforce. Especially in an increasingly digitalised industry where human connection is diminished.

There are many solutions businesses can implement that will impact efficiency and HR excellence, perhaps the two most effectual would be the adoption of an all-in-one Human Resource Management Software (“HRMS”) and outsourcing your payroll processing to a service provider in Malaysia.

01 Outsourcing to a payroll service provider in Malaysia

Outsourcing your payroll processing to a service provider can significantly boost your team’s efficiency almost immediately. Payroll is filled with administrative burden, requires a high level of attention to detail and is realistically only a sub-function of your HR department. By outsourcing this function, you allow your teams to focus on strategic business drivers that grow your company. As with all business decisions it’s critical to evaluate the advantages against your desired outcomes. Whilst there is a wealth of benefits associated with outsourcing your payroll, the top three would have to be: specialised/localised knowledge; reduced cost/timesaving and; data security.

 

Specialised/Localised Knowledge

One of the greatest benefits associated with payroll outsourcing is having a dedicated team of professionals, with local knowledge of Malaysia’s labour laws, running this important function for you. This means your business can benefit from years of experience as well as the strict protocols and multi-level cross-checking payroll vendors are subject to. This can be of particular benefit for companies that operate in different states or multiple countries, where the labour laws can vary. Having a group of specialised regional payroll experts ensures that your company can operate safely across borders and the burden is not placed on your in-house HR teams.

 

Reduced Cost & Timesaving

Payroll processing can be a resource drain when not managed carefully. Calculating payroll taxes and statutory filings, like Social Security Organisation (“SOCSO”) in Malaysia, handling payroll enquiries and disbursement; whilst being simple administrative tasks can be extremely time consuming. Add to this, factors such as rapid expansion and your HR teams can be put under immense pressure which can result in an increased propensity for error and a diversion away from strategic activities that enhance business performance. Payroll outsourcing passes the time-cost saving down to the bottom line.

In addition to this significant saving, there can also be visible savings to your business from not needing to maintain payroll software, manage paperwork and tax liabilities.

 

Data Security

A key concern in today’s highly digitalised world, HR departments are expected to adhere to local laws such as the Personal Data Protection Act 2010 (“PDPA”) in Malaysia. Payroll and employee personnel details are incredibly sensitive information that HR handles on a regular basis.

A good understanding of the personal data life cycle management process will enable proper protocols that comply with local laws. This can be especially complicated to implement for multi-national companies. Having an experienced regional payroll outsourcing vendor can help mitigate risk for your in-house HR team.

Another concern is the back-up of data; if there are any lapses in security or a hardware malfunction, this can paralyse key business functions. Most reliable payroll outsourcing service providers store their data on highly secure cloud-based servers. Backed up across multiple server locations, the servers are usually protected by high-end encryptions. All of which is managed by the outsourced vendor, taking away compliance risks and mitigating time costs.

02 Investing in an integrated Human Resource Management System (“HRMS”)

Another option, if you wish to keep payroll processing in-house is to adopt an all-in-one HRMS to mitigate administrative burden for your in-house teams.

Below are some of the benefits associated with the implementation of a well-integrated HRMS.

 

Increased Productivity

By having an integrated HRMS system in place, HR teams can automate a large portion of the payroll workflow from calculating salaries, claims, deductions and leave.

However, selecting the right HR and payroll system is critical to success. For you to achieve the greatest benefits the system should include key modules like Leave, Claims, Time and Attendance, Personnel and Payroll.

An integrated system will also have added benefits like increasing data accuracy of pay runs through the automation of several payroll processes. For example, statutory payment requirements in Malaysia are automated within the HRMS. The system calculates all mandatory payments or tax deductions such as Employee Provident Fund (EPF), Zakat and Employment Insurance Scheme (EIS), which not only alleviates administrative burden it mitigates the risks of human error.

 

Eliminate Human Errors

When you use an all-in-one system, your risk of human error is significantly reduced. Much of the manual work is automated, from data entry to calculations. You can also ensure that there’s no important data missing and ensure uniformity by setting mandatory or restricted fields within the system.

Possibly the greatest benefit of an interconnected and automated HRMS is the decreased risk of important payroll calculations such as hours worked or tax deductions. This not only saves time but also ensures accurate disbursements to your staff every time.

 

HRMS simplifies employee service

A vital function of HR is employee servicing. The number of administrative tasks can be overwhelming for an in-house HR team especially those from larger businesses.

Self-service functions empower both the HR team and employees: staff can obtain basic payroll information such as payslips or leave balances without having to add to the HR team’s workload. Employee’s feel empowered as they’re able to access the information they need when they need it.

Reputable providers will also offer a mobile application, so employees have the convenience of accessing all their HR information as their fingertips, anytime, anywhere.

Key to success

Ultimately, there are many solutions available to boost the efficiency of your HR team. In Malaysia, the two most common and effective are outsourcing payroll and adopting an integrated cloud based HRMS.

As with all change, success is dependent on your change management process. In the current Malaysian climate where people are worried for their jobs, it’s important that your change management processes are robust, and all designed with employee welfare in mind.

Efficiency does not always mean downsizing staff, instead, existing resources can be redirected to other roles such as data analysis, facilitation of outsourcing or integration.

What solution works best for your organisation will depend mostly on your current processes and the needs of the company, but it is always best practice to regularly monitor and review HR processes.

Interested to find out more about increasing the efficiency of your HR team in Malaysia? Speak to our payroll experts today.

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Mitigating Costs in an Economic Downturn

mitigating_costs_in_an_economic_downturn

Mitigating Costs in an Economic Downturn

The onset of the COVID-19 pandemic along with efforts to contain it has plunged much of the global economy into a recession. In April, the International Monetary Fund’s World Economic Outlook (WEO) projects global growth to shrink by 3 per cent. However, its October publication amended the projection to 4.9 per cent. The impact of the pandemic will continue into 2021, where the WEO projects global growth to be at 5.4 per cent, which is 6.5 per cent lower than the pre-COVID-19 projections of January 2020.

Mitigating costs in an economic downturn-Growth projection

Looking forward, we can expect the recession to leave lasting scars despite the extraordinary efforts of governments worldwide to alleviate the situation through fiscal and monetary policy support.

During these unprecedented times, companies need to take affirmative action to mitigate risk amidst the economic downturn. Crafting recession strategies to retain or expand your customer base, learning to embark on affordable yet effective marketing or even taking this opportunity to review and better optimise business operations are all practical solutions businesses can explore. However, the immediate strategy for most companies would be to adopt cost-cutting measures.

In this article, we will share some of the most popular and effective measures companies can take to mitigate costs during an economic downturn.

Look to outsource

Outsourcing is when a company engages a third-party service provider to handle or manage a business function externally instead of choosing to manage the particular service in-house.

Of the numerous functions that exist in a company, payroll is perhaps the one that will offer the most significant benefit when outsourced during an economic downturn. By outsourcing payroll, your company can effectively improve its focus and expand its accessible talent pool, which are all essential to helping the company navigate through an economic recession. But most notably (and most beneficial during an economic downturn), outsourcing can reduce and control a company’s operating cost.

While the actual cost-savings of outsourcing HR and payroll services may vary between businesses, the most common areas where they could come from are:

  • Reduced payroll employees or headcounts
  • Elimination or change of existing payroll management software (often to something like a cloud-based payroll system that offers automation solution)
  • HR and payroll system updates
  • Employee training
  • Hefty penalties that are incurred when payroll mistakes happen

Outside of payroll, some of the most popular services that companies often outsource to mitigate and manage costs are accounting, administrative services (corporate secretary) and human resources.

Look to your accountants

During an economic downturn, it becomes imperative that you have experienced accountants to help you financially navigate through this challenging landscape. Beyond their capacity for keeping financial records, accountants can interpret them and provide you with a clear and succinct evaluation of the company’s current performance and financial position that could positively influence the outcome of any business decision during a recession.

Given their unique position and objectivity, a critical and core function of accountants on mitigating costs during an economic downturn is to uncover opportunities to eliminate unnecessary expenses and save costs. In areas where it is not possible to cut costs completely, your accountant can strategically advise on how payments can be deferred to maintain a healthy cash flow during difficult periods.

In addition to cutting cost, seasoned accountants can also analyse your business trends and provide effective forecasting. Such input is critical to helping you understand the changing performance of your business and assist with realigning projections, which can help you assess the viability of your current business plan and provide insights for new alternatives should the need arise.

Look at tax relief and economic stimulus packages

In an economic downturn, it is essential to monitor tax policy changes that can aid in providing financial relief for the company and improve cashflow. During such times, it is common for banks to begin cutting their interest rates while the government actively works to put forward spending and tax packages as well as offer administrative relief by extending tax-filing deadlines. Governments across the world might even introduce tax credits and tax cuts for companies that have experienced a significant drop in revenue.

Additionally, most governments would also roll out stimulus packages as part of their plan to spur their respective economies. However, it is worthwhile to note that in the long term, these governments intend to recoup the funds that were used to finance the stimulus packages and their plans could impact the bottom line of many businesses later. A likely course of action would be adjustments made to policies and tax rates, including but not limited to Corporate Taxes and the Sales and Service Tax (SST). Therefore, we strongly advise that businesses continually revise their tax plan in response to any possible policy changes to achieve greater savings and maximising any tax benefits.

As you embark on any tax planning efforts and find yourself lacking in experience or resources to do so adequately, it is a good idea to engage a professional. In doing so, you can ensure that your tax plan is continuously revised to strategically leverage every tax benefit, maximise tax deductions, and comply with the local tax regulation and statutory requirements.

Look at better managing your working capital

An economic downturn presents several working capital challenges for businesses across industries. To stay operational, companies must look for new ways to finance their working capital. According to the Hackett Group’s 2020 Working Capital Survey, organisations have focused on the availability of corporate debt as a source of working capital for too long. While this may be a common practice, it increases the company’s exposure to unavoidable risks, such as changing customer demands and disruption to the supply chain. During an economic downturn, these potential risks to your working capital could prove detrimental to the survival of the company.

Companies need to manage their working capital during an economic downturn effectively to mitigate cost through individual strategies that address their levels of debtors, creditors, procurement and inventory, and receivables process.

Mitigating cost and managing working capital in an economic downturn

Look at BoardRoom to help you through this crisis

During an economic downturn, when faced with numerous challenges, companies will naturally seek to hunker down and begin cost-cutting strategies. Such strategies are necessary, but it is also vital to note that even in crisis, there are opportunities. Companies will have to practice greater diligence and adapt to the changing landscape quickly through the adoption of forward-looking, growth-oriented plans that prepare the company for when the economy improves.

BoardRoom can help you through any recession period and prepare your business for the inevitable upturn. As a market leader in providing accounting, payroll and corporate services, our in-house team of dedicated experts can help to provide effective cost strategies regardless of your business size or needs. Our in-depth understanding and experience of economic trends will empower your business to discover and explore new opportunities.

Are you looking for a trusted partner and advisor as you weather this difficult time? We are here for you. Contact our BoardRoom outsourcing experts here!

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Payroll Outsourcing or SaaS: Which is Best for Payroll Management

Payroll Outsourcing or SaaS: Which is Best for Payroll Management

Payroll Outsourcing or SaaS: Which is Best for Payroll Management

Payroll Outsourcing or SaaS: Which is Best for Payroll Management

A well-managed payroll process is one of the key drivers for achieving employee satisfaction. However, it also hinges heavily on an effective payroll system that cuts through tedious paperwork to present pay checks to employees on a timely basis.

Today, Human Resource (“HR”) managers are doing away with cumbersome payroll processing and opting for more efficient solutions. Such solutions include engaging payroll outsourcing service providers or leveraging an all-in-one cloud-based Software as a Service (“SaaS”) Human Resource Management System (“HRMS”) solution. A SaaS HRMS is a method of software delivery where HRMS applications are located on external servers and accessed remotely over a network to manage payroll and handle employees.

How do these two payroll models benefit HR managers? How do they compare to each other? When determining which type of model is most appropriate for managing payroll, HR managers must first understand how each model can benefit their corporate objectives while managing costs; cross border functionality and; confidentiality of employees’ personal data.

In this article, we will discuss the key difference between the two payroll models so that HR managers can make informed decisions when selecting a solution that best fits their payroll needs.

01 Task & Responsibility – Who is Doing What?

With a cloud-based SaaS model, the payroll software is hosted offsite and HR managers gain access to the software via a network. With such a model, the SaaS service provider undertakes maintenance of the software and server, technical support, and data backup of the software system for a subscription fee. As such, HR managers do not have to pay a hefty price tag for owning the software. This is not only cost-saving for the business but takes away the burden of maintaining a proprietary system, consequently allowing HR managers to spend more time on handling employee requests, processing payroll and other primary HR duties.

Comparatively, a full or partial payroll outsourcing service can provide an even higher level of ease to HR managers. Such services take on most, if not all, of the payroll function with little need for HR management intervention. This implies that the HR department can enjoy greater flexibility in deploying its manpower to manage other in-house duties.

Let’s look at a summary of the key tasks and who is responsible in both scenarios.

TasksWho is Responsible?
Cloud-based SaaSOutsourced Payroll
Payroll processingHR managerService provider
Handling employee & management enquiriesHR managerHR manager
Data backup & system recoveryService providerService provider
System upgradesService providerService provider
System support & developmentService providerService provider

02 Ease of Payroll Management – Cross Border Expansion

As a company expands operations to global markets, the complexity of payroll management will multiply because of legislative requirements, market regulations and even differences in cultural practice.  Furthermore, employees’ expatriate terms and tax obligations can make payroll processing increasing tricky especially if HR managers are unfamiliar with local regulations.

Take China as an example, due to the city-tier classification within the country, companies that are expanding their business into this market are faced with complex regulatory requirements because each city-tier has its own set of rules and conditions.  As such, the structure of employee tax, insurance and allowance are also processed very differently across different states.

For companies venturing into new markets abroad, payroll outsourcing can offer an efficient and effective solution to this problem.  Such service providers are usually well-versed with local policies and are in the best position to respond to dynamic changes that are happening in the global market. Entrusting payroll processing to an experienced service provider can reduce the risk of errors and non-compliance, freeing up local managers to concentrate on the growing business.

While the cloud-based SaaS model can provide software support that is essential for upkeeping payroll processing, HR managers who are unfamiliar with the foreign markets are still faced with tremendous difficulties in managing the payroll and employees’ enquiries.  Unless the in-house HR team has a clear understanding of the foreign regulations, adopting a SaaS solution alone may still present a high degree of challenges for the business.

03 Time & Cost Efficiency – Operating in Multiple Markets

For larger companies that operate in multiple markets with a fair number of employees (usually more than 100), outsourced payroll can serve as an efficient solution that is both timely and cost-effective. With such services, companies need not invest in costly proprietary payroll software or hire and train an in-house HR team in each market to facilitate payroll processing.

This is especially true for foreign companies that are managing payroll out of a regional headquarter. As per the example on China, illustrated in the above point, it can be a mammoth task for HR managers to keep abreast of regulatory standards and changes across multiple countries/regions when they are not physically based there. At the most basic level every market has its own unique tax rates, standard employee entitlements, currency exchange and employee social security contributions. HR managers will need to spend a significant amount of time to acquire this information and more importantly stay up to date with any changes happening across the individual markets.

Appointing an outsourced payroll service provider that has a deep understanding of the local market can ensure that payroll processing is executed professionally and according to government standards.

Is a cloud-based SaaS model beneficial for companies that operate in multiple markets then? Using SaaS does present its own advantages, especially for companies with smaller headcounts. The subscription-based model is cost-effective and easy to implement across various markets. In addition, many SaaS solutions are robust enough that once the initial setup is complete the remainder is largely automated, simplifying payroll handling. However, for it to be successful HR managers will need to be prepared to spend time on staying up to date with the requirements of each market they operate within and updating the system settings accordingly, which in itself can be a time consuming task.

04 Confidentiality and Security – Is Employee & Company Data Secure?

One of the key concerns of HR managers when selecting between an outsourced payroll service provider and a cloud-based SaaS solution lies in confidentiality and security issues. Payroll processing is an extremely sensitive matter that involves employees’ personal data and compensation details, the risks of such information becoming public knowledge can be detrimental for any organisation.

While it is common knowledge that payroll service or software providers will attest to maintaining the confidentiality of data provided to them, HR managers must still take steps to consider if these partners have legitimate security features and robust processes in place to uphold the claim.

This is especially true for payroll outsourcing service providers that have full access to employees’ records, the risk/cost of a confidentiality breach may far outweigh that of the increased time required to implement a cloud-based SaaS model. The lack of in-house HR personnel involved in the outsourced process can certainly heighten the risk of exposure.

In the case of the cloud-based SaaS model, it is not without its risk too. Fundamentally, the cloud-based system is hosted on a network that has potential for security breaches by external parties.

Choose a Payroll Model That Aligns with HR Objectives

Every company has its own unique objectives and considerations when selecting a payroll solution. There is no right or wrong option but rather one that fits into the specific HR strategy seamlessly.

Outsourced payroll processing may be the easiest option for most HR managers, however, choosing the cloud-based SaaS model can be just as beneficial if the HR team requires a flexible and cost-effective solution that can simplify a legacy in-house process.

Whatever the choice, selecting a model that aligns with the company’s go-to-market plan can certainly optimise business potential and encourage long-term growth.

Looking for a Software Solution or an Outsourcing Partner?

At Boardroom, we are experts in helping companies, from corporations to fast-growing SMEs, with their payroll, allowing them to focus on what matters – growth and profitability.

From local payroll services handling to managing substantial payroll obligations for bigger companies spread across Asia-Pacific, we help businesses comply with local statutory regulations while ensuring their most valuable asset, the employees, are paid on time.

Contact us today and empower your organisation with greater freedom through our payroll solutions.

Or you can also learn more about our payroll solutions here.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.

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