Outsourced Payroll – What do I put in the SoW?

The statement of work is an essential part of any outsourced service.  For an outsourced payroll service, the items to consider for inclusion are:

Purpose:  We may think that the purpose of payroll is obvious - to pay employees accurately and on-time.  But, there may be other objectives to consider, and these need to be explicitly stated, e.g.:

  • To protect the security of employee personal data
  • To comply with social security and tax regulations
  • To maintain adequate payroll records


Scope:  The scope of an outsourced payroll service can vary significantly.  Some organisations only require a “Gross-to-Net” service where the payroll provider receives a file of employees Gross pay and returns a file showing the net pay together with the Payslips.  Other organisations may require a fully managed payroll service where the payroll provider extracts data from the clients HR and benefits systems, calculate Gross pay including applying bonus percentages and rules by employee grade or category to determine the Gross pay, submit payment files to the client’s bank, submit pension details direct to the pension provider, submit GL posting files to the accounting or ERP system and then distribute cost reports to management.  The scope is a key driver of service cost, so it is best to get this documented in detail at the start, to avoid the “I thought that was included” moment.


Inputs:  Providing input data to the payroll provider can range from completing the providers standard template of Gross Pay and Benefits each month, to having the provider implement direct integrations with HR, T&A, and benefits systems.  It is important to precisely specify the input file formats and content as this is critical to the accuracy of the payroll processing.


Instructions and Overrides:  Anyone who has experience of working on payroll, knows that there are always exceptions to be handled.  There will be new hires who are late supplying their details, leavers who need to be paid their accrued holidays or bonuses that have to be paid before the month end.  Sending an email saying “Please pay Katie a 15% bonus this month” is not good practice. The SoW should define a structured approach for recording and authorising additional Instructions and Overrides that the payroll provider will process in addition to those items contained in the standard input file.


Calendar:  Every payroll will operate to a recurring calendar.  This is typically monthly in Europe and Fortnightly in the US, but weekly payrolls are also popular in Manufacturing and Retail industries worldwide.  The calendar will define the cut-off dates/times for inputs and outputs together with the timings for various reviews, validations and approvals.  The timing of some actions will be impacted by seasonal events (e.g. bank holidays) or moveable dates (e.g. last Friday of the month) and it is best to prepare the calendar for at least a year to plan for these events.  There may also be regulatory dependencies – e.g. some countries have specific regulations for dealing with “Week 53” or “Fortnight 27”.


Actions:  This should be a detailed list of the recurring payroll actions with responsibilities assigned to named individuals and named backup person to cover holidays or illness.


Deliverables:  Essential deliverables will be (a) the payments file (b) a Gross-To-Net report, and (c) Employee Payslips.  These will be included as standard in any SLA, but other required deliverables will ne to be documented and can include:

  • Tax and Social security submissions
  • Pension submissions
  • Custom reporting packs
  • Data feeds to General ledgers, BI systems, HR systems and 3rd Party benefits providers


Validations & Reviews: Checking is a key part of the payroll process, and the SLA should call-out what needs to be checked and who should check it.  For example, are employee bank account numbers validated by the HR system, and if they are not, is the outsourced provider required to check these and what procedures should they follow if they find an error.


Approvals: The SLA should state the named individuals who can approve or authorise certain activities (e.g. submit payment file to bank or amend an employees pay) and have a procedure for adding and removing individuals to/from this list.


Controls: The SLA should include the internal controls to be applied to the payroll process.  These may include procedures for encrypting data, issuing passwords, validating changes or approving actions.  For larger or more complex payrolls, this section may reference a separate internal controls document.


Costs:  The cost of a payroll service will typically have fixed and a variable component.  The cost schedule should clearly state these together with the trigger event and basis for any variable items.  e.g. Monthly fee for additional employees, hourly rate for out-of-scope reports, etc.


Service Levels

The Service Levels metrics will be the key determinant of success or failure of an outsourced payroll function.  Historically, they only included the metrics to be achieved by the outsourced provider, but more recently they also include metrics for both parties to foster a collaborative approach to optimising the end-to-end payroll process.  The metrics should be achievable and granular, with a number of increments ranging from excellent to fail.  Avoid the temptation to set everything to 100%, a broader spread of metrics gives you more visibility and control if something needs remediation.  See example below.


Specimen Service Level

Suggested categories of Service Level include:

Accuracy, Timeliness, Compliance, Customer Support, Data protection