The Future Of Payroll In 2024

From new regulations to new technologies; learn how the payroll sector will evolve in 2024

The payroll landscape keeps evolving rapidly, especially for companies that operate globally and deal with independent contractors and remote workers.

On the one hand, companies in the space need to adapt to a growing number of regulations and a shifting legal environment. On the other hand, the swift development of technologies like AI and machine learning is not only providing tools to payroll companies to increase their efficiency and service offerings but also redefining the nature of work itself.
 

Based on this, I expect that in 2024, the payroll sector will divert from some of the trends that were evident in 2023. Let’s look at that first.

The Main Trends in 2023

1. The role of contractors and service providers strengthened, and Employers of Record (EOR) grew substantially

From 2021 to 2023, companies had to grapple with rising levels of uncertainty stemming from the global environment, being affected by a series of events such as pandemic-related restrictions and international military conflicts, which also resulted in economic sanctions. This made it more difficult for many companies to build teams outside of their home regions.

However, since they still needed staff in some of these places, businesses started working with them as contractors, relying on the support of employers of record. Established EORs enabled global organizations to give certainty to employees who were located in conflictive regions without hindering their growth.

2. Platforms found themselves providing more support to contractors

Contractors’ growing need for support due to the changing landscape created an additional burden on HR managers, which was outsourced to contracting platforms. An example of this is providing assistance to freelancers who had questions about how to pay tax on their income.

3. The role of analytics grew in importance

When integrated properly, AI can provide a lot of visibility and enhance the data analytics capabilities of an organization. In the payroll field, we are already seeing AI-powered projects that help companies understand the effectiveness of their workforce — including freelancers—in more detail.

2024 — A New Era

While certain trends like the implementation of AI-powered features will continue, in other areas, I expect the payroll industry to change its course, because the market is moving into a new stage.

In previous years, companies were asking questions like, “How do I work with remote teams?” and looking for solutions to improve these processes. Now, organizations are being more proactive and thinking about how to manage their payroll more effectively. Here are the aspects that I believe will define the industry this coming year.

1. The growth of EOR services will slow down

Every major company in the market — including Remote, Oyster, Deel, Gusto, Rippling, and Remofirst—already has EOR services integrated into its offering. This means that the EOR segment has reached a level of maturity, and companies will start paying attention to other factors, like quality and reliability.

2. There will be a clearer separation of internal and external teams

For some time, the line between internal and external teams was very blurry. However, legal authorities are catching up.

For example, in California, Assembly Bill 5 — also known as AB5 — has granted employee classification to certain gig workers, which has already resulted in legal battles involving companies like Uber, Lyft, and DoorDash. Even Deel has found itself in the middle of turmoil as a result of employee misclassification.

While in Europe the regulatory efforts have been more vague — with the exception of Germany — I expect we will see more attempts at defining clear boundaries between who is an employee and who is an independent contractor.

If emphasis prevails on solving the worker misclassification issue, I foresee that this will strengthen the niche market of freelance management systems (FMS) and contractor management software (CMS) companies, since they do not work with full-time employees.

Also, existing players will be subject to more intense scrutiny from government agencies as a result of a ripple effect, something that was addressed recently by other players in the space in an article regarding Deel, which is now already facing investigations outside its home turf, in countries like Singapore.

3. Nearshoring becomes a norm

Nearshoring recruitment, which is a relatively new approach, involves hiring specialists in countries close to the employer’s location. This has many advantages, including similar business hours, ease of travel, and a better cultural alignment.

For example, many U.S.-based companies are opting to hire talent in Latin America, which has numerous advantages compared to places like China, including the reduction of intellectual property protection challenges.

This impacts the payroll landscape because emerging companies will focus on those regions where most of the hiring is taking place since this will cause the demand for effective and trusted payroll services to increase. I anticipate that those startups that are able to demonstrate cultural sensitivity and have a deep understanding of the region are the ones that will win.

4. The nature of human resources is changing

HR teams are evolving, and, with more frequency, we are seeing cases in which companies have some HR managers focused on internal teams and some specializing in external teams. This is because the metrics that they will be evaluated under differ widely. While internal managers’ focal point will be areas like corporate culture and turnover reduction, external managers’ responsibilities will be along the lines of classifying workers adequately to reduce misclassification cases and creating efficient onboarding programs.

Understanding HR managers is important because they are the main target audience for payroll services companies, and more often than not, the most fervent advocates of implementing technologies that make their job easier. Therefore, it is important that companies are able to adapt their product to these new metrics, and show HR managers how their service can improve their KPIs tailored to this new reality.

5. AI will redefine the self-employment landscape

Depending on how AI keeps evolving, I see two fundamental hypotheses here. The first one is that low-skilled specialists will be replaced by AI, which will shrink the potential market pool for global payroll companies. This has been put to the test by a study conducted by researchers from Washington University in St. Louis and New York University, which, after analyzing one popular freelancing platform, found that the launch of ChatGPT caused freelancers’ average monthly earnings to fall by 5.2%.

There is, however, an alternative outcome that could happen. If freelancers learn to adequately harness the power of AI, the gap between low-skilled and mid-skilled professionals could narrow significantly. This would cause the number of specialists that companies are open to working with to increase, strengthening the quality of services provided and creating a more robust market.

Final Thoughts

While tech deployments and the formation of external teams will continue, we must be aware of the transformation surrounding the payroll sector, which is particularly driven by the shifting nature of work, both in terms of location — office work, remote work, and hybrid — and the changes in employee classification, which pose further challenges for payroll companies and HR professionals alike. However, by understanding these evolving dynamics, drawing clear boundaries between employees and independent contractors, utilizing technologies like AI, and partnering with platforms that understand this landscape, companies can create thriving global teams while having effective payroll management.

Author Bio

Pavel Shynkarenko, an IT expert and entrepreneur with 20+ of experience is the Founder and CEO of Solar Staff.