While a company needs to retain control over the core operations that set their business apart from the rest, they may find immense value in outsourcing supporting and back-office functions like payroll processing.

So what does outsourced payroll look like, and what are the potential advantages and disadvantages of taking this route? Throughout this article, we will discuss why companies consider outsourcing payroll services, the pros and cons associated with it, and provide you with some best practices for getting started.

What is Payroll Outsourcing?

Payroll outsourcing is a type of service in which third-party providers offer legal, tax, and accounting support related to the payroll process. Payroll outsourcing partners can manage the entire process to ensure employees receive correct paychecks and taxes are properly calculated and withheld, among other technical components.

Payroll processing is known for being tedious, so human resource teams can work to streamline and simplify their workflows by outsourcing payroll. Further, the regulatory and compliance requirements associated with this process can easily become a burden for HR professionals. As a result, organizations can simplify compliance requirements by outsourcing this process to a team of experts.

Lastly, many firms consider outsourcing payroll for cost-saving reasons, though the feasibility of this can rely on a multitude of different factors, which we will discuss in more detail below.

Cost Effectiveness of Payroll Outsourcing

Companies are often drawn to payroll outsourcing–or outsourcing of any kind–because of the potential cost savings they can tap into.

The cost of recruiting, hiring, training, and retaining staff is almost always going to cost the organization more than what they’ll spend on outsourcing. Especially today when the labor market is so tight, companies are often dealing with an expensive revolving door of attracting and hiring talent that can be avoided when hiring a reliable outsourcing partner.

In many cases, hiring an external outsourced partner rather than internally turns a fixed labor cost into a variable cost. This means the labor cost associated with payroll processing will directly correlate to the amount of work that goes into it, not a fixed cost that gets paid to an internal employee each month, regardless of their output.

Even still, companies will need to make the proper assessments before partnering with a provider to ensure it makes sense financially. They should evaluate the costs of in-house payroll management compared to payroll outsourcing, and determine what the ROI of their investment will be, among other considerations that we will describe later.

Pros of Payroll Outsourcing

Companies across all different industries, geographies, and sizes can tap into the advantages of outsourcing payroll processes. Here are some of the top benefits of outsourcing payroll that you may experience.

Expertise and specialized knowledge

Working with an outsourced payroll partner gives organizations access to teams with specialized knowledge and expertise on payroll matters. No matter how simple or complex the payroll tasks might be, outsourced payroll experts can handle them with precision and efficiency.

Especially for smaller organizations that may not have hired a payroll specialist just yet, outsourced partners can be a key asset for these teams when it comes to tax, legal, or compliance concerns related to payroll.

Time and cost savings

One of the biggest draws of outsourcing payroll is that it can help companies become more efficient with their resources.

Payroll tasks can be very tedious and time-consuming, so outsourcing this process can save HR teams valuable time and money that can be spent elsewhere. Plus, when comparing the costs of hiring in-house personnel to manage payroll versus hiring an outsourced company, outsourcing is almost always the better option financially.

Compliance and accuracy

Payroll outsourcing can also help companies meet compliance requirements and stay up-to-date on the changing regulations in the field. The guidelines and regulations surrounding payroll can be complex. But, outsourcing payroll processes can help companies simplify their compliance burden and delegate it to the outsourcing partner.

If found non-compliant with payroll requirements, companies could face costly fines, legal consequences, and other penalties. So, gaining expert support on compliance matters is a massive benefit to organizations.

Outsourced payroll partners help companies stay on track by ensuring employees are paid correctly and on time, tax liabilities are paid, and timely reporting is done.

Scalability and flexibility

Rather than hiring a payroll team internally, hiring outsourced payroll providers means companies can scale their engagement up or down as needed to meet capacity needs.

When managing an internal team, it can be much more difficult, lengthy, and taxing to hire and fire personnel to meet the needs of the expanding or downsizing business. To avoid this headache, companies can hire outsourced payroll providers who are much more adaptable to changing business conditions.

Access to advanced technology and software

Working with payroll outsourcing partners not only gives organizations access to expert teams of professionals, but it also allows them to take advantage of the latest technology and software that they utilize.

It may not be feasible for organizations to invest in highly-specialized payroll software or programs internally. But, specialized payroll providers will likely use the latest technology to ensure compliance, a high degree of accuracy, and efficiency. So, organizations are still able to leverage niche tech innovations without having to make the investment themselves.

Able to allocate more focus on core business functions

All in all, outsourcing payroll means organizations have more time, energy, and money to focus on core functions that move the needle for their business.

With the peace of mind that tedious and time-consuming payroll tasks are being handled by experts, companies can have their HR professionals focus on tasks that are more strategic for business growth and require critical thinking.

Cons of Payroll Outsourcing

There are possible downsides that can come from outsourcing payroll; however, this isn’t a universal experience.

When working with expert providers like Paypro, clients enjoy close communication with our expert team of professionals who are ready to jump in for assistance at any time. We value the power of both technology and personal relationships in all our outsourcing engagements, which helps us easily integrate with your existing software and workflows for effective payroll solutions that grow with you.

Even still, here are some things to watch out for that can lead to an ineffective payroll outsourcing arrangement.

Loss of control and visibility

Business leaders may feel like they’ve lost control and visibility over a crucial process within their organization when they outsource payroll to a third party.

Especially given the compliance and regulatory implications of payroll, organizations want to feel confident that payroll is being handled properly. But, this can be difficult to manage without direct access and transparency to the payroll provider about their processes.

Data security and confidentiality concerns

Given the sensitive employee information that is necessary for payroll processing–like their Social Security number, bank account information, home address, and more–there are data security concerns that can come from outsourcing this process.

Various regulations that cover payroll matters require companies to safeguard employee data, so the same expectations need to be upheld by service providers as well. If not, the company and its employees could face serious consequences in the case of a data breach or hack that exposes their data to bad actors.

Dependency on a third-party provider

Outsourcing payroll to a third-party provider makes the company and its employees dependent on them to some extent.

While the company has to manage the external and internal forces that impact their own operations, working with an outsourced payroll company means they need to be aware of the forces impacting their business, too.

If the outsourced partner faces system outages, financial troubles, or other headwinds impacting their operations, the company’s payroll processing can be impacted accordingly.

Potential for communication challenges

Depending on the outsourcing partner, there is a potential for communication challenges that degrade the trust in the relationship. When handing off such a critical function like payroll to a third-party provider, companies want the peace of mind that these tasks are being handled and that any potential issues are being communicated properly and in a timely fashion.

Without clear lines of communication between the two organizations, a regular reporting schedule, and a dedicated point of contact for each team, communication issues can quickly arise.

Integration and compatibility issues

It can be challenging to find an outsourced payroll partner that has the right technology and culture compatibility with your organization.

If either of these factors are not aligned, integration with the external partner can be very clunky and inefficient, which can keep the engagement from being successful or result in inaccurate outcomes.

Is Payroll Outsourcing a Good Idea?

After reviewing the drawbacks and benefits of outsourcing payroll, how can you know if it’s the right fit for your organization?

Each company will have its own considerations to determine if outsourcing is a suitable fit for their operations. Aside from making a financial assessment of outsourcing, companies will also need to consider how it will impact their existing workforce. Namely, do they already have someone internally who is handling payroll? How will their role change if they start outsourcing?

In general, payroll outsourcing might be beneficial to both large and small businesses that:

• Don’t have the in-house capacity/expertise to effectively manage payroll processing
• Have Finance/Accounting departments that need to spend their time on other tasks
• Require assistance/support with compliance requirements
• Need multinational payroll support

The Payroll Outsourcing Process

If you decide to go forward with payroll outsourcing, here is a brief overview of some of the steps that are involved with a successful outsourcing partnership.

Step 1 : Selecting a payroll outsourcing provider

First, you need to shop around to find the right payroll outsourcing provider that meets your standards. Consider all the points we’ve discussed so far, and whether or not they will help you meet the strategic goals of your organization.

Step 2 : Defining service requirements and expectations

After you’ve chosen a provider, you’ll want to start the engagement by defining your service requirements and expectations from the outsourcing partner. Make these expectations clear and in writing so there is no confusion about what each party is responsible for to avoid payroll mistakes and other consequences.

This is where you can discuss the unique needs of your organization, the size, and any other pertinent information that the provider will need to know to be successful.

Step 3 : Data migration and implementation

Next, you will need to work with the provider to migrate your existing payroll data and set up a data-sharing process for the ongoing engagement. In order to process payroll on your behalf, they’ll need relevant information like employee details, salary structures, tax information, time cards, direct deposit details, and other records.

Step 4 : Testing and validation

Before going fully live, you’ll want to do some testing to make sure the system works properly and is operating to your standards and specifications. This is where you can work out any kinks to ensure employees get paid on time, tax liabilities are dealt with correctly, and deal with any other areas of friction that may arise.

Step 5 : Ongoing communication and support

Lastly, make sure you set up direct channels of communication between your team and the outsourcing company. Delegate points of contact for both teams, and establish a schedule for regular check-ins, reportings, and procedures for support issues and future questions or concerns.

Tax Responsibilities and Implications

The IRS has strict regulations regarding how tax filing must be handled by employers, meaning there can be serious legal and financial consequences for organizations that fail to adhere to them in the case of an audit.

It is the responsibility of the company to make sure they’re paying their payroll taxes, all income tax withholdings from employee paychecks, and other tax liabilities on time. So if you’re working with a third-party for payroll processing, make sure each party is clear on what their responsibilities are so nothing falls through the cracks. If they will be handling and paying all tax liabilities on your behalf, request regular updates and reports on these payments for full transparency.

If they make a mistake, keep in mind that you will still be liable for the taxes you owe, including any penalties for late payments. Thus, it’s important to find a trusted provider who you can collaborate with to ensure compliance with tax regulations in all jurisdictions where you operate.

Best Practices for Choosing a Payroll Outsourcing Provider

As you’re shopping around for the best payroll outsourcing provider, there’s more to consider than just the financial feasibility of the partnership. Make sure you consider the following components to find the right provider for your payroll needs.

Identifying business needs and objectives

Be clear on what your organization needs and the types of solutions you’re looking for before you start comparing different providers. This will help guide you to the payroll outsourcing partner that fits your requirements and will add value to the organization.

Evaluating provider reputation, experience, and expertise

Consider what previous customers have said about the provider by checking out reviews of their services or requesting client references. You will be able to better gauge their reputation in the industry and determine if they’re a trustworthy provider.

See what types of industry-specific certifications they may have, or any literature they provide on their specific areas of expertise.

Assessing technology capabilities and security measures

Evaluate their technological capabilities to determine if it’s up-to-par with modern innovation and industry standards. Assess whether the programs they utilize are compatible with your own internal payroll systems for easy integration.

Make sure they have implemented sophisticated data security measures to help protect the sensitive information of your employees. This will ensure you’re adhering to relevant regulations and compliance requirements.

Considering customer support and responsiveness

Inquire about their customer support team, and whether they offer a dedicated agent to help assist you with any future questions or concerns. Also ask about self-service features. Providers that have limited hours or methods of contact may not be able to provide you with the assistance you’ll need.

Reviewing pricing and contract terms

Before you sign the dotted line, review the full pricing and contract terms so you fully understand the conditions of the partnership. Request or make any amendments if needed, and make sure your legal team is able to review the conditions as well.

The Role of AI in Payroll Services

In today’s modern age, artificial intelligence (AI) technology plays a big role in outsourced payroll processes. The efficiency and data analytics capabilities of this technology makes it a great tool for automating and streamlining the repetitive and tedious tasks that are involved in key payroll functions. Plus, it can provide advanced reporting and analytics on-demand to help businesses make informed decisions regarding payroll and workforce planning.

While this type of advanced technology may be out of reach for certain organizations, working with outsourced payroll partners gives you access to innovative systems that leverage AI for better efficiency and accuracy in payroll processing.

However, no matter how integrated AI in HR becomes, like in payroll outsourcing, there will always be a need for human involvement in these processes. The personal connection that comes from building human relationships enables strong and trusting partnerships, supplementing the accuracy and efficiency of AI technology.

Conclusion

Payroll outsourcing is a common solution that organizations employ to gain back more time for their internal team, receive support on payroll and tax compliance requirements, access innovative technology, and more.

Each organization will have their own unique considerations to make when choosing to outsource payroll and select the right partner. However, the benefits of outsourcing payroll, especially with a trusted partner like Paypro, helps companies streamline their back-end and devote their resources to more strategic matters.

Paypro works hand-in-hand with our clients to ensure they receive personal support on tax, payroll, and legal issues, paired with advanced data analytics and reporting powered by our cutting-edge payroll software.

Schedule a consultation with Paypro today to see if payroll outsourcing is right for you.

Q3 workforce activity dips initially for a seasonal summer slowdown, though improvements throughout the quarter suggest a steady Q4.

Table of Contents

1. Introduction
2. Key Findings
3. Data Sources & Methodology
4. Top Trends in Q3 ‘23
5. Decrease in Shifts Worked
6. Slower Decline in Labor Participation Rate in the Overall Economy
7. Continued Strength in Healthcare Sector
8. Dip and Recovery in Public Sector
9. Slowdown in Retail and Hospitality
10. Workforce Activity for Small Companies Uneven
11. Shift Recovery Strength for Nearly All Companies
12. Manufacturing Sector Sees Better Shift Growth
13. What to Expect in Q4 2023

Introduction

Following the surprising strength in workforce activity in Q2, Q3’s labor rates started off slightly slower, though late-quarter improvements left the period steady overall. 

The slowing decline in the labor participation rate this year compared to last has been an overarching theme throughout the past few periods. Q3 continued this trend, finally hitting an inflection point at the end of the period to represent not just a slower decline, but a growing labor participation rate compared to the same period in ‘22. 

Though a large majority of sectors and company sizes experienced improvements in workforce activity as the quarter progressed, shift growth declined overall for the period. As you will see in the data below, shift growth and workforce activity for small businesses continue to lag behind the performance of larger companies. Since small companies make up the majority of businesses in the country, this could account for the shift work decline in Q3. 

Overall, much of the data from Q3 shows a continuation of trends seen so far in 2023 or regular slowdowns for the summer season. Going into a busy Q4, the Q3 workforce activity levels signal stability for the labor market, especially amid ongoing recession uncertainty. 

Key Findings

1. September 2023 is the first month indicating a growing labor participation rate since March 2022
2. Continued strength for companies of nearly all sizes, except small companies 
3. Workforce activity growth in the healthcare sector outpaces all others
4. Slowdown in the retail and hospitality sector going into the Q4 holiday season

Data Sources & Methodology

To complete our analysis of the state of workforce activity in Q3 2023, Paypro compiles data gathered by UKG, a leading HCM cloud provider. 

We assessed their monthly workforce activity reports from July through September of 2023 to uncover ongoing trends in workforce activity in Q3 that HR and finance executives should be aware of: 

• UKG Workforce Activity Report – July 2023
• UKG Workforce Activity Report – August 2023
• UKG Workforce Activity Report – September 2023

Throughout this report, all metrics reported are derived directly from the above reports. 

In these reports and as we present our own findings, you should be aware of a few key terms to better understand the data:

• Workforce Activity: a comprehensive term describing the current state of labor and employment outlook in the United States, based on factors like the number of shifts worked by employees and pay statements
• UKG Workforce Recovery Index: a rolling 12-month scale created by UKG that measures the level of workforce activity relative to the same month one year ago
• The index tracks workforce activity levels of 4.2 million employees across more than 35,000 businesses across the United States
• The index offers directional insight into the anticipated changes in the labor participation rate (e.g. if the index is <100% then the labor participation rate is shrinking compared to last year’s levels, it if is >100% it is growing)
• Shifts Worked: a total that is derived from aggregated employee time and attendance data, this metric reflects the number of times that employees “clock in” and “clock out” via a time tracking system at the beginning and end of each shift
• Shift Recovery: reflects month-over-month shift growth for a company or industry, as measured by time punches

Top Workforce Trends in Q3 ‘23

Shifts worked declined for the period overall, though many sectors, regions, and company sizes saw continued improvements over the Q3. 

Continued lagging metrics for smaller companies appear to weigh on the overall shift work growth for the economy, as you will see in further detail below. 

Another bright spot for Q3 was an inflection point for labor participation rate growth, which occurred in September. As you continue reading below, we’ll discuss the top trends we observed in US workforce activity during Q3. 

1. Decrease in Shifts Worked

Workforce activity dipped in July for the first time this year since April 2023, showing a bit of a slowdown following a surprisingly strong Q2. August workforce activity was down slightly from July, though September workforce activity rebounded to positive growth. 

Though the quarter ended on a positive note, there was still an overall decline in shifts worked for Q3. The slight decline in August 2023 is also similar to the decline that was seen in August 2022, signaling a normal pattern to end off the summer season. 

Here is a breakdown of the workforce activity data for the quarter: 

• July: -0.7%
• August: -0.8%
• September: +0.1%

Q2 had a positive shift work growth of +0.4% but was followed by a tighter Q3 which saw a decrease of -0.5% overall. This shows that there were fewer shifts worked across the economy throughout the quarter. 

The decrease in shifts worked in July sparked some concern; however, more stable activity towards the end of the quarter leaves experts feeling optimistic for the time being as recessionary fears still linger. 

2. Slower Decline in Labor Participation Rate in the Overall Economy

Continuing on the strength of Q2, Q3 ‘23 data signaled a slower decline in the labor participation rate compared to the previous year. 

Industry experts focus on the labor participation rate to measure the portion of the population over the age of 15 that is actively working or looking for work. This metric includes people who are unemployed, but are still seeking out employment. But, it excludes unemployed individuals who have stopped looking for work. 

Thus, slower declines in the labor participation rate may not necessarily signal that more people have found jobs. But, it may show that more people who have previously given up looking for work or left the labor market are re-entering and seeking out jobs again. 

The UKG Workforce Recovery Index is a directional indicator of the changes in labor participation in the United States. The year-over-year improvement shown in Q3 is what indicates a slower decline in the labor participation rate than a year ago, as seen below.  

• Q3 ‘22: 96.9%
• Q3 ‘23: 99.4%

The index has shown both year-over-year and quarter-over-quarter improvements, with the index in Q2 ‘23 at 98.3%. 

We have yet to see an inflection point with the index >100 for an entire quarter this year, and the help from the holiday rush in Q4 could be the key component to seeing this occur. 

Aside from the year-over-year and quarter-over-quarter improvements, the index gradually improved throughout Q3 and finally reached an inflection point in September, as shown in the monthly data below. 

• July: 98.4%
• August: 99.2%
• September: 100.6%

September 2023 is the first month with an index >100 since March 2022. On a monthly basis, this signals a total rebound and growth in the labor participation rate. Hitting this inflection point at the end of Q3 is a meaningful milestone, and could be signaling a strong rest of the year for labor participation. 

3. Continued Strength in Healthcare Sector

The strength in workforce activity for the healthcare sector in Q2 has continued throughout Q3, outpacing all other sectors. 

While the sector showed a meaningful rebound in workforce activity during the second quarter, we can now see that this strength was not transitory, as seen in the overall improvements to the UKG Workforce Recovery Index for the sector again throughout Q3: 

• July: 109.2%

• August: 102.3%
• September: 118.8%

Though there was a slight slowdown in growth in August, September showed meaningful improvements, indicating greater workforce activity overall in Q3 ‘23 compared to Q3 ‘22. 

From the above data, we can see that workforce activity levels have improved both quarter-over-quarter and year-over-year, showing remarkable labor market strength across the sector. 

4. Dip and Recovery in Public Sector

The public sector saw a rebound in workforce activity mid-Q2, though activity shrank and then rebounded again at the end of Q3 to better levels than in 2022.

As a reminder, the public sector refers to public government roles as well as employment in public K-12 education and public higher education. This could help explain why workforce activity for the sector dropped during the summer months. 

Here is the data for the UKG Workforce Recovery Index for the sector throughout the third quarter: 

• July: 92.6%
• August: 97.2%
• September: 108.6%

Again, index values >100 indicate year-over-year growth in workforce activity. From this, we can gather that July and August ‘23 workforce activity levels shrunk from the same months in 2022, though rebounded in September 2023 quite a bit, likely as the school year got into full swing. 

5. Slowdown in Retail and Hospitality

Workforce activity in retail and hospitality has had slowing growth for the fourth consecutive month. By the end of Q3, workforce activity for the sector actually showed a decline from last year’s levels in September ‘22. 

Not all sectors saw resounding strength throughout the quarter like healthcare. However, the continued slowdown in workforce activity in retail and hospitality could signal an overall cooling throughout the sector while others remain stable or growing. 

Here is what the UKG Workforce Recovery Index looked like for the retail and hospitality sector throughout the third quarter of 2023:

• July: 101.3%
• August: 101%
• September: 99.9%

Growth in workforce activity for the sector was already slowing at the start of the quarter, though by September, we see 2023 levels shrinking from those in September ‘22 with an index value <100. 

The Q4 holiday season generally has a positive impact on workforce activity in the sector. But in the meantime, we can use the index data to determine that there may be a shrinking labor participation rate across retail and hospitality. 

6. Workforce Activity for Small Companies Uneven

In Q2, one of the persistent weak areas in workforce activity was small companies with less than 100 employees. In Q3, this remains unchanged. 

Q3 data for small companies showed slower declines overall compared to Q2. However, as we reported last quarter, they still have not hit an inflection point during this recovery period. 

The UKG Workforce Recovery Index for companies with less than 100 employees was still below 100, indicating lower labor participation rates in Q3 ‘23 compared to Q3 ‘22. 

• July: 96%
• August: 99.2%
• September: 95.8%

The third quarter started relatively unchanged from the end of Q2, with some improvements shown mid-quarter nearing an inflection point, which dropped down again in September to end the period. 

Even though there was a quarter-over-quarter improvement for smaller companies, the data still shows lower levels than Q3 ‘22, signaling a slower recovery than larger companies. 

7. Shift Recovery Strength for Nearly All Companies

Similar to what we saw in Q2, shift recovery data remained strong or improved across Q3 for nearly all companies except those with less than 500 employees. 

Shift recovery for large companies with >2,500 employees has strengthened throughout the entire year, and Q3 is no different. 

Here is some of the supporting shift recovery data for each month in Q3 by company size: 

The above data represents month-over-month shift growth as measured by time punches, with each sized company ending the quarter with positive growth, minus the smaller companies. 

This trend continues on what we’ve seen so far this year. The ongoing strength of larger companies may shed light on what is still to come for smaller companies that are having a slower recovery. 

8. Manufacturing Sector Sees Better Shift Growth 

There was a decline in shift growth for the manufacturing sector to start off Q3, though this improved throughout the quarter and ended on a high note. This follows a similar pattern to what we saw for the sector in Q2, which also ended the period with positive shift recovery despite early quarter contractions. 

Here is the Q3 shift recovery data for the manufacturing sector: 

• July: -0.9%
• August: -0.6%
• September: +0.9%

The above data shows the sector ended Q2 with positive month-over-month shift growth, even after an apparent slowdown in July and August. 

Following muted growth over the summer, the shifts worked in the manufacturing sector are growing as we head into the rest of 2023. Q4 tends to be a busy time of year for most sectors, which should be no different for manufacturing as the sector builds off the momentum seen at the end of Q3.

What to Expect in Q4 2023

Many areas of the US economy saw both quarter-over-quarter and year-over-year improvements in workforce activity in Q3, despite early quarter slowdowns. Ongoing labor strikes appear to have had minimal impact, and the momentum going into Q4 for much of the economy signals stability for the labor market amid continued talk of a looming recession.

During the last quarter of 2023, HR and finance executives can watch out for the following trends to inform their hiring and workforce planning within their organizations: 

• Holiday season strength: Q4 is a busy season for many sectors of the economy with the holidays approaching, which should support continued positive shift recovery across the US economy to end off the year. Specifically, the retail and hospitality sector could benefit the most following a slowdown in Q3.
• Rebound in workforce activity levels for small companies: We are still waiting for shift recovery and workforce activity levels for small companies to mirror that of larger companies. The holiday season could make it possible for this inflection point to occur before 2023 ends, which would have positive ripple effects throughout the entire economy. 
• Growth in labor participation rate: The UKG Workforce Recovery Index finally reached an inflection point in September, though we have yet to see an entire quarter with an index >100 this year. The Q4 holiday push could make this possible, signaling a growing labor participation rate compared to Q4 ‘22. 

Q2 workforce activity shows labor market resiliency, with most sectors, company sizes, and regions showing y/y and q/q improvements.

Table of Contents

1. Introduction
2. Key Findings
3. Data Sources & Methodology
4. Top Trends in Q1 ‘23
5. Increase in Shifts Worked
6. Slower Decline in Labor Participation Rate in the Overall Economy
7. Rebound in Healthcare Sector
8. Rebound in Public Sector
9. Rebound in the Northeast
10. Workforce Activity for Small Companies Still Below ‘22 Levels
11. Shift Recovery Strength for Nearly All Companies
12. Manufacturing and Services & Distribution Sectors See Better Shift Growth

Introduction

The year for workforce activity had a strong start in Q1 though levels eased as the period progressed. However, in Q2, there was widespread strength across the economy, represented by the metrics we will discuss below.

While cooling workforce activity levels at the end of Q1 appeared to signal continued trends throughout Q2, the actual results have shown surprising resiliency and better workforce activity than expected. Thus, the weakness seen at the end of Q1 did not persist throughout the second quarter.

Overall, it has been a better-than-expected start to 2023, especially as strong recessionary fears dominated the narrative for the first half of the year. The strength shown in Q2 was not only better than Q1 levels but better than Q2 ‘22 levels in many areas as well.

Key Findings

1. Strongest start to Q2 shift work since pre-pandemic (2019)
2. Improving Workforce Recovery Index y/y signifies a growing labor participation rate in Q2
3. Strength for companies of nearly all sizes, except small companies with <100 employees
4. All sectors end Q2 with positive shift growth

Data Sources & Methodology

To complete our analysis of the state of workforce activity in Q2 2023, Paypro compiles data gathered by UKG, a leading HCM cloud provider.

We assessed their monthly workforce activity reports from April through June of 2023 to uncover ongoing trends in workforce activity in Q2 that HR and finance executives should be aware of:

• UKG Workforce Activity Report – April 2023
• UKG Workforce Activity Report – May 2023
• UKG Workforce Activity Report – June 2023

Throughout this report, all metrics reported are derived directly from the above reports.

In these reports and as we present our own findings, you should be aware of a few key terms to better understand the data:

• Workforce Activity: a comprehensive term describing the current state of labor and employment outlook in the United States, based on factors like the number of shifts worked by employees and pay statements
• UKG Workforce Recovery Index: a rolling 12-month scale created by UKG that measures the level of workforce activity relative to the same month one year ago
• The index tracks workforce activity levels of 4.2 million employees across more than 35,000 businesses across the United States
• The index offers directional insight into the anticipated changes in the labor participation rate (e.g. if the index is <100% then the labor participation rate is shrinking compared to last year’s levels, it if is >100% it is growing)
• Shifts Worked: a total that is derived from aggregated employee time and attendance data, this metric reflects the number of times that employees “clock in” and “clock out” via a time tracking system at the beginning and end of each shift
• Shift Recovery: reflects month-over-month shift growth for a company or industry, as measured by time punches

Top Workforce Trends in Q2 ‘23

Workforce activity and shift recovery improved throughout Q2 for nearly all sectors, regions, and company sizes.

As you will see below as we break down these trends in further detail, larger companies lead much of the improvements seen over the quarter, with small-mid-sized companies still lagging in certain areas.

Continue reading below as we dive deeper into the top trends we observed in workforce activity in the US throughout Q2.

1. Increase in Shifts Worked

April 2023 recorded the strongest second quarter start for shift work since pre-pandemic levels in April 2019. Q2 shift work growth also showed an improvement from the first quarter of the year, which started strong yet tapered off as the quarter progressed.

Following a negative Q1 shift work growth of -0.7%, April already showed improvements, with shift work growth turning positive in May. This momentum continued into June, leaving the shift work growth positive overall for the quarter, as seen in the data below:

• April: -0.2%

• May: +1.0%
• June: +0.4%

May 2023 represented the first month with positive shift work growth since November 2022, which was supported by seasonal holiday strength.

Overall, shift work growth over Q2 was +0.4%. Thus, we can gather that there were more shifts worked across the economy throughout the quarter.

With Q1 shift work growth seeing larger declines over the course of the quarter and recessionary fears becoming heightened simultaneously, this Q2 shift work data is seen as a welcomed sign of strength in the labor market to finish off the first half of the year.

2. Slower Decline in Labor Participation Rate in the Overall Economy

Another major trend we observed was signs of a slower decline of the labor participation rate in Q2 ‘23 compared to the previous year’s levels in Q2 ‘22.

Industry experts focus on the labor participation rate to measure the portion of the population over the age of 15 that is actively working or looking for work. This metric includes people who are unemployed, but are still seeking out employment. But, it excludes unemployed individuals who have stopped looking for work.

Thus, slower declines in the labor participation rate may not necessarily signal that more people have found jobs. But, it may show that more people who have previously given up looking for work or left the labor market are re-entering and seeking out jobs.

The UKG Workforce Recovery Index is a directional indicator of the changes in labor participation in the United States. The year-over-year improvement shown in Q2 is what indicates a slower decline in the labor participation rate than a year ago, as seen below.

• Q2 ‘22: 95.8%
• Q2 ‘23: 98.3%

Aside from the year-over-year improvement, the index gradually improved over the quarter as well and is nearing an inflection point, seen in the monthly Q2 data:

• April: 96.4%

• May: 99.1%
• June: 99.5%

While there has yet to be a total rebound and growth in the labor participation rate, which would be represented by an index value >100%, this year-over-year improvement indicates positive momentum in the labor market as we head into the second half of the year.

The majority of the economy is made up of small-to-mid-sized businesses, and as we will discuss below, these are the only companies that have yet to see a full rebound in the UKG Workforce Recovery Index. Thus, we can assume that the inflection point will be driven by smaller business recovery catching up with larger companies.

3. Rebound in Healthcare Sector

Declines in workforce activity in the healthcare sector were slowing over Q1. Now, the sector has seen a meaningful rebound in workforce activity mid-quarter, which strengthened over the rest of Q2

We draw this conclusion from the improvements to the UKG Workforce Recovery Index for the sector throughout Q2:

• April: 97.6%

• May: 100.1%
• June: 108.5%

Trends in workforce activity for the healthcare sector already looked promising at the end of Q1. But, the Q2 values >100 signify improved workforce activity levels compared to the previous year.

So not only did workforce activity improve for the sector from the first to the second quarter of 2023, but we can also see that these levels are above Q2 ‘22 as well.

4. Rebound in Public Sector

The public sector was experiencing shrinking workforce activity levels throughout Q1. However, in Q2, those levels have improved and significantly rebounded in mid-quarter like the healthcare sector, showing better levels than in 2022.

As a reminder, the public sector refers to public government roles as well as employment in public K-12 education and public higher education.

Here is the data for the UKG Workforce Recovery Index for the sector throughout the second quarter:

• April: 97.6%

• May: 103.5%
• June: 103.4%

As we discussed with the healthcare sector, values >100 show year-over-year growth in workforce activity. Some of the possible explanations for this rebound include post-COVID recovery in schools and universities, which were largely impacted by the pandemic.

The improvements to the UKG Workforce Recovery Index for the sector throughout Q2 show a nice rebound from the declines seen in Q1, in addition to positive year-over-year improvements as well.

5. Rebound in the Northeast

Aside from the rebounds seen across various sectors in Q2, specific regions also saw strength in workforce activity over the period.

The Northeast had a rough Q1 regarding shrinking workforce activity compared to other regions of the country. Q2 levels not only improved but fully rebounded to above Q2 ‘22 levels.

Here is what the UKG Workforce Recovery Index looked like in the Northeast throughout the second quarter of 2023:

• April: 97.2%

• May: 101.7%
• June: 104.1%

April declines slowed slightly from the end of Q1. However, an inflection in May led to further momentum throughout the rest of Q2 for the region.

Similar to the discussions above, the year-over-year improvement to this index likely signifies a growing labor participation rate in the region compared to Q2 ‘22. Though there may be many factors contributing to this rebound, Q2 growth for the Northeast completely made up for the shrinkage seen in the first quarter of this year.

6. Workforce Activity for Small Companies Still Below ‘22 Levels

One of the few areas showing workforce activity weakness in Q2 was small companies. Q2 data for small companies show slower declines than what this group experienced in Q1. But, they have yet to hit an inflection point during this recovery period.

The UKG Workforce Recovery Index for companies with less than 100 employees was still below 100, indicating lower labor participation rates in Q2 ‘23 compared to Q2 ‘22.

• April: 94.2%

• May: 97.1%
• June: 96.3%

Even though there was a quarter-over-quarter improvement for companies of this size, the data still shows lower levels than Q2 ‘22, indicating a slower recovery than larger companies.

As we will discuss below, nearly all company sizes saw rebounds in shift recovery in Q2 compared to Q1. So, it is possible that these smaller companies will follow suit in the coming months to align with the rest of the economy.

7. Shift Recovery Strength for Nearly All Companies

Shift recovery for large companies was already strengthening over Q1. In Q2, nearly all-sized companies saw better shift recovery over the period, except companies with <100 employees which had negative overall shift growth for the quarter.

Here is some of the supporting shift recovery data for each month in Q2 by company size:

The positive momentum for shift recovery in larger companies may signify similar trends will follow for smaller companies in the near future. Again, smaller companies make up the large majority of the US economy. So, the impending positive shift work growth for smaller companies will likely send positive ripple effects throughout the labor market.

8. Manufacturing and Services & Distribution Sectors See Better Shift Growth

All other sectors started and ended the quarter with positive shift growth but the manufacturing and services & distribution sectors. However, although these sectors had negative growth to start the second quarter, they both saw improvements over the period.

In the end, both sectors ended off Q2 with positive shift growth after seeing a mid-quarter inflection in May.

Here is the Q2 shift recovery data for the manufacturing sector:

• April: -0.4%

• May: +0.1%
• June: +0.4%

And for the services & distribution sector:

• April: -0.5%

• May: +1.2%
• June: +0.1%

The improvements to shift growth for these sectors likely were caused by the same factors lifting all other sectors over the quarter, just with slightly lagged results. The recessionary fears that were felt at the end of Q1 could have kept growth muted at the beginning of Q2 for these sectors. However, the overall results for the quarter show that these sectors have made gradual gains throughout the entire first half of 2023.

What to Expect in the Second Half of 2023

Across the board, Q2 workforce activity levels came out better than Q1–and better than expectations. Lay-offs at the end of Q1 spread nerves across the economy that additional lay-offs were imminent. However, Q2 data showed surprising resilience and continued positive momentum for workforce activity is now at play throughout most sectors and company sizes.

During the second half of 2023, HR and finance executives can watch out for the following trends to inform their hiring and workforce planning within their organizations:

• Continued strong shift recovery across sectors: There may have been a seasonal summer lift to shift recovery data in certain sectors in Q2. But, Q3 and Q4 feature the back-to-school and holiday shopping season respectively, which will likely support shift recovery data in the second half of the year.
• Rebound in workforce activity levels for small companies: Following suit of the larger organizations, smaller companies should see an inflection point for shift recovery and UKG Workforce Recovery Index in the second half of 2023, which will support a broader recovery for the overall economy given the large proportion of small businesses that make up the US economy.
• Growth in labor participation rate: While the UKG Workforce Recovery Index has yet to cross over 100, the past few months of data show that an inflection point is imminent, which could receive the final push from recovery in smaller companies. This would signify a growing labor participation rate, the first since March 2021.

When it comes to AI in HR, there are plenty of applicable use cases that will help organizations improve efficiency and diminish hands-on work for repetitive and routine tasks. However, this doesn’t mean that the human factor will suddenly become less important or obsolete in the future of HR.

As such, it’s important for organizations to strike the proper balance between automation and human engagement in HR matters. Continue reading through this article as we discuss the various applications of AI and automation in human resources tasks, and highlight how the employee experience will continue to play an important role in these processes even as the industry continues to undergo digital transformation.

Benefits of AI in HR Departments

There is no doubt that AI technology offers powerful advantages to HR professionals. It has the potential to streamline their workflows and free up their calendar for more strategic and value-add tasks.

Thus, the largest appeal to leveraging AI in HR is the increased efficiency and productivity it can provide. HR teams can automate tedious and time-consuming tasks like employee onboarding, payroll processing, scheduling, time-tracking, and more. Allowing more timeto engage with employees and strategize how to improve the workplace.

Further, AI in HR can also improve the accuracy of key HR workflows and reduce the occurrence of human error. In tedious tasks like payroll processing, scheduling, or time tracking, AI tools can produce more reliable and consistent results that benefit the entire organization.

Additionally, the data analytics capabilities of AI help HR professionals derive data-driven insights quickly to inform their decision-making. Given the large volume of data available today, AI makes it possible to process all this information and gain meaningful insights from it.

Limitations of AI in HR

Though there are plenty of benefits to using AI in HR, there are certain limitations and drawbacks that HR professionals need to be aware of.

Primarily, there have been concerns about the ethical considerations and potential bias that can be found in AI algorithms. Though there might be the assumption that this would only be possible in human decision-making, certain algorithms have been shown to make decisions or recommendations with an apparent bias against certain groups of people.

Plus, no matter how advanced the algorithm, it still cannot replace human judgment and empathy. The personal touch that is included in interpersonal interactions will never be replicated by machines, which is very pertinent to HR matters when dealing with sensitive human issues on the job.

Thus, there needs to be human oversight and intervention, even when AI programs are implemented in HR departments. These programs can be more accurate than humans in certain tasks, but they certainly should not be left unmonitored or deemed infallible.

How AI is used in HR processes

To illustrate the importance of retaining the human touch amid continued AI adoption in HR departments, here are some key uses of AI in HR and why the human aspect will never go out of style.

AI in Recruiting and Hiring

Using AI in talent acquisition was one of the first applications of the technology that HR professionals adopted in the recruitment process.

Related tasks like making job postings, filtering through applicants, and scheduling interviews are all tedious administrative tasks that HR professionals were previously responsible for implementing on platforms like LinkedIn.

With AI, HR departments can benefit from improved candidate sourcing and screening based on the parameters the company has set, leveraging the power and efficiency of automation tools like ChatGPT over having these tasks be completed manually by the HR team.

Overall, applying AI to recruiting and hiring tasks has helped HR professionals create a more efficient hiring process and save valuable time that can be spent on other tasks that require more critical thinking.

Limitations

Though AI can help with initial candidate screening, there is still a certain level of human judgment that is needed to assess other factors about potential candidates aside from what’s included on their resume.

HR professionals are much more adequate at assessing the candidate’s cultural fit for the company than AI programs. Humans are better at determining what the candidate’s soft skills are, and whether those skills make them a good fit for the role they’re interested in.

Plus, humans can offer a more personalized experience for the candidate throughout the application and interview process. AI programs can be used to send out personalized correspondence using templated messages; however, there is still a robotic tone to these interactions that applicants can quickly pick up on.

AI in Onboarding and Training

The onboarding and training process for new employees is often known for being time-consuming and draw-out. But, certain automation tools are helping to speed up these tasks and require less hands-on attention from HR personnel.

Gathering and processing employee documents, getting them set up with the proper accounts, and training them on the essential tools and platforms that the organization uses can all be prompted with the help of AI onboarding through chatbots and other tools.

In this way, AI works to streamline the onboarding process without requiring much human intervention from the HR team.

Depending on the role the individual has been hired for, the AI program can personalize the experience to make it relevant to their position, eliminating certain redundancies that are associated with more general onboarding procedures.

Limitations

AI programs can help speed up the onboarding and training process, but new employees still need to build up rapport and trust with their new colleagues through face-to-face interactions.

A key component of being successful in a new role is the mentorship the hire receives while getting started on the job–something that even the best AI onboarding programs cannot offer.

The nuances that are associated with starting a new job are something that HR professionals understand well, making them more than equipped to address the employee’s concerns and questions as they get started in their new role.

AI in Career Development and Succession Planning

Another great application of AI in HR is when it’s used to derive data-driven insights on current employees. These insights can be used to help employees further develop their skills and receive personalized career path recommendations based on their credentials and qualifications.

This level and volume of data analysis would be nearly impossible to complete manually, which is where AI machine learning comes in handy. Thus, AI programs can identify skill gaps that certain individuals may have, and provide personalized learning resources tailored to their needs to upskill them and help them be more successful in their role.

All in all, companies can benefit from a highly-skilled workforce that can fill in high-level roles when openings arise, a key factor in succession planning.

Limitations

AI-powered employee training programs can help deliver personalized skill development at scale, but employees still require personal interaction with HR professionals when it comes to setting meaningful career goals for themselves.

For employees to discuss their personal career aspirations and dive deeper into what makes them feel fulfilled, they need a real human as a guiding resource, not an AI program. HR professionals can draw on their own experiences, what they’ve observed throughout their careers, and apply that to their industry knowledge to create thoughtful recommendations that increase employee engagement and retention.

Yes, AI employee training programs can deliver personalized skill development courses, but to receive truly individualized career coaching and feedback, HR professionals are an invaluable asset to employees.

AI in Payroll & Time Tracking

Payroll management and time tracking are two areas of HR that are notorious for being time-consuming and repetitive. As a result, they are a great target for AI initiatives and have largely benefited from automation capabilities.

In general, AI payroll tools have helped to increase the accuracy and efficiency of payroll processing. Eliminating the risk of human error, these programs take care of data entry tasks that HR professionals were typically responsible for, and can automatically generate reports, calculate taxes, manage deductions, and more.

Further, AI time-tracking platforms have also revolutionized the space, especially in the modern era where more business leaders are managing remote workforces. AI time-tracking tools can use their sophisticated algorithms to detect patterns in workers’ schedules, flag possible outliers for further review, and provide other analytics that business leaders can use to make informed business decisions.

Limitations

Human decision-making in these workflows will continue to stay relevant even as AI time-tracking tools and payroll platforms take off.

There are many complex scenarios that can arise in payroll situations including overtime pay, bonuses, and other factors that the algorithm may not know how to handle. HR professionals will still need to oversee payroll, time and attendance tracking tasks to handle any exceptions and ensure that employees are being appropriately compensated.

Plus, if employees have any paycheck-related questions or concerns, they will need to turn to a human rather than an algorithm to get their questions answered.

AI in Workforce Management

Workforce management is an important component of any HR department, and emerging AI tools can help these teams make more effective and optimal decisions for the organization.

Automation can assist in this area by helping companies take stock of their current talent, the skills they possess, and other details to create a more productive workforce. Especially with remote teams becoming more commonplace today, AI workforce management tools can help HR departments get a more comprehensive view of the company’s workforce and identify areas for improvement.

HR teams can use AI workforce management platforms to perform real-time data analysis for resource allocation and identify where certain individuals would be better suited. They can more accurately gather employee feedback and utilize this data to make changes to operations that result in better employee satisfaction on the job.

Limitations

With such subjective matters on the line like employee satisfaction, HR departments can’t rely on AI workforce management tools alone to complete these tasks.

HR professionals can tap into their own knowledge and expertise to help balance employee preferences and discover what structure will provide the best work-life balance for workers. Such decisions can be supplemented by what the AI tools recommend; however, human decision-making will still play a major role in employee management matters.

Further, advanced algorithms are great at data analysis, but they are not so effective when it comes to handling employee grievances and engaging in conflict resolution. This is where the value of the HR department shines as they navigate these touchy subjects with ease and precision.

AI in HR Analytics

There is a ton of data out there today, more than ever, and AI HR analytics tools can help teams derive meaning from the large sums of data they possess.

Using data-driven insights for more informed decision-making helps HR departments gain an objective view of their current and future workforce needs, productivity levels, attendance rates, absenteeism, and other important workforce metrics.

The advent of predictive analytics has helped HR teams make better workforce planning and talent management decisions by looking ahead to the future and making accurate forecasts and predictions using historical data.

Limitations

There needs to be some level of human involvement in interpreting and contextualizing the findings of AI HR analytics tools.

There is no doubt that AI algorithms are much more efficient at processing and analyzing data than humans are. But, the level of nuance that must go into interpreting the hard data and facts that the algorithm outputs is the job of a human.

Without human involvement, you will simply be left with data and figures–the real insights from data analytics come from your HR team who will interpret the findings and determine what it means for the organization.

Plus, as we already discussed previously, AI algorithms are not 100% foolproof and do have the tendency to show bias in their analysis. So, HR professionals should still play a role in these data analytics tasks to consider the potential biases that could be in the data and utilize the results accordingly.

AI in Employee Scheduling

AI employee scheduling tools are highly efficient at using algorithms to identify the optimal resource allocation for the company. Companies can utilize automation of shift management to match employee availability, ensuring that all positions are covered during critical shifts.

These programs can use historical data to create the most efficient schedules based on employee skills, availability, qualifications, and other factors. Plus, they can typically do so in a fraction of the time that would be needed to create the schedules manually, and without some of the human bias or error that may be involved.

All in all, companies can use AI employee scheduling programs to help determine the best-recommended employee schedules that optimize productivity and take into account needed employee downtime.

Limitations

Employees care about more than resource allocation and optimization when it comes to their scheduling. As such, HR professionals can help improve employee satisfaction by considering and accommodating employee preferences and their work-life balance when setting the schedule.

AI employee scheduling programs are likely to only consider what’s optimal for the company when making its recommendations, not the side of the employee. As a result, HR personnel should still be involved in the employee scheduling process in order to prevent employee frustrations.

Plus, using their experience, HR professionals can effectively address scheduling conflicts and unforeseen circumstances that may arise, while AI programs may struggle to deal with these outliers.

How Paypro Integrates the Human Factor in AI Solutions

Paypro takes pride in the personal experience we offer to clients through our dedicated account managers. We know that human interaction will always carry high value, even as AI adoption continues to ramp up throughout the industry.

This means we always have professionals available who are willing to lend a helping hand. Any client questions, requests, or modifications are addressed by a member of our team who is eager to hop on a call and walk through the issue. Plus, we are more than happy to build out a customized solution to fit the client’s unique needs.

Not only does our team offer technical assistance, but we go as far as helping our clients interpret what the data means and provide recommendations on how to apply it. Our payroll and legal specialists are even available to offer their own input on the situation!

Conclusion

Further adoption of AI in HR is undeniable–it has the potential to save professionals hours of time each week, improve the accuracy of certain workflows, perform advanced data analysis, and more. But, each application of AI in HR must be accompanied by human involvement to some degree to retain the integrity of the workplace and make it feel more human.

At Paypro, we help clients get the most out of our platform by preserving the human touch even as the world becomes more digital. Our dedication to clients’ success means our team is always ready to draw on our professional expertise to handle even the most complex business issues.

As a Paypro client, you can benefit from top-of-the-line software programs to help your business succeed, but you don’t have to compromise on the human element, either. Schedule a consultation with Paypro today to see what other software platforms are missing.

Staying current on regulatory FLSA changes can feel like a full-time job on its own. But, prioritizing HR compliance keeps the workplace safe and equitable for employees, and helps the company uphold its reputation and avoid harsh fines or penalties.

Continue reading through this article as we dive deeper into what HR compliance looks like, what key regulations HR professionals need to be aware of, and provide you with a helpful HR compliance checklist to help ensure your internal practices and policies adhere to the relevant laws and industry guidelines.

What is HR Compliance?

HR compliance refers to the ability of an organization to adhere to relevant labor laws and regulations. Such policies and regulations can be imposed by government agencies, regulatory bodies, and legislation at the local, state, or federal level.

HR leaders play an important role in keeping the business compliant. They must regularly monitor and review changes in legislation that relate to labor laws, and oversee any updates to internal workflows and processes to remain compliant with new industry standards.

In addition, they must audit their internal practices on an ongoing basis to ensure compliance and alignment with existing regulations. As such, HR compliance is an iterative and ever-changing process.

Legal Consequences of Non-Compliance

When a company fails to update its HR practices to comply with new industry standards or policies, it could face potential legal ramifications and fines, in addition to other serious consequences.

Depending on the nature of the incident, the frequency, and other factors, regulatory bodies could impose certain fines and penalties on a business as a consequence. For more severe incidents, the company could open itself up to legal disputes or lawsuits.

Further, the business may damage its reputation as an employer, leading to high employee turnover and low morale among those that remain. As such, legal compliance in HR is a key factor that keeps the business running smoothly and offering a safe place to work.

Important Laws to Know for HR Compliance

There are a number of key laws and regulations that have shaped the workplace and the HR field as we know it. To achieve HR compliance in 2023, here are some of the applicable labor laws in the US that every HR professional needs to know.

Anti-Discrimination & Harassment Laws

Various laws exist to help protect certain classes of individuals from discrimination and harassment while on the job.

In general, these laws protect against discrimination based on age, race, sex, disability, genetic information, national origin, sexual orientation, gender identity, pregnancy, or religion.

Some of the relevant laws that fall under this category include:

• Title VII of the Civil Rights Act
• Americans with Disabilities Act (ADA)
• Age Discrimination in Employment Act (ADEA)
• Equal Pay Act (EPA)
• Pregnancy Discrimination Act (PDA)
• Title VII (Sexual Harrassment Act)

These laws typically apply at all stages of employment, including pre-hiring, interviewing, employment, promotions, compensation, and rightful termination.

Title VII of the Civil Rights Act also included workplace harassment as a form of discrimination, which was further protected under subsequent legislation.

Equal Employment Opportunity Commission (EEOC) Guidelines

Intertwined with anti-discrimination laws are guidelines set forth by the Equal Employment Opportunity Commission (EEOC). The EEOC is responsible for enforcing anti-discrimination laws, which apply to most employers with more than 15 employees, in addition to most labor unions and employment agencies.

Outside of the federal anti-discrimination laws listed above, the EEOC enforces relevant regulations, EEOC sub-regulatory guidance, commission decisions, and more as they relate to workplace discrimination.

Occupational Safety and Health Administration (OSHA) Regulations

The Occupational Safety and Health Act (OSHA) entitles employees to safe working conditions. This law is enforced and overseen by a specialized division of the U.S. Department of Labor, the Occupational Safety and Health Administration, also referred to as OSHA.

OSHA regulations are meant to help curtail preventable injuries, illnesses, and even deaths that occur while on the job.

Some of the most commonly-cited OSHA standards that arise in workplace inspections include:

• Fall protection
• Respiratory protection
• Ladders safety
• Eye and face protection

Family and Medical Leave Act (FMLA)

The Family and Medical Leave Act (FMLA) ensures eligible employees receive up to 12 weeks of unpaid leave for applicable family and medical reasons. This protects their healthcare coverage and job security over this period.

As of 2010, certain amendments were made to this law to provide additional protections and flexibility to active-duty military and veterans.

Americans with Disabilities Act (ADA)

As we briefly mentioned above, the Americans with Disabilities Act (ADA) offers discrimination protection to those with disabilities. This law provides protections for people with disabilities both on and off the job.

Specifically, Title I of the ADA protects private, state, and local employees from discrimination in any aspect of employment–from pre-hiring to hiring, compensation, training, job assignment, and more.

This act also applies to employees or applicants who may not have a disability themselves, but have a relationship or association with someone with a disability.

Further, employers must offer ‘reasonable accommodations’ in the work environment to permit the employee or applicant with a disability to participate in the application process, perform essential job functions, and more. This can include:

• Acquiring or modifying equipment and devices
• Offering readers or interpreters
• Modified work schedules
• Job restructuring

Privacy Laws

Privacy rights for employees exist across the board. But, certain jurisdictions have also enacted their own privacy laws that employers may need to be aware of. Such laws include:

• General Data Protection Regulation in the European Union
• California Consumer Privacy Act

In general, employee privacy rights limit the extent that an employer can search employees’ person or possessions, monitor their activity and communications, and more.

Wage and Hour Laws

The U.S. Department of Labor regulates certain laws related to employees’ hours and wages. Namely, the Fair Labor Standards Act (FSLA) protects a number of employees’ rights, including:

• The 40-hour workweek
• The national minimum wage
• Overtime pay
• Child labor regulations

Your Checklist to Avoid Common HR Compliance Issues

To help you stay on top of labor laws and regulations, we’ve created an HR compliance checklist as a comprehensive resource. Since labor-related legislation and guidelines are constantly evolving, it’s important to regularly audit and review your practices to ensure you’re staying compliant and adhering to any regulatory changes.

1. Hiring and Recruitment Compliance

Frequently run through your hiring and recruitment processes and materials to make sure they’re compliant with labor laws.

As we discussed above, many laws, like those related to discrimination, are applicable even during the pre-hiring process. This means companies could be liable for actions before they’ve even interacted with the candidate, like if the job listing was written with discriminatory or preferential language.

Audit your hiring practices to ensure they are fair, and try to avoid anything that may open you up to accusations of discrimination. On your applications, job description and other hiring materials, make sure you state that the company operates in compliance with ADA and Equal Employment laws.

Further, make sure you are making proper use of background checks and not abusing them or using them unfairly. Plus, you’ll want to avoid using any interview questions for new hires that could be deemed inappropriate under anti-discrimination laws.

2. Wage and Hour Compliance

To stay compliant with wage and hour laws, make sure all employees are properly classified as exempt or non-exempt to avoid possible fines and penalties down the road. These classifications should be made according to the legal guidelines, not just what status is viewed as most favorable to the company.

You should also review your overtime calculations and payment structures to ensure FSLA compliance, including minimum wage requirements in your city or state if they differ from the federal level.

3. Anti-Discrimination and Harassment Compliance

HR leaders are responsible for taking action to prevent discrimination across the entire employment life cycle. As we’ve discussed throughout, this includes hiring activities, promotions, and terminations.

Reflect on how you could create a more safe and inclusive workplace that not only promotes HR compliance but also the safety and well-being of your employees. This may include altering existing practices or introducing new policies to be better aligned with regulations.

With this, make sure you have adequate processes and effort that goes into handling all employee complaints of harassment and discrimination, and that reasonable investigations ensue afterward. This means that employees are aware of what constitutes harassment, and how they can file a complaint with HR if necessary.

4. Employee Benefits Compliance

HR professionals should review their benefits and compensation packages to ensure they meet the standards laid out in certain healthcare laws like the Affordable Care Act (ACA). The company should:

• Provide employees a summary of benefits and coverage during open enrollment
• Offer information about the health insurance marketplace (Healthcare.gov)
• Send out Forms 1094-C and 1095-C by the proper deadlines each year

More specifically, be aware that if you have more than 50 employees, you must offer minimum essential health care coverage to full-time employees.

In this vein, you should also ensure retirement plan compliance. As such, review 401(k) regulations and responsibilities of employers, in addition to the standards of the Employee Retirement Income Security Act (ERISA).

Also take the time to assess internal policies related to paid and unpaid time off and leave, which would be enforceable under FMLA.

5. Privacy and Data Protection Compliance

Employers can typically collect and retain employee records either digitally or physically. But, they must make reasonable efforts to safeguard employee data and privacy in accordance with data security laws. With this, you should request and retain documentation of employee consent on your data handling practices and what you plan on doing with their information.

Make sure you have guidelines in place for dealing with potential data breaches, including how you’ll inform employees in the case of the breach.

6. Recordkeeping and Documentation Compliance

HR compliance involves the proper documentation of employee policies and procedures. HR should clearly lay out all employment policies and practices, and make them transparent and easily accessible to all employees throughout their employment life cycle. Most of the time, this can be offered in the form of an employee handbook that is distributed to all employees. It should be easy to navigate and understand.

Make it clear to employees how they can report any incidents of non-compliance with labor laws to show that you’re dedicated to protecting their safety on the job. If you update the employee handbook, make sure all employees receive a new copy and are aware of the changes that have been made.

There are also certain guidelines related to how long companies need to retain employee documentation and files, and how they should be properly disposed of upon termination. Review what these guidelines are, and create a proper document lifecycle management process to adhere to these laws.

7. Workplace Safety and Health Compliance

Employees must receive proper job safety and training under OSHA. Review these materials frequently to keep them up-to-date with current laws and regulations, and include your dedication to workplace safety in all employee handbooks.

Perform regular audits and inspections to ensure workplace practices are aligned with OSHA standards. Inform employees of how they can file any official OSHA violations if necessary.

Employers are required to maintain proper safety records and report any workplace injuries and illnesses to OSHA each year with OSHA Form 301. Make this form easily available to all employees in the case of an accident, incident, or illness on the job.

8. Immigration Compliance

To stay compliant with immigration laws, always follow the proper employment eligibility procedures. Collect a Form I-9 from all applicable employees and review the form and proof of identity documentation within three days of their employment starting. The company must securely store all I-9 forms and have them readily on hand for future reference in a potential audit.

If a company sponsors work visas for foreign workers, it must understand all government requirements and compliance obligations to avoid entering legal trouble, fines, or penalties.

9. Payroll and Tax Compliance

HR officers need to make sure the company is staying compliant with relevant payroll laws and regulations. This involves the proper handling of employee taxes and deductions, as well as reporting and remitting payroll taxes, which are strictly regulated by law. Depending on where the company is located and operates, you may need to do so for local, state, and federal taxes.

To ensure HR compliance, the company needs to accurately withhold taxes from employee paychecks, and make the proper payments to the local, state, and US government on behalf of the employee. Proper handling of payroll taxes will help the company avoid any serious tax law violations.

Staying Up to Date HR Laws That Change Most Frequently

HR laws and regulations are subject to change, but some receive updates and amendments more frequently than others. It is the responsibility of HR leaders to monitor such changes and respond accordingly through internal policy changes.

As public sentiment evolves, non-labor-related legislation gets passed, and technological advancement continues, new labor laws will emerge and existing ones will be amended to reinforce employee protections on the job.

As a result, HR professionals will want to regularly monitor the following labor matters, as legislation is frequently enacted or is currently underway on these matters:

• Local/state/federal minimum wage laws
• Pay transparency on job postings
• COVID-19-related regulations
• Cannabis use protection
• Stricter OSHA penalties
• Pregnant workers’ rights
• Criminal background checks

Using Paypro to automate HR compliance, you can easily interpret and react to new labor legislation and changing industry regulations to stay compliant and up-to-date.

Wrapping up Our Discussion on HR Compliance

Maintaining an up-to-date HR compliance manual is not just a convenient resource for companies–it’s a necessary tool to help you keep labor practices up-to-date and compliant with industry standards.

With the state of labor legislation constantly in flux, HR professionals need to be agile and ready to adapt to the changing landscape to uphold workers’ rights and keep their company from violating any labor laws. Using the above HR compliance checklist, as well as creating your own internal resources, you can stay on top of new regulations and be proactive with how your company responds to changing laws.

HR leaders can use the following to monitor changes in labor laws and be the first to know when there’s been a new development:

• The U.S. Department of Labor website
• Your state and local Department of Labor
• The U.S. EEOC website
• The Society for Human Resource Management (SHRM) website

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Q1 workforce activity started off hotter than expected and cooled down as the quarter progressed.

Table of Contents

1. Introduction
2. Key Findings
3. Data Sources & Methodology
4. Top Trends in Q1 ‘23
5. Decline in Shift Work
6. Shrinking Labor Participation Rate in the Overall Economy
7. Public Sector Weakness
8. Strengthening Healthcare Sector
9. Slowdown in the Northeast
10. Smaller Companies Saw Moderate Improvements
11. Unsteady Shift Recovery in Retail
12. Strong Rebound in Shift Recovery for Larger Organizations
13. What to Expect for the Rest of 2023

Introduction

The year’s workforce activity started off strong and better than expected following an uneven Q4, but levels declined throughout the quarter. 

Much of the slowdown in workforce activity that was seen in March is aligned with what experts had anticipated throughout the start of the year, especially amid a rise in recessionary fears that are resounding throughout the country. We saw a gradual decline of workforce activity throughout the quarter, despite a strong labor market with demand for workers and labor shortages in certain industries. 

Following the heights of the pandemic, this normalization of the market is welcomed in part, though looming talks of a recession will be a factor to consider as the year continues. 

Key Findings

• Q1 2023 workforce activity down from Q1 2022
• The monthly change in shifts worked in March ‘23 is the biggest decline since Aug ‘21
• The number of shifts worked declined -0.7% over Q1
• Retail workforce activity dips over the quarter
• Larger organizations see a strong rebound in shift work growth in March after falling throughout the earlier parts of Q1

Data Sources & Methodology

To complete our analysis on the state of workforce activity in Q1 2023, we compiled data gathered by UKG, a leading HCM cloud provider. 

We assessed their monthly workforce activity reports from January through March of 2023 to uncover ongoing trends in workforce activity in Q1 that HR and finance executives should be aware of: 

• UKG Workforce Activity Report – January 2023
• UKG Workforce Activity Report – February 2023
• UKG Workforce Activity Report – March 2023

Throughout this report, all metrics reported are derived directly from these above reports. 

In these reports and as we present our own findings, you should be aware of a few key terms to better understand the data:

• Workforce Activity: a comprehensive term describing the current state of labor and employment outlook in the United States, based on factors like the number of shifts worked by employees and pay statements
• UKG Workforce Recovery Index: a rolling 12-month scale created by UKG that measures the level of workforce activity relative to the same month one year ago

-The index tracks workforce activity levels of 4.2 million employees across more than 35,000 businesses across the United States

-The index offers directional insight about the anticipated changes in the labor participation rate (e.g. if the index is <100% then the labor participation rate is shrinking compared to last year levels, it if is >100% it is growing)

• Shifts Worked: a total that is derived from aggregated employee time and attendance data, this metric reflects the number of times that employees “clock in” and “clock out” via a time tracking system at the beginning and end of each shift
• Shift Recovery: reflects month-over-month shift growth for a company or industry, as measured by time punches

Top Workforce Trends in Q1 ‘23

Workforce activity for many companies, sectors, and regions in the U.S. have slowed down quite a bit over the first quarter of 2023, but not at an alarming rate. 

There were some outliers that we will discuss in more detail below, such as healthcare seeing improvements throughout the quarter and larger organizations rebounding in March. 

Let’s take a look at some of the prominent trends in workforce activity in the U.S. that we noticed throughout Q1. 

1. Decline in Shifts Worked

An overarching theme that occurred in the U.S. economy throughout the first quarter of 2023 was that there was a decline in shift work compared to the previous period.  

Following uneven patterns at the end of 2022 and a holiday season that was lackluster compared to expectations, shift work levels in 2023 started off flat, with no change reported in January from December levels (0% change). 

This was a stronger-than-expected start to the year; however, each month that progressed throughout the quarter saw incremental declines, including: 

• January: 0.0%
• February: -0.5% 
• March: -1.6%

March’s decline, in particular, was the largest monthly decline in shift work in over a year, since August ‘21 to be specific. 

When taken together, shift work declined by about -0.7% over Q1. All in all, this data shows that there continued to be fewer shifts worked across the economy throughout the quarter. 

A dip in shifts worked in Q1, particularly early in the quarter, is not uncommon after seasonal highs that typically occur in Q4 from the holiday season. However, the continued decline throughout the quarter indicates that labor activities may become more in line with the recessionary fears that are rippling throughout the macroeconomic environment. 

2. Shrinking Labor Participation Rate in the Overall Economy

Another major trend seen in Q1 ‘23 was evidence of a declining labor participation rate compared to Q1 ‘22 levels. 

The labor participation rate is a commonly referred to term in the industry which reflects the portion of the population that’s over 15 years of age that is actively working or looking for work. This includes unemployed individuals who are still searching for jobs. 

The change in the UKG Workforce Recovery Index between this year and last year is what indicates this trend, as the index is a directional indicator of the changes in labor participation in the country: 

• Q1 ‘22: 100.3%
• Q1 ‘23: 93.3%

This index has gradually declined each month over the past year, so the current levels aren’t out of the ordinary. However, the index has slipped significantly between Q1 of 2022 and Q1 of 2023. 

This decline gives us a clue that the rate of labor participation is on the decline, meaning that more people have left the labor force altogether, or have given up looking for work compared to last year.  

3. Public Sector Weakness 

Data from the past quarter alludes to weakness in the public sector, with a significant drop in workforce activity in this segment over Q1 ‘23. 

The public sector refers to public government roles as well as employment in public K-12 education and public higher education. 

Referring to the UKG Workforce Recovery Index, the index for the public sector saw a big downward swing throughout the quarter, worse than any other industry at this time: 

• January: 114.8%
• February: 99.0%
• March: 85.2%

What’s driving this decline isn’t entirely evident at this time. However, a few factors at play may include an aging workforce that is retiring at a more rapid pace as well as some lingering impact from the COVID-19 pandemic that pushed more people out of the labor market. 

4. Strengthening Healthcare Sector

On the flip side, we saw the Healthcare sector pick up strength in workforce activity as the quarter progressed. 

We draw this conclusion from the fact that the UKG Workforce Recovery Index for the industry saw steady improvements throughout Q1: 

• January: 83.2%
• February: 90.7%
• March: 91.3%

This shows positive momentum for the Healthcare industry in comparison to other struggling areas of the economy like the public sector. However, the fact that the index for each month was below 100% tells us that current work levels are down from the previous year. 

From this data, we can conclude that workforce activity in the sector has improved so far throughout 2023, albeit still below last year’s levels at this time.   

5. Slowdown in the Northeast

Particular regions of the country have also shown weakness to start off 2023 aside from just specific sectors in the economy. 

Namely, the Northeast region of the United States saw larger declines in workforce activity than any other region in the country–many of which actually improved over the quarter. 

Here is what the UKG Workforce Recovery Index looked like in the Northeast throughout the first quarter of 2023.

• January: 107.3%
• February: 95.1%
• March: 96.8%

The year started off with better workforce activity levels than January 2022, though this quickly shifted as February and March showed lower levels than the previous year. 

As you may be able to gather, the decline in this index throughout Q1 indicates that the labor participation rate is likely down in the Northeast. 

Again, there are many factors that could be leading to this shift; though the decline is meaningful enough to point to a trend that is likely ongoing in the region. 

6. Smaller Companies Saw Moderate Improvements

Companies with less than 100 employees and companies with 101-500 employees saw better workforce activity throughout the first quarter of 2023. 

This is in comparison to businesses of all other sizes that saw declines in workforce activity over the start of the year. 

Let’s take a look at the UKG Workforce Recovery Index for companies with less than 100 employees:

• January: 86.5%
• February: 89.9%
• March: 89.8%

Here is the data for companies with 101-500 employees over Q1: 

• January: 91.4%
• February: 92.2%
• March: 92.6%

While workforce activity moderately picked up for these smaller companies over the quarter, it’s still important to note that activity is much lower than it was a year ago, owing to a slowdown in the overall economy year-over-year. 

7. Unsteady Shift Recovery in Retail

Back on the industry-specific level, we saw uneven levels of shift growth across the retail sector throughout the first quarter. 

Shift recovery, or the month-over-month shift growth as measured by time punches, yo-yo’ed throughout the period, ending down slightly for the quarter compared to the last. 

Here is the monthly breakdown of shift recovery in the retail sector for Q1 ‘23: 

• January: -2.9%
• February: +1.0%
• March: -2.2%

Especially following the holiday season when retail is generally strong, this is not too concerning to start off the year. However, it is worth watching going forward to see how retail responds to the looming threats of a recession. 

8. Strong Rebound in Shift Recovery for Larger Organizations

Lastly, shift growth for large organizations saw a sizable rebound over the period, while shift recovery for smaller companies got worse over Q1. 

Companies with over 5,000 employees had the following shift growth in each month of the quarter: 

• January: -3.0%
• February: +0.2%
• March: +2.4%

As a reminder, workforce activity declined overall for these companies throughout the period, though their shift growth improved month-to-month. As you can see, the quarter started off with negative growth which then turned positive towards the middle of the quarter.  

What to Expect for the Rest of 2023 

Q1 started off strong, with activity rates mostly easing throughout the economy as the quarter progressed. There were some outliers to this trend, though the overall direction tends to be a slowdown in workforce activity alongside other economic indicators amid a period of economic challenges. 

For the rest of the year, HR and finance executives can keep an eye on the following trends to make informed hiring and workforce decisions in their organizations: 

• Shift recovery by region to normalize: the COVID-19 pandemic created widespread disruptions to shift growth that were felt nationwide; however, as the impacts of the pandemic largely remain in the past at this point, disruptions to shift work and growth will return to more localized and regional factors like extreme weather events
• Workforce activity continues to tighten: the labor market remains tight with labor shortages still prevalent in many sectors and continued positive job growth each month. But as economic conditions shrink across the country and the globe, workforce activity will tighten as companies look for cost savings and ways to cut back on spending with fewer and shorter shifts worked
• White-collar layoffs: at this time, layoffs will continue to be more widespread across white-collar workers as we have seen so far this year, and not as much for frontline workers