Payroll Shortcuts Put Corporates In Compliance Jeopardy

Globalization, while supporting business growth, places new pressures and challenges on the payroll department — particularly when it comes to compliance and the need to manage regulations that continue to evolve both within and across borders.

According to a recent report from EY, payroll is becoming an increasingly important part of business expansion strategy and planning, viewed as a function that can support overall compliance efforts. But not all payroll executives are up for the challenge.

Payroll and human resources (HR) executives are taking shortcuts on compliance efforts, and it’s putting employers at risk, suggests new research released Monday (March 19) by The Workforce Institute at Kronos Incorporated.

A survey of 812 HR and payroll professionals in the U.S. found most admit they have seen “questionable” practices related to compliance. Analysts noted that these practices are putting their companies at risk unnecessarily, though payroll professionals aren’t cutting corners intentionally: The survey suggests that a lack of time and resources is squeezing payroll departments.

The Kronos Institute’s “The Risky Business Survey” revealed that 66 percent of payroll professionals said they know their companies “cut corners” that may lead to compliance issues.

Kronos Senior Director of Payroll Practice Group Malysa O’Connor told PYMNTS that noncompliance can have profound impacts both on employees and the enterprise at large.

“Payroll professionals face a tremendous amount of pressure each pay period to finish processing payroll in time for payments to arrive on payday,” she said. “It’s a responsibility that, if done correctly, employees rarely give a second thought. However, anyone who has been paid late or incorrectly recognizes the disruption that this can have on their personal life.”

“With that in mind,” she continued, “one example of how a payroll professional may cut corners is not ensuring employee sign-off and manager sign-off of all timecards before they begin processing payroll. It may seem like they’re doing everyone a favor, but by issuing payment, they can create a host of legal and tax issues if the employee is not accurately compensated for the hours they worked.”

Nearly half (47 percent) of survey respondents also noted that their organizations keep duplicate records of employees, leading to greater compliance risk. On average, businesses keep five separate records per employee, while professionals are forced to spend 32 hours a week on manual, duplicate data entry alone.

Not for Lack of Effort

While The Workforce Institute’s report found that employees are taking shortcuts, researchers noted that this isn’t because professionals are sloppy or don’t care. Instead, the survey found, payroll executives struggle with a lack of time and resources.

“HR and payroll professionals … don’t cut corners because they’re careless: Usually it’s because they’re overburdened, understaffed or lack the proper resources required to handle anything above and beyond [the] day-to-day activities required to run the department,” said Joyce Maroney, The Workforce Institute at Kronos executive director, in a statement.

On average, these professionals spend 36 hours every week on compliance-related activities, the survey found, including tracking regulatory proposals and developing new policies for their companies.

According to The Workforce Institute, there’s a correlation between businesses that invest in and implement new technologies and greater efficiency in payroll compliance.

More than two-thirds (69 percent) of survey respondents said their payroll systems were more than five years old — one of the easiest ways a company may put itself at risk for noncompliance. The report also linked updated payroll solutions to less time spent on compliance efforts: On average, professionals spend 10 fewer hours every week on compliance-related initiatives when their solutions are between one and five years old.

Nearly three-quarters of survey respondents said cloud-based solutions are the best option not only to enhance payroll efficiency, but also to ensure solutions are flexible enough to remain compliant with ever-changing regulations.

“Payroll technology and service providers, especially those who offer cloud solutions with a single employee record encompassing human resources, time and attendance and payroll, are perfectly situated to serve as … valuable partners that can help organizations keep up with rapidly changing regulations,” said O’Connor. “Cloud delivery brings a huge advantage, as it provides the flexibility needed for payroll departments to receive regular updates that address new rules and regulations.”

In a statement announcing the survey results, O’Connor also noted that many payroll executives “feel like regulations are changing at the speed of light.”

“They’re working hard to keep pace, but the technology that they’re surrounded with is often outdated or doesn’t provide the agility and efficiency needed to adapt to changing laws,” she noted. “HR, payroll and timekeeping in a single cloud solution will simplify the time and resources required to keep up with regulatory change while also ensuring that company policies are applied fairly and consistently across the entire workforce.”

New Challenges Ahead

Enhanced, cloud-based payroll technologies, coupled with the rise in RegTech, have the potential to significantly increase a payroll department’s ability to maintain compliance while reducing payroll errors. But just as regulations are changing at “light speed,” technology is too.

One disruption payroll professionals expect stems from the shift toward faster payments. Payroll is one of the few areas of corporate payments in which businesses are eager to implement faster payment capabilities, especially in the on-demand economy, where faster paychecks can mean stronger worker loyalty, according to Hyperwallet’s “Payday in America” report, released in 2016.

But faster payments may also be a trend that could add to executives’ compliance burdens, according to O’Connor.

“When companies look to reduce the time of processing payments for employees, there’s a greater risk for FLSA [Fair Labor Standards Act] Rules — overtime, blended rates, bonuses — to be calculated without having a full pay period’s or timeframe worth of data,” she said. “This results in inaccurate pay to the employee, which can jeopardize retention and employee engagement efforts. It may ease short-term pressure for the employee, but can cause longer-term exposure risk.”

That doesn’t mean there isn’t a place for faster payments and other innovations in the payroll department, especially considering the potential benefits of technology upgrades on compliance, accuracy and efficiency. O’Connor noted that companies simply have to consider all the options.

“It’s important for organizations to seek out and select a payroll partner who understands their specific industry and has extensive experience handling the regional and even cultural nuances that can come along with payroll,” she said.