8 Ways to Lower Costs and Improve Performance in Payroll Processing

At a compliance symposium about ten years ago, the keynote speaker began with a zinger:

“In a small business, a Payroll Manager can usually do fairly well at HR administration. They are meticulous record-keepers and know how to stay in compliance. If you ask your HR Manager to handle payroll, you are in trouble.”

I laughed along with everyone else, remembering back to the time when a payroll implementation failed. My first indications were people standing outside my office asking about their paychecks. When we learned the fix would take two months or more, the company issued chequebooks to HR managers so we could estimate pay and write cheques. We worked closely with Angela, the Payroll Manager, and kept her sane while she worked with IT to straighten out the mess.

That exciting experience that broadened my horizons. I made a lot of new friends at the local Wage and Hour Division office.

In honor of Angela’s hard work recalculating my “estimates,” I want to pass on a few tips learned over the past fifteen years in HCM technology.

Automate and Move Payroll to the Cloud

Because Payroll is a repetitive process, machines can do the work better than people if you manage the tools well. Automating Payroll can cut costs by as much as 80%.

Automate your payroll tax forms and integrate them into your onboarding application. Set up alerts to notify you if a new employee fails to complete the documents, and audit your records frequently.

Moving to the cloud will cut costs, ease integration, and make it easier to update your software. Almost all cloud vendors update their platforms automatically when laws and regulations change.

Integrate Payroll With Other Systems

Integrate your Payroll process with Finance and HR systems. Since nearly all the employee transactions affecting pay originate in HR or self-service operations, you will eliminate duplication and error with a well-designed interface. What you spend in design and integration will repay your costs many times over.

The data your process generates is invaluable to planning. Unify your reporting so you can integrate Payroll into cost analysis and show your business leaders what people cost.

Classify Employees and Contractors Correctly

Classify your workers properly. Misclassifying employees as independent contractors can incur substantial penalties. If necessary, get a legal review. Pay contractors through Accounts Payable and let Procurement handle the financial details of the contractor relationship.

Keep managers aware of what constitutes a contractor relationship. If they attempt to exert control over when and how a contractor performs work, they can run into trouble. Most freelancers and contractors choose that lifestyle because they want freedom from control. Managers need to coach and develop their contractors, but micromanaging will sour the relationship, and could create the appearance of an employee/employer relationship.

Manage Payroll Globally and Process Locally

Your organization needs to stay on top of costs and trends. Fragmented systems will make that exceedingly difficult. Global business platforms like Workday, SAP, and Infor make it possible for you to centrally manage broad policies and procedures across the organization while giving your local managers the control they need.

You can outsource processing to local providers so your local managers can be more responsive to local authorities. We advocate outsourcing payroll processing wherever possible. It’s a great way to cut costs.

Communicate the Payroll Process to Employees

Keeping employees informed about their pay will promote trust and understanding. Make the payroll process transparent, and publish information to employees about how the process works.

You will generate much of the information about pay from your Compensation team. Informing people how you determine salaries, how you calculate each pay element, and how you calculate salary changes is more important than the actual numbers.

Keep employees well informed of how you determine leave balances, eligibility, and paid time off. Give them the details of year-end adjustments and how you calculate them.

Create a simple diagram of the payroll process and make it available to employees wherever they are.

Require Payroll Direct Deposit

How you manage direct deposit depends on your culture, but your aim should be 100% participation. A printed check costs many times more than a bank transfer and is much harder to manage if there is an error.

If employees resist, you can require it for new hires only. When your people see their new teammates receiving pay earlier than they do, they will change their minds.

Test, Retest, and Audit Your Payroll Process

The cause of the troubles I described was inadequate testing. We recommend end-to-end parallel testing for as long as it takes to be sure there will be no issues after go-live. Test and retest every process from the initial transaction to the final file transmission.

Your automated Payroll platform should allow you to configure alerts and notifications to tell you of processing errors or if transactions exceed specified limits or violate rules. We recommend you also conduct frequent regular audits so you can catch problems before they escalate.

Choose the Right Payroll Partners

If you are outsourcing, bear in mind that some payroll providers strive to be the low-cost solution. Selecting a vendor solely on price may not lead to the best choice. Accuracy, service, and ease of use (including integrations) count for much more.

Consider experience and expertise, but more important, choose a partner who will work with you. The right partner will take the time to understand your business and your needs, and will be sensitive to your constraints.

Pixentia is a full-service technology company dedicated to helping clients solve business problems, improve the capability of their people, and achieve better results.