How to avoid costly payroll mistakes

For most firms, payroll is the largest operational expense and making payroll mistakes can have a significant impact on business - a dent in cash flow, an investigation by the IRD, and perhaps even a court case with a disgruntled employee. It is also an area which very few businesses actually get right.

Payroll is at the heart of any relationship between employer and employee and mistakes are not only embarrassing, but sometimes costly. You need to work on this at two levels - setting up fair and transparent polices about pay, and setting up a system that minimises the chance for error.

Unfortunately very few employers in New Zealand actually know their legal requirements in the area of payroll (especially holiday pay). This situation is made worse by the fact that some payroll systems do not process payroll absolutely in line with the law. Of course the situation is greatly complicated by the current occupational health and safety laws.

Pay policies

Have a pay policy and put it in writing. Not being able to point to the firm's policy on why some people got a raise and others didn't is a sure way of setting yourself up to have a group of unhappy team members, complaints, and maybe even legal action. Come up with a policy that describes the bases for giving bonuses, rises and promotions - and then put it in writing. For example, you may state that pay will be based on their role, their level of competency, and their level of responsibility. However, it won't be based on how long they have served with the company, or their age or sex. Policies based on objectively assessed performance keep you within the law and out of court.

Implement pay changes at the correct time. It's not uncommon for there to be a disconnect between the process of awarding a pay increase and getting that information into an employee's payroll record. If that increase doesn't turn up in the employee's bank account at the agreed time you've sent some bad messages about your reliability and what you think of their interests. Another example of this sort of thing is the sales executive who knows the customer has paid, but doesn't get his commission on time because the information hasn't filtered through to the payroll system. This person will eventually become fed up and look for another company that treats its employees better.

Deal with overpayments immediately. Research has found that almost half of employees have been overpaid at some time in their work life, but a third didn't own up and pocketed the cash. Payroll mistakes like this cut two ways - they can undermine an employer's trust in their team, and they can, if not handled correctly when recognised, damage the employee's feelings about their employer. Demands for immediate and total repayment may be perceived as unfair and imposing a real burden for instance.

Assess termination pay accurately. Take the time to find out exactly what a terminating employee is entitled to. Mistakes can go in either party's favour but you probably won't get back an overpayment while you can find yourself in trouble over an underpayment.

If you are preparing your own payroll you'll know just how much time it takes to monitor this crucial, yet recurring task. And maybe you've decided that in fact it's taking up just too much time. Options?

Basically two - buy a suitable payroll software system or outsource the whole thing to an agency.

Even small companies can save money and effort by outsourcing their payroll processing. In most cases, a professional payroll processor will calculate the payroll each pay period, provide a direct credit electronic schedule for transfer into your own bank's electronic banking system, complete PAYE returns for your business and provide costing and management reports as required (printed, or electronically for transfer into your accounting system). All of these can save your business time and help avoid payroll mistakes and late or inaccurate PAYE filings.

Outsourcing payroll services isn't everyone's best option, however. It makes sense to keep doing it yourself if you:

Have a relatively simple payroll, and
Can get good help understanding the thicket of rules and regulations that go with payroll, and with making the payroll system work properly.

If you opt to do it yourself with a payroll software programme, the system you choose must be able to calculate all employee payroll obligations (including holiday pay), payroll deductions and PAYE obligations, as well as record and update all payroll information in a general ledger.

Unlike most other programmes, your payroll software must be updated annually, to ensure you deduct the correct amount of PAYE every time. Since the scrapping of IR5's, this is even more important than it was for many years.

If payroll is becoming too complicated and too time consuming then there are options - but whether you go for outsourcing or software, seek some independent professional advice and do your homework thoroughly.

For more information contact your RAN ONE business professionals at
Academy of Business Excellence Limited