Payroll errors: Mistakes cost money

If you thought payroll ran itself, recent high-profile cases mean you might need to think again. How do you avoid an expensive error?

When it comes to costly and embarrassing payroll errors, size and reputation count for little, as a glance at the recent HR headlines will confirm. In March, Tesco – the UK’s largest retailer – had to reimburse around 140,000 employees to the tune of £9.7m after a move to a new system led to a ‘technical error’ involving those who had salary sacrifice arrangements. Two months later, the feted John Lewis Partnership admitted breaching minimum wage legislation when a pay averaging problem led to £36m being returned to staff.

They are far from alone, with renewed interested in the topic of payroll being spurred by the national living wage. The government initiative of naming and shaming employers that paid below the national minimum or living wage saw 350 names on the list in February 2017, the highest number on record.

While some companies’ reasons for underpaying staff relate to unsustainable or questionable policies – including claiming to use tips to top up pay or making staff buy their own uniforms – others have made honest mistakes.

John Lewis blamed its own error on the complexities of minimum wage legislation: the company’s pay averaging arrangements did not meet the “strict timing requirements” of the regulations, according to its annual statement, which was published in May. While staff would receive the correct pay over the course of a year, where greater than average hours were worked they would have been paid less than the hourly minimum wage. 

But the complexity of the minimum wage rules is shining a light on a broader issue – that in an age of technological innovation and process excellence, we haven’t been able to eliminate payroll errors and, in fact, by some measures they are increasing. Almost half of employees across Europe have been paid late, according to an SD Worx survey, and even more have been paid incorrectly; while cashflow issues are part of the picture, old-fashioned mistakes are a problem too.

 “The list of elements that make up payroll is endless,” says Samantha Mann, senior policy and research officer at the Chartered Institute of Payroll Professionals. Over the years, more and more have been added, from pay rates to overtime hours and ad-hoc allowances. As systems have evolved, this has meant that payroll workers often do not fully understand why they perform certain tasks in certain ways.

The complexity doesn’t stop there. The PAYE system, which was originally set up in 1944 as a simple way to collect tax, has been “tweaked, pulled and stretched, and automated to become something that a 1944 employer would not recognise and would most assuredly not attempt to deliver”, says Mann.

“It is becoming complex and the rules and regulations that you are complying with change,” agrees Charles Cotton, performance and reward adviser at the CIPD. “Payroll has had a significant number of challenges over the last few years – the move to reporting in real time, pensions auto-enrolment and then all the issues around the tax changes to pension contributions and how they have been tightened up, as well as the tax treatment of salary sacrifice. There are a lot of things going on that employers have to know about.”

Meanwhile, the introduction of Real Time Information (RTI) in 2013 means employers are reporting their PAYE information to HMRC as it happens. This has opened the door to new pay attachments being linked to payroll. For instance, the apprenticeship levy applicable to all employers with a yearly pay bill of more than £3m must be paid through PAYE.

Payroll mistakes are especially common in fast-growing businesses, says Kate Upcraft, an independent payroll consultant and lecturer. “When processes can’t keep up with growth, that is a common instance in which things slip. You have to underpin growth with robust processes. Otherwise, things can quickly escalate. Once people have got away with procedures that are a bit sloppy that can become the normal practice, which gets dangerous.

“Suddenly a business is growing and it needs policies that it didn’t before. For instance, someone decides to write an expenses policy but they don’t know enough about expenses to do it, so the policy is ignored or it doesn’t work properly.”

Keeping up to speed with changing legislation is another problem, she says. “I have seen a payroll team that is not using up-to-date documentation for new starters. They are not capturing the right info when people start, so their student loan deductions won’t be correct, for example.”

Despite the amount of expertise required to keep up to date with payroll, not everyone dealing with it is necessarily an expert. Especially in smaller companies, the person responsible for paying staff is often performing other roles, such as HR or administrative work. Part of the solution is a straightforward investment in payroll. “HMRC has invested heavily in compliance in recent years and I think employers need to respond accordingly with a similar investment in their payroll provision, whether that be internal or external, third-party providers, or a mixture of both,” says Mann.

The stakes are high. “Because of RTI, we send information to HMRC every time we pay people. So if there is anything wrong with it, immediately the business is exposed. The more investment in getting good people and good systems, the better,” says Upcraft.

An investment in payroll resources would also help professionals keep up with the myriad new requirements expected of them, adds Mann. “Under-resourced people in payroll are struggling. This [complexity] is tripping up well-qualified professionals.”

Continuing professional development (CPD) could take several forms, says Upcraft, but the most important thing is a high-level commitment to regular training. “That doesn’t just mean training once a year at year-end, it means constant CPD, whether that’s webinars, reading industry magazines or networking with peers at conferences. It is vital that you are adapting best practice – so you know how your software works, how the industry works and what compliance looks like.”

A shift in organisational mindset would also help, says Cotton. At present, organisations tend to see payroll as an administrative cost, when they should view it as a function that effectively delivers benefits to the business.

A consistent policy and message is vital, adds Upcraft. “It has to come from the top: the executive board, HR and finance director have to be united on payroll policies. Doing that whole lifecycle of employment, from how it feels when I open my payslip to the last time I get one – are we sure that everything is being done correctly? The confidence of the workforce is key. They should know that their overtime is going to be right; that their tax is going to be right. If they don’t have that confidence, it can erode engagement.”

The payroll team also deserves more respect, Upcraft says. “I have heard payroll professionals saying ‘we have been telling HR we can’t use that form for ages, but HR ignores us’ – there is a lack of respect. HR is seen as having a seat at the directorial table. Payroll sits between HR and finance and does not usually get a seat at the top table, except in the very largest companies. But it needs to be respected because it is managing the most important and most potentially reputationally damaging part of a business.”

Attracting new talent is essential to an effective payroll team. But Mann and Upcraft agree that the sector is struggling to appeal to promising new hires. It’s time for a rebrand, says Upcraft. “We have to do what HR did and call ourselves something different. I call myself an employment tax specialist, which is sad, because I do much more than that, but it sounds far more serious and influential than ‘I am a payroll consultant’.”

Perceptions of payroll must also shift. As Mann says: “Payroll isn’t just about pushing buttons. Arguably it never has been, although in some organisations data entry may have been one element. The people who are operating payroll need to be knowledgeable and qualified. But they also need to be kept up to date. It is not possible to deliver payroll in an effective way without CPD.

“We need to encourage a much greater number of younger people into payroll. It offers enormous variation – you can guarantee there is never a boring day. Even with increased automation, it requires a delicate balance of informed operator and an accurate, well-designed software solution, as well as a good working relationship with HMRC.”

It’s also a good idea to communicate with employees about the importance of checking payslips, says Cotton. Worryingly, research by the CIPD suggests that around 300,000 UK employees do not receive a payslip, either electronically or in print, meaning their employer is breaking the law.

Outsourcing is another important piece of the jigsaw but, on the perennial question of whether to run payroll internally, most experts remain agnostic while stressing the importance of having access to knowledgeable people. “The little guys are outsourcing in their droves at the moment, because they can’t cope with pensions” says Upcraft. “They struggled through RTI, but pensions has been the straw that broke the camel’s back.”

Meanwhile, the largest companies also tend to outsource – seeing the cost as a worthwhile investment. Conversely, medium and large employers are bringing payroll back in-house, says Upcraft. They fear they lack control over the process and are exposed to errors by an outsourced provider, for which they will then be liable. “[Internal payroll professionals] can’t be as fleet of foot because the outsourcer wants payroll data three to four days ahead of time – suddenly, if someone’s overtime comes through or you have a new hire, you lose that flexibility,” she says.

Technology is often heralded as the solution to today’s payroll problems. However, Dr Sumita Ketkar, senior lecturer in leadership and professional development at Westminster Business School, warns employers not to be blinded by it: “I think from the HR side, you have to choose a partner very carefully. A partner may have all this technology, but is it really supporting what you have?” Technology is likely to improve, with the advent of AI one important development, she adds. But there is a human element to payroll that can never go away.

Ongoing communication between an employer and outsourced payroll provider is especially important. “Do you really understand what is happening? The tendency is for companies to outsource and forget about it. To maintain the whole system, you have to keep an eye on it all the time,” says Ketkar. It won’t guarantee that your name won’t appear in the wrong sort of headlines, but it will at least give you a defence it if does.