Payroll Process and its Errors

Harry S. Truman said “Actions are the seed of fate deeds grow into destiny” ,  similarly the tasks performed by an employee gets billed as a salary which an organization pays through the payroll system. This is processed every month towards the last week to disburse the salaries. The process includes managing large number of data generated through attendance and other inclusions. This process entails payouts post the standard deductions and reimbursements.

This system includes certain common functionality which includes the areas as discussed below :

  • New employee inclusion: When a new employee joins an organization Inputs including salary details, reimbursements, statutory deductions, benefit enrollment and many such information are filled in the ERP System from which the payroll data is collected. This information provided gets stored in the ERP system which is connected to the company database.
  • Tax declaration form: The tax gets deduced as per the government guidelines. Hence, an internal tax declaration form is filled and provided by the employee supported with the documents to suffice for tax rebates. These include rent agreement, to claim the HRA , investment in Saving Schemes offering tax saving, Home loans etc. Different accounting cycles may have its own time to consider this. Such as, in certain organizations, the tax declaration is taken in the beginning of the employment and rebates are offered. At the end of the accounting year the supporting documents such as Medical bills would be required to validate the information provided by the employees at the beginning of the financial year. If those documents are not provided by the employees, yearly tax deduction would be made.
  • Attendance data – This datum is collected from the attendance system. If, there are any gap in the data, it requires to be cross checked with the reporting leaders, to avoid errors. Late comings and early leaving are two areas which are calculated. These deductions are to be made as a part of penalty. Prolonged vacation and sabbaticals are verified as the employee may have left the organization. Off site deputation may have a separate process for calculating the attendance. Here the report might be drawn from the client’s feedback and system of data collection from the client’s site. Maternity or any other medical leaves are calculated as reported on pro rated basis. In case they were approved by the leader, the leave balance would be allocated avoiding any deduction in the salary . In case the leave balances have refurbished, the deduction in the salary may be reconsidered on the approval of the leader.
  • Reimbursement for late working: Certain business situation may entail high work volume or even a high priority task to be delivered at a short notice. These situations may require employees to work beyond their normal working hours. Legal standards direct on how the extra hours should be designed. Hence, any additional pay to be made along with any reimbursement for working late and  providing additional support requires to be included in the payroll sheet.
  • Other Reimbursements–  These are paid on submission of bills with the approval of the reporting manager or the decision making authority. It includes maintenance areas such as Car, mobile phone, etc. The eligibility to such a reimbursement is defined in the policy. The calculation remains to the grid as defined in the policy. Such as a manager may be eligible for a petrol reimbursement of Rs. 5000 a month where as a Senior Manager or an Assistance Vice-President may be eligible for Rs.11000 or more. The total amount would be paid if the supporting bills are provided to the accounts team processing the payroll. If it is not provided, there might be a tax deduction on them.
  • Other Benefit payment – Every role would include certain benefits such as car, accommodation, fees for first two children depending on the grade and level. Every employee may not have this privilege. It is offered at a senior level which would require the employee to submit the bills to be reimbursed as tax free amount. The scope of error lies in miscalculations of data from the bills and excess taxing . Any submission of bills make the amount non-taxable to the employee. Yet it may get taxed by error.
  • Shift allowances – This is offered to the employees who have been working in different shifts other than the normal working hours. The working hour policy defines the time line and eligibility of such payouts. The confirmation to this payout comes from the reporting managers. The scope for errors lies in receiving and providing the data accurately in the payroll sheet.
  • Pay for performance – This is performance incentive, disbursed for achieving the targets as agreed in the scorecard. The pay on performance grades are announced. The reporting managers provide this input to the payroll generating team.
  • Insurance intimation for new employees – Organization offer different insurance including mediclaim and accident insurance. These require to be started when a new employee joins the company. These programs are reinstated every financial year for the employees in the payroll of the company. The monthly payroll includes this datum as it is a payout that may not reflect in the salary slip. Yet few companies allow the employees to avail extra coverage on a payment made by the employee over and above what is made by the employer. On such an event, the deduction is made from the salary every month for that employee.
  • Stop payment – Organization have a policy to initiate a stop payment for the employee who resigns and would be leaving the company. As defined in the exit policy , the notice period  starts from the day an employee resigns. It may be for a month or more than that up to three months.  The stop payment is initiated on the last month, where the employee would not receive the salary at the end of the month but with the full and final settlement. Ideally this helps to calculate the clearance as there might be dues to be cleared by the employee. The stop payment initiation is made by the HR team, where an email including a request to stop the payment of the employee is sent to the accounts department who would process payroll. Generally HR Team initiates this when the reporting manager of an employee mails the resignation acceptance by the employee.
  • Full and final settlement : When an employee leaves an organization, the process of clearance includes calculating  all the number of  holidays that are not availed. These are required to be reimbursed calculating it from the basic salary for those days. The salaries of the months that were freezed as a result of resignation, any bonus to be paid and every other payment to be made at the time of separation.
  • Deductions: Statutory requirements share a guideline on how the deduction should be made from the salary. Any deduction due to a loan or loss of pay

The complexity of this process increases with the volume it manages and processes it follows. The scope of error lies in miscalculation, duplication, missing the due dates resulting in incorrect disbursement.

If this process is outsourced to vendors, it’s important to check if the vendor would have the bandwidth to align with the changing organizational structures or business model. If a series of mergers and acquisitions are planned by the organization, the vendor should be able to accommodate it.

Few of the performance indicators to the payroll process have been shared below:

  • How timely has its process been -The payment needs to be rolled out timely every month without any non-adherence to the service level agreement. The salaries have an indelible effect on the employees. Any delay would affect the morale. Hence, organizations follow stringent rules to ensure the payment is made on time.
  • How accurately the data was provided – The data provided to the payroll sheet after the assimilation and final calculation remains the final input for the payouts. In case these inputs are made inaccurately, it causes a massive impact in the salary disbursed. Any inaccurate salary disbursement is taken as non-adherence to the policy. The inaccuracy may range from incorrect data for employee ids to reimbursement. The corrections can be made during the next month’s payroll but requires a lot of validation creating unnecessary hassles and bottlenecks.
  • How many re-runs in between the process – The re-runs for the payroll system increases the cost to run it. This impacts the business spending hence lowers the ROI on this system.
  • Time within which the data needs to be provided– If the data required to run the payroll gets delayed, it creates a bottleneck for the final calculation. This is often mitigated by keeping the deadline way ahead of the payroll time. The cost incurred for this error, needs to be calculated on the time taken by the supervisor who was responsible for the input.

Finally this process may not appear to be a month long just as other ongoing processes are. Yet there are areas of this process which keeps working even when the payroll is not been run. The errors and risks to this process can be well mitigated and countered when identified ahead of time. This process remains as vital as the employees who are the most valuable assets to any company and who get paid through it. Just as John Maynard Keynes noted that ” The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future”.

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