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Payroll compliance: Ignore it at your peril, HR

Stacey Harris, Sapient Insights Group
Stacey Harris
Stacey Harris is the chief research officer and managing partner of Sapient Insights Group, where she oversees their industry research work, including the esteemed Annual HR Systems Survey and White Paper, now in its 25th year. Results of the survey debut exclusively at the HR Technology Conference each year.

Payroll is an area too often taken for granted. It was one of the first HR processes to become automated, so payroll systems have been around for what seems like forever. A company’s payroll system is kind of like that comfortable sofa in the living room: It’s used every day, but there’s probably not much thought invested into where it is placed or if there are other, better options.

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However, payroll is at the very core of HR and, thus, demands attention. The market offers new features and functionality that didn’t exist just a few years ago. At the same time, payroll complexity is only increasing as organizations become less centralized and more geographically dispersed, workforces grow more heterogeneous and laws continually evolve. The associated risks—whether related to taxes, employment regulations or data security—have also grown exponentially.

No matter how or where your payroll processing is done, the reality is that HR is on the hook for getting it done right. While the current buzz around AI and other shiny topics may be more exciting for HR to focus on, it’s dangerous to overlook any potential weaknesses in your payroll processing.

This article will focus on the critical compliance-related considerations HR teams should keep top of mind.

The state of payroll tech disruption

Interestingly, payroll is one of the biggest areas of disruption and change for HR. Our 2023 research showed that 13% of organizations surveyed are actively involved in a payroll RFP and expect to make a technology solution selection this year—meanwhile, 15% plan to make a replacement change in the next 12 to 24 months.

When asked about the reasons for making a change, 71% of respondents said their current solution did not meet their basic needs; other top reasons were poor customer service and high costs. Our 2023-2024 HR Systems Survey report shows a vendor-by-vendor breakdown of customer plans for change. (Workday, Rippling, isolved, Paylocity and Ceridian have the highest percentages of customers planning no changes.)

Our research also found that slightly more than half of organizations (on aggregate) use an internal payroll system, while the other half use some type of outsourced service (employer of record, ASO/MSP or PEO).

Important payroll compliance considerations—no matter how you process it

Do you have someone who truly “owns” all aspects of payroll processing? Even if your company uses a third-party firm for payroll processing, you should designate someone internal to oversee the service provider’s work, schedule periodic touchpoints and stay on top of regulatory and tax requirements likely to impact your company. If multiple people across multiple functions are involved in payroll processing, be sure to designate a specific person who is held accountable and manages the work and people involved. Remember, at the end of the day, it’s the responsibility of your organization to hire the right payroll firm, to make sure that all employee-related data you’re providing is up to date and accurate, and to have all required records on hand and secure.

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Have you quizzed your technology partner or service provider on the exact regulations and regions the company covers and how frequently it makes any necessary updates? It’s important not to take a promise of “full compliance” at face value. For instance, if you have an employee working in Nova Scotia or Liechtenstein, are you covered?

You should also double-check to ensure that required compliance isn’t affected by any customization work you’ve done or plan to do. Mark Stelzner, founder of Inflexion Advisors and conference chair of the upcoming EPIC HR event, stresses the importance of fully understanding the impact of past or planned processing customizations.

How are you and your team being notified of regulation and tax changes? How quickly does your payroll partner make updates? You need to make sure you’re being notified in advance and have a full understanding of how and when changes are being made. Be careful that changes are not buried in release notes that may get overlooked.

Are you conducting periodic audits of your payroll technology and processes? Even if you rely 100% on an outsourcing provider, you should schedule a detailed audit and review of all involved technologies, processes, rules, definitions and reports.

You’ll want to ensure secure data storage and transmission at every step, including when data is being moved. Make sure to review access rights and check that all employees (including contingent workers) are properly categorized.

Compensation/classification rules often change over time, so you’ll want to ensure all rules are being applied fairly and accurately. For instance, if some of your employees are now back at the office, are you still compensating them for home internet and computer equipment? If you’re now offering some type of commuting compensation, are payments accurate?

Have you worked with your internal and external counsel to do scenario planning about potential compliance risks and fines? When it comes to potential liabilities and exposure, it’s hugely important to define the accountabilities and responsibilities of all third parties involved in the payroll process, as well as those of your own organization. These details need to be crisply and clearly documented.

Are you being pressured into “going live” on an implementation before all I’s are dotted? Given that many companies will be implementing new systems or committing to new service partnerships, it’s critical to avoid going live until you’re 100% sure all aspects of your processing are fully stress-tested and you’ve got the support infrastructure you need. Too often, companies let the start date of a license determine when a change goes live.

Building on—not moving beyond—compliance

For the last several years, HR thought leaders (including me and my team) have stressed the importance of strategic HR. As I was writing this column, I realized that some may have interpreted this guidance to mean that areas such as predictive analytics, business alignment and workforce upskilling should take priority over payroll and compliance.

Nothing could be further from the truth. As our CEO Teri Zipper puts it, “Compliance is table stakes for HR.” That is, ensuring that your employees are paid timely and accurately and that your organization is following all tax and regulatory requirements is at the foundation of the HR function.

In fact, we advise HR teams to use payroll as part of the journey to become strategic. Demonstrating to senior leaders that you’ve done due diligence in selecting the right partners and technologies and that your team is thinking ahead (and strategically) on associated risks will strengthen HR’s perception as a full-fledged business partner.

Payroll-related notifications and communications can also be used to build and reinforce employee engagement and organizational culture. For instance, bonus payments can reinforce performance achievements and trigger career discussions. A message from the CEO about an upcoming business change can accompany a pay notification. We believe it’s important to turn these types of rather mundane transactions into moments that matter and that will be remembered.

For a more detailed (and lively) discussion of the issues around payroll compliance, we invite you to tune into this episode of our regular podcast, The HR Huddle, featuring a conversation with Teri Zipper and Mark Stelzner.