While falling real-term wages, ongoing strikes and an inflation-driven cost of living crisis are the biggest stories on pay from over the last year, payroll errors have also made headlines.
Next and Asda were at the centre of two of the biggest furores. During 2022 staff at these retail giants reported turning to food banks and payday lenders after payroll errors, vendor migration problems and ongoing underpay.
This resulted in reputational and employee engagement issues for both businesses – with Next also facing a minimum wage investigation from HMRC – but they aren’t the only employers struggling to get payroll right.
Research from payroll software provider MHR found in 2022 that 91% of UK and Ireland businesses make payroll errors each month – some losing up to £150,000 a year as a result – which causes 30% of impacted employees to turn to high-interest borrowing.
As such, with money tight for many employees and employers alike, Resolution Foundation data shows that almost two thirds of the UK population in the bottom income quintile are now cutting back on spending, and so there is even more pressure to ensure payroll delivers as it should.
For HR, payroll and finance teams, understanding where common payroll errors occur can only be a good thing.
In the US, data from the Inland Revenue Service shows manual inputs are the biggest factor in payroll errors and Matt Stark, head of UK payroll at Mazars, says domestic businesses have a similar problem. Over-reliance on technology is also an issue.
He says: “We are all human and have the potential to make mistakes, and so the checking process is vital to ensure these mistakes are picked up and corrected.
“In addition, while payroll systems providers have done an amazing job in recent years… they are not always right, and it is critical to retain knowledgeable payroll specialists.”
Samantha O’Sullivan, policy lead for the Chartered Institute of Payroll Professionals (CIPP) says poor inter-departmental communication and information sharing are also big contributors to errors.
She also cites other issues payroll practitioners should look out for: “We’ve seen overpayment, breaches of personal data held in the payroll department and various technical issues.”
Furthermore, Craig Billington, an accountant at Kirkwood Wilson, explains that failing to meet payment deadlines and not keeping abreast of changing pay legislation also result in issues.
He adds: “This can cause unnecessary stress for employees, waste time correcting errors made on payslips, and cause tax implications.”
It is understanding of the stress and the financial impact of these errors that Gethin Nadin, chief innovation officer at Benefex, says should drive employers to want to become mistake-free.
He says: “Employers must be aware that the smallest error or delay in paying our people can have huge ramifications.”
So, what can HR, payroll and finance departments do to start running an effective payroll process that delivers for both the business and employees?
As Nadin sees it, practitioners should have well-articulated processes, contingency plans that those outside of payroll understand, clear documentation, and use technology to help minimise human error.
For Claire O’Sullivan, head of payroll at Millwall Football Club, good payroll starts with a simple process, knowing which team payroll sits in, and being cognisant of its impact on people.
She says: “It’s all about getting the basics right. Get a simple process and know what information you need to get from managers.
“It’s not necessarily about having the fanciest systems as it’s all about communication. Often that means good communication between HR and finance.”
“It’s not necessarily about having the fanciest systems as it’s all about communication."
Like Nadin, Jeanette Wheeler, CHRO at MHR, believes digitisation of payroll processes can underpin necessary adaptation on a changing business landscape and better integrate crucially important finance and HR teams.
She says: “Digitalising payroll not only eliminates human error but can also respond to a changing market, decreasing the risk of regulatory issues and its associated cost and also keep everybody connected and aligned.”
Billington agrees alignment between finance and HR is fundamental in ensuring payroll accuracy, and that it benefits the employer-employee relationship, but he also believes managers have a central role to play.
He adds: “It’s always a good idea to have a couple of people monitoring the payroll for errors and I recommend a manager calculating the hours for their department before passing those hours over to a centralised team.”
Similarly, Stark believes the payroll process should be underpinned by collaboration between payroll, HR and finance teams who use the same systems and have good data-sharing practices which emphasise timeliness.
He adds: “The separation of these functions is best practice to give segregation and true independence to checking.
“And, when it comes to auditing, the most important point is the segregation and independence of checking, rather than the order [of
which teams do it].”
For these parties to work well together, adds CIPP’s O’Sullivan, there is also a need for the whole business to be educated on the importance of getting payroll processes right.
She says: “All departments should be aware of payroll cut-off dates and understand the consequences of sending pay-related information late.”
O’Sullivan also recommends that payroll teams have a human-centred fail-safe plan for when errors occur, and that any communication of pay is wrapped up in a wider financial education plan.
She says: “Give everyone a breakdown of what to expect in payroll and if there is a mistake, apologise, get the right data, manage their expectations and give them options.”
Duncan Brown, principal associate at the Institute for Employment Studies, believes not enough businesses think of payroll as a utility with a massive impact on wellbeing.
He says: “Within financial wellbeing policies, how many employers are looking at payroll efficiency? How many are looking at how long it takes to get errors sorted?
“I bet for most employers payroll isn’t even in their financial wellbeing policy.”
With a cost of living crisis impacting almost everyone in the UK, perhaps this is how payroll should be conceived: as something fundamentally central to the multi-threaded financial, emotional and wellbeing contract between workers and businesses which, if delivered correctly, can benefit both parties.
Billington certainly thinks so. He adds: “Employers should see payroll as one of, if not the most vital cog in their business wheel as payroll extends past simply being about finances, and happy employees lead to a more successful business.”
The full feature above first appeared in the January/February 2023 print issue. Subscribe today to have all our latest articles delivered right to your desk.