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Protecting Your Payroll Team From Consequences of Noncompliance

By Anne Clifford

On the scale of payroll complexity, the United States sits slightly higher than the global average. According to the Global Payroll Complexity Index (GPCI), published in late 2017 by NGA Human Resources, the challenge of managing payroll processes across the United States has decreased in the three years since the publication of the previous study.

Inside_GPR_May18_NGAFeature1We know that this is not necessarily the case though, and you may agree. So why does the GPCI state otherwise?

This is because a very high percentage of payroll professionals who responded to the study in the United States have been relieved of the burden of administering payroll and the complexity of reporting on it. Instead, all or part of the process is being managed as a service by payroll professionals; outsourced teams whose only responsibility is to ensure that payroll is processed on time, accurately, and within the bounds of tax and workforce legislation. The result is that the payroll complexity for participants of the study is removed, but not from the entire payroll process.

The 2017 GPCI examines the period May 2014 through May 2017 and reports the opinions of nearly 3,000 payroll professionals, including their experiences with changes in payroll complexity. It was presented to the payroll industry via a series of webinars in the United States with our partner, the American Payroll Association (APA).

During these sessions, polls were run to establish a real-time opinion. Across all regions, “Payroll, HR and Regulatory Updates” were stated as being the greatest challenge for teams processing payroll. In the United States, this was the opinion of 67%, followed closely by “Reporting and Analytics.” Both are essential to ensuring compliance.

 

How Do You Rank Payroll Complexity?

The GPCI measures all the components in a country’s payroll processes, from data parameters to legislation, and ranks them. Where a country’s ranking is lower, it doesn’t necessarily mean complexity is low but possibly that payroll legislation is more mature. While the overall difficulty remains the same, payroll professionals may be used to and familiar with frequently changing regulations.

Other countries, often with emerging economies where payroll legislation is being introduced or tightened, rank higher due to the newness of reporting and compliance. In several instances, these countries have no tax standardization and therefore can change even monthly, ensuring that no two payroll runs are ever the same.

 

Spotlight on North America

Managing payroll data and the payroll process is complex regardless of the country or countries you’re administering, and each country is unique.

In the United States, the federal, state, and local jurisdictions have their own regulations and reporting requirements. Often, these change every year. As many jurisdictions move reporting deadlines forward, it increases the demand on payroll to stay in compliance.

Based on the study alone, the complexity score for payroll in the United States over the last three years has declined. A closer look reveals that rather than a lessening of payroll complexity, there has been a significant increase in the United States and Canada for managed payroll services.

Over the last three years, payroll teams in the United States have matured in their approach to outsourcing the administration of payroll to specialist payroll service providers to effectively remove the time, risk, and complexity of managing payroll from the business.

And so, while payroll complexity in the United States mostly remains the same, the impact on in-house payroll teams where complexity has been outsourced has lessened, hence the lower overall ranking on the GPCI and a lower risk profile for an increasing number of organizations.

 

Summary of Payroll Complexity in North America

Below is a brief summary of how payroll complexity in North America fares, according to the study:

  • U.S. complexity is at 5.78, one point lower than in 2014—likely the result of high-complexity processes being outsourced, not a reduction in complexity
  • Overall, the United States remains in the top 40% for complexity, with only Brazil ranking more complex in the Americas (11th)
  • Complexity remains “high” and “very high” for U.S. and Canadian payroll teams when it comes to “Managing Payroll Data” and the “Payroll Calculation Process”
  • 67% highlight technical, HR, and payroll updates as the greatest complexity challenge
  • 28% of enterprise organizations in North America plan to move employees into new regions (28% to U.K., 24% to Asia Pacific, 20% to South America)
  • Zero-tolerance for noncompliance is fast becoming a “secondary” business tax (see below)

 

Summary of Payroll Complexity in South America

South America’s overall payroll complexity is slightly higher than average, with Brazil sitting at 11th in the overall complexity rankings. However, in South America, companies require the least number of data items to manage and remunerate a single employee, and the frequency of payroll runs is lowest.

The average number of potential legally required/taxable/fringe benefits is highest in this region. However, managing these benefits in terms of payroll is not particularly onerous.

Retro pay calculations are shown to be particularly complex. This may be because they perform the lowest number of retro-calculations across all regions. The task of calculating government-reported payrolls is also felt to be most arduous and complex in comparison to the private sector.

In several countries in South America including Argentina, there is no fixed pattern to tax changes and these can happen as often as monthly. Language-related payroll complexity also peaks in South America, with a relatively small number of languages believed to make a moderate impact upon payroll processing.

 

Zero Tolerance—Increases the Challenge

One of the major challenges for payroll professionals in the United States highlighted in the research stage of the GPCI is the move toward zero-tolerance for noncompliance. This has been referred to as a secondary method of taxation in place of increasing tax. Regardless, the impact of a breach on a business financially and in terms of its reputation can be huge, to the extent that it’s possible its license to trade in the United States could be revoked.

And there is also the moral obligation to employees. An employer has a contractual obligation to not only pay employees on time, but accurately. Employees will show little tolerance for errors in their paychecks. The best talent is not going to opt for an employer with a bad employee engagement record.

This tightening should also be seen with a positive eye. Rather than adding pressure, it’s helping organizations focus on compliance. While in the past some might have been willing to take the risk, with the very real chance of high penalties, organizations are taking complexity and the need to comply very seriously. It’s likely a reason why we’re seeing the growing trend for managed payroll services.

 

U.S. Payroll in 2017—Data and Salaries Share Importance

The overriding conclusion of the 2017 GPCI is that payroll is no longer simply the process of paying people.

Twenty-first century payroll is about data—the management, handling, control, and security of personal data in a landscape where tax, employment, and workplace legislation are ever more complex and noncompliance fines are being firmly administered. Get your payroll wrong or mismanage the personal data of your employees and the consequences for your business can be grave.

In parallel to this, the amount and depth of information that must now be managed, controlled, and reported is getting greater and more and more complex.

This change in payroll data dynamic is not unique to the United States. The GPCI and the parallel polls running during each of the five regional webinars presented similar findings, highlighting even greater challenges for teams managing multi-country payrolls.

 

Impact of the Global Economy

The ascent of cloud technologies combined with faster, cheaper transportation has meant that new economies continue to emerge and prosper. With this increased competition, many businesses have had to consider expanding as a competitive imperative.

Not every country expansion requires a full office presence, but it does require people on the ground who need to be paid. Some will be recruited locally. Others will be transferred, requiring relocation packages. All scenarios require processes, which generate data that must be managed, stored, and secured. This adds complexity, risk, and reporting to your payroll.

 

Data Analytics

Big data, and the analysis of it, is another factor to have accelerated over the last three years. Payroll is the bedrock of HR data and this data is increasingly being used at the core of all major business decisions, making it far more valuable than any business intelligence you can buy.

It is a complete trail of past, present, and future opportunities or losses. It is compliant, clean, accurate, up-to-date, and essential to ongoing business success.

The regulators have also recognized the value of information held in your payroll process. It tells them a lot about modern business processes and possible new revenue opportunities to be raised from firms failing to comply.

 

Global Regulations and Control

Where it was once only necessary to monitor in-country for regulatory updates, increasingly we see more and more regional regulations and updates that impact payrolls in other countries. For example, Japan has rolled out a program similar to the U.S. Sarbanes-Oxley Act. And in Europe, the General Data Protection Regulation (GDPR) becomes active in May 2018, in addition to other regional regulations in discussion. In their own ways, these regulations impact countries where even a single file of data is held, requiring simple management of data records and reporting. One small error can potentially lead to one huge fine.

 

Cybercrime and Data Theft

The most profitable crime now is the theft and sale of personal data. The value of data has never been greater as a commodity. This has made the challenge to get hold of it even more pertinent to criminals. It is vital that all HR data be as secure as possible, with many organizations opting to remove this risk with a move to managed services.

 

Cloud HRIS on the Rise

Next-generation payroll in the United States needs to ensure that these compliance programs are clearly understood, that there are consistent controls, and that these are being operated locally, regionally, and globally.

The future of payroll is being built around the cloud. The technology advancements mean next-generation global HRIS are cloud solutions with unified, centrally stored global employee experiences. By the next iteration of the GPCI, we expect to have seen a significant reduction in local legacy systems.

The leading payroll providers are all investing in advanced cloud HRIS. These are agile, highly secure environments over which highly transparent multi-country payroll processes can be run.

To add an element of complexity, the integration between the HR, payroll, and related back-office systems must be of the highest caliber to eliminate risk. We’re all very familiar with the segregation of duty in our transactions, but this must be extended to the data when you have files being shared between these clouds, an HRIS, and your payroll environment. This is leading to standards in our processes, which in turn will lead to more regulatory reporting.

 

Payroll Fit for the Future of Work

The overall conclusion of the GCPI is that payroll is complex. It is complex whether it is single-country, regional, or global. The only way to survive moving forward as an organization aspiring to elevate your business to the next level is to have the most robust payroll, processing, and control systems in place.

Where it was once a mechanical administrative function, payroll is now a highly complex and vital business process. It engages with every employee and it enables information to be triaged, analyzed, and shared within the organization.

Today, payroll is not just about administering paychecks; it’s about understanding reporting requirements, the controls that are needed, and segregation of duty. All of these are competencies and skills that were previously not needed in a payroll position. It’s vital to recognize the value of your payroll talent.

 

What’s Next for U.S. Payroll Teams?

You need to start minimizing your risk. The only way you can do this is by ensuring controls are in place, that they are well-understood, and they are standard in all of your payroll processes, not just in the United States, but consistently across the globe.



AnneClifford

Anne Clifford is Senior Director, Global Payroll Operations at NGA Human Resources, based in Granada, Spain. She has been an advisor and management consultant with more than 25 years of global, operational, transformation, and implementation experience in outsourcing, shared services, and product marketing strategies gained while in senior leadership positions with market-leading companies. Clifford’s global experience includes working for U.S. companies, successfully doing business while expatriated and residing in Hong Kong, London, Panama, and the United States.