The ugly, persistent payroll issues few talk about

Profile picture for user brianssommer By Brian Sommer September 16, 2021 Audio mode
Summary:
Whoever uttered that old phrase “The more things change; the more things stay the same”, must have been thinking of payroll software. Some thorny payroll technology problems are like bad houseguests: they won’t ever go away! Before you change your payroll or HR technology, read this!

shock

While lots of HR vendors have ‘fast’ implementation methodologies, there’s still one area that takes a lot of work and often gets shortchanged in the implementation: payroll’s interface/integration with the financial applications (mostly G/L but also cost accounting). Payroll’s integration with financial apps is only one sore spot and all of these product failings are still major work generators for HR, Finance and Operations personnel.

One client of mine has operations in 18 countries and has 22 different payroll solutions in place. Their payroll integration was so poor that it consumed about a third of the finance/accounting team’s time every month. Why? Some of the payroll reports were too high level (ie: lacked needed detail). Few/no integration files were similar from one payroll provider to another. And many integration files contained a lot of errors.

Payroll solutions providers, in my observations, love to point to user configuration issues, user input errors and other user-generated problems as the root cause for all of this. And yet, in the 60+ years since the first payroll solution was created, the status quo hasn’t changed much.  (Note: Payroll giant ADP was founded in 1949 and got its first IBM Tab machine in 1957.)

This is a major problem and too few software vendors address it.

The Payroll to G/L interface

Ideally:

After each payroll run, employers should get a file or report that identifies the gross pay amounts for each employee, the taxes withheld, the employer’s taxes due, the amounts withheld for certain benefits, retirement withholding amounts, etc.  Each amount should map to specific general ledger accounts and, if possible, trigger the generation of one of more journal entries.

Ideally, the payroll system is tightly integrated with the financial system’s general ledger, chart of accounts and accounting calendar. Not only would it create the journal entries mentioned above, but it would also create accrual and reversal journal entries where appropriate. And, the ultimate convenience would be the payroll system also generating a number of statistical or memo entries (eg: FTE counts by department, hours worked by department, overtime worked by department, etc.).

The problems:

The litany of issues here is extensive. Here is a brief summary of the usual challenges with this integration:

  • Many of the solution providers don’t really provide an ‘integration’ to a company’s financial system. Instead, they offer a payroll output file that users must manipulate, reformat, and/or expand to act as an input file to the general ledger. This can be a lot of work as one line item in the report could generate numerous journal entries (and vice versa).
  • Often, the manipulated input file will not process correctly on the first try. After additional rounds of testing, the file might work. Unfortunately, the manual nature of these changes (and the poor documentation of same) mean that users will likely revisit these same issues as future payrolls are processed, too.
  • Few payroll providers, software vendors, etc. have personnel who know, really know, what journal entries are required and how they should be formatted. Do they have any CPAs with corporate accounting experience on their implementation services teams? Poorly developed integrations often occur at the onset of the implementation and many Payroll groups suffer with these broken capabilities for years. I’ve had to call payroll software providers on more than one occasion to come back to my client and fix the mess they left some time earlier.
  • Integrations often produce hinky results when Payroll and other personnel submit inaccurate or incomplete time records. These records will require corrections or re-running of Payroll. When clients don’t fix the problem in the source system and instead alter time records in the payroll application, then a mountain of reconciliation errors (and other issues) will arise. This, of course, can bork the Payroll to Financials interface.
  • I have never encountered a client where the pay cycles (eg: daily, weekly, twice monthly) align with the accounting calendar/closes (e.g., 4-4-5, daily, monthly). This means that some portion of pay costs must be allocated to the current accounting period and some to a different accounting period. I rarely see great, working accrual functionality within these payroll-to-financials integrations.   
  • Back dated payroll transactions are quite problematic. They can trigger the generation of multiple journal entries that cross multiple accounting periods.
  • The allocation of some payroll amounts (eg: earned but unused PTO) may cross accounting periods. The accounting rules for these allocations can be client-specific. The fabled ‘retroactive pay increase’ is one such culprit of this activity but it could also be due to employees not submitting time reports, expense reports, pay increases and other transactions in a timely manner.
  • Operations leaders may create special kinds of pay (one-time commission opportunity) that were not considered when the payroll to ledger integration was initially created.
  • A prior payroll accrual may need to be backed out once a new accounting period is in effect. Not all payroll-to-ledger integrations handle accruals and reversals.
  • Beyond the immediate payroll expense entries that must be created, some firms will need specific payroll costs for their cost accounting module. These amounts may require additional logic if the firm wants to ascribe actual overtime, shift differential and other cost attributes to a specific job/product/batch/plant instead of using average costs. These costing decisions vary from company to company and make a standardized solution a bit of a challenge to implement.
  • Even if a viable interface/integration is created, Payroll/HR may not have competent staff to maintain the integration when:
      • Tax laws change
      • The company acquires a new business unit
      • The company divests a piece of its business
      • The company launches a new business model
      • Someone in Accounting changes/adds/deletes accounts from the chart of accounts
      • The company opens an office in a new country
  • The customer has many different payroll providers or their current provider has different payroll systems in different locations. Diversity is not a good thing when it comes to simplifying the accounting workload from all of these different payroll systems. The customer may need to integrate with one or more local, in-country payroll providers and each may generate a payroll integration record that comes in different formats(eg: CSV file, a flat file, a paper report, etc.) and in different levels of detail.

The companion problem - tax filings

Ideally:

When a company runs its payroll, it would like the software to also calculate the values it needs to place on relevant tax forms and map each to them where appropriate. Tax forms are quite different from journal entries or general ledgers. Some fields require calculations. Some require table lookups (eg: to determine a tax rate). And some require an intense understanding of specific government programs.

The problems:

Corporate tax software is a completely different animal from ERP-based financial accounting products.  For example:

  • The rules behind what goes where on a tax form can change annually.
  • The number of different taxing authorities that must be placated are stultifying. Different states, municipalities, national governments, regulatory groups (eg: EEOC), etc. all have their own forms and requirements. Sadly, none of them are consistent or static.
  • Tax competency may not be a payroll software vendor’s key competency.
  • Some payroll service bureaus and software vendors do not provide any tax filing functionality, or, if they do it may be limited to a single national level only.

The mythical global payroll unicorn

Ideally:

Every multi-national client of mine wants to deal with one payroll software (or service outsourcer). They dream of a one throat to choke scenario regarding payroll processing and tax filings.  But this is like the proverbial Texas euphemism: “Wantin’ and Gittin’ are two different things!”

The problems:

This dream is not new but it’s also proven to be very challenging to software vendors. Depending on how you count it, there are approximately 200+ countries or territories in this world, each with its own quirks regarding how payroll and payroll taxes are handled.  The incredible variety in how people get paid globally has made it impossible for payroll software vendors to create a single payroll engine. A couple of major payroll software vendors have been able to create a payroll engine that can handle 4-12 countries but this is nowhere near what users want.

The closest the market has come to this ideal is to create an interface where employee hours, gross pay, and/or specific pay additions/deductions are entered into a standard pre-processing file format regardless of what country a person works in. Past this interface, there may be a myriad of different third-party payroll providers that will compute the gross-to-net pay calculation and identify amounts to be withheld for specific tax entities. Some firms then take all of the output files from these different payroll services/programs and map the values into a standard format spreadsheet or other file for uploading into the general ledger. This is rarely straightforward as amounts must be placed into journal entries that balance and will pass general ledger validation.

Customers aren’t thrilled with this approach but it is a start. If the customer has a specific issue, they often have to deal with the third-party payroll processor behind the interface layer. Some clients have noticed that certain third-party solutions are only cost-effective when the number of employees in a given geography are quite small. And, sometimes, some country-specific solutions are only cost-effective when large numbers of employees’ records are being processed. These economic perversions make it hard for a company to standardize on a single solution provider.

Other irritating and lingering problems

Several of these issues continue to crop up at many clients. These include:

  • Bank fees are often significant and HR leaders want solutions where they can either get employees to accept alternate payment methods and/or help the company bypass their main business bank. The issue here is that banks often charge outsized fees to process paychecks. Different vendors have some options for this but functionality to encourage adoption of same is sometimes lacking.
  • When businesses expand globally, calculating an employee’s pay may not be the biggest challenge. That challenge could be the creation of a local, in-country banking relationship. For some locales that might require government approval and that can take time. Some newer solutions can assist with this.
  • The pandemic put financial pressure on some families triggering many to want/need daily pay. Several major HRMS/Payroll vendors now offer pay-anytime functionality but it’s not omni-present yet.
  • 1099 Processing for Payroll enabled expense reimbursements is not an HR/Payroll core competency. Some firms will run some or all employee expense reimbursements through their payroll software. The correct processing of these requires that payroll employees understand the difference between non-taxable additions to pay (e.g., usual and customary travel expenses) vs. taxable additions to pay (e.g., some employee relocation costs). Moreover, some items that are non-taxable at the federal level may not be at the local or state level. It gets worse as the mapping to general ledger accounts may need to be sensitive to transaction specifics (e.g., is the meal expense 100% taxable, 50% taxable or non-taxable?).   

New point solutions appearing

Innovation is occurring on the payroll front just in some interesting places. One company, Celergo, was acquired by ADP not long ago. Here are some of the vendors trying to fix some of these thorny issues:

  • Papaya Global – Papaya Global can help firms hire and pay people in 140+ countries globally. They also assist in paying contractors and ensuring local regulatory compliance. I first spotted them several years ago when their initial core competency was helping firms quickly expand globally. They’ve added capabilities and grown substantially since then. They recently raised a $250 million venture round. Workday Ventures is an investor.
  • Payslip – I only recently spoke with Payslip. Payslip works with multi-nationals and many of their existing payroll/HRMS providers. Payslip has a lot of knowledge with many financial software products and in creating viable integrations, too. This statement by Payslip summarizes them well:

“Payslip software integrates smoothly and sits between the HCM and local payroll vendor systems. It then automates work flows and standardizes data feeds. This allows international employers to manage their payroll processes, people, data and reporting from one central platform.”

  • Blue Marble – Blue Marble has a solution set that some of my global clients have considered over the last couple of years. They can handle payroll in around 150 countries. They also possess HR, Time & Attendance, and, check this out: a Treasury Management solution.
  • CloudPay – CloudPay is a big player in the global payroll space. Besides global payroll, they also have a treasury management tool, a daily pay capability, pay benchmarks and more. In mid-2019 I wrote:

CloudPay is often used by multi-nationals to help with payroll and regulatory filings in scores of countries worldwide. CloudPay indicated that its ideal customer is often a mid-sized or smaller business with cross-country operations. However, since the company can support payroll processing in 130 or so countries, it also is a favorite alliance partner of major HCM software providers as well as HRMS/HCM Business Process Outsourcers. Dallas-based OneSource Virtual has a relationship with CloudPay.

  • Neeyamo – I started looking at Neeyamo mid-2020. They offer a fairly compete HR/Payroll solution. They have recently branded their solution as Tailohr™ and they describe it as:

It is a one-stop plug-and-play packaged solution that envisions to orchestrate critical hire-to-retire HR processes enabling HR to manage their dispersed workforce. Upon implementation, Tailohr™ acts as an extension to other HRIS solutions deployed in primary geographies. The solution is pre-configured to address local requirements at a field level across all countries of operations coupled with multilingual support. Tailohr™ is custom-fit to comply with in-country regulations across all global HR and payroll processes. With its high focus on the long-tail, the solution provides a fixed pay as you use model that competes with the often exorbitant pricing models provided by other global providers.

My take

In briefings I have with payroll application software vendors or payroll process outsourcers, I frequently quiz them on their payroll to general ledger functionality. Most every time, I’m left wanting.

Here’s what you should do:

  • You can’t ‘digitally transform’ payroll if you don’t deal with these problems. They cause huge waste, inefficiency and frustration. Getting a faster time entry function on a poorly integrated solution is like putting icing on spoiled food. It’s not dealing with the big issues afoot.
  • If you do replace your payroll technology, make sure the implementation team is accounting savvy and that there is time in the implementation to sort out the financial interfaces. A rapid implementation that leaves you with no (or broken) financials integration is not responsive.
  • If your firm is a multi-national, you really should investigate some of the newer gap solutions. At this year’s HR Technology Conference, I’m sure more firms will emerge there. You must see the entire art of the possible and not just shop for an old school North American HR/Payroll solution.
  • It’s great that niche solutions are now available BUT the fact that many of these innovations are coming from net-new firms and not traditional HRMS/Payroll providers is disheartening. You need to put old school solution providers on-notice that the status quo is unacceptable. If they don’t innovate here, you’ll seek true love elsewhere.
  • Building on the prior point, run two software selections. One should look at large HR/Payroll suites and the other should focus on the enabling Payroll technologies that will dramatically improve the relationship Payroll has with Accounting/Finance.

Colleague Jon Reed penned a piece on planning/corporate performance management vendor Planful this week. One of the points he wrote about was how CFOs want to close the company’s books remotely because of new WFH (work from home) and Great Resignation wave requirements. But how can they do these closes remotely when the Payroll-to-General Ledger integration is still a big mess?  They can’t in many companies until Payroll gets better tools.

Let’s get this done!