Assessing risk in your payroll strategy

Payroll is one of those parts of the business that you don’t really want to hear about. It should just happen. Payroll experts, though, know that making it ‘just happen’ takes a lot of work.

From initial set-up to ongoing monitoring, payroll is a such a fundamental part of the smooth running of any organization that assessing where the risks lie is the first step in preventing a breakdown. This is particularly true as our workforce gets more mobile – and global – making the payroll process more complex to manage efficiently. The first step in getting control over this complexity is to know the elements you need to monitor.

Assessing risk in your payroll strategy – a checklist

While every employer is different, risk in their payroll strategy can be collated into several buckets. Future trends, shifting legislation, people, processes, and systems are the big-ticket items you need to address.

One third of organizations do not have a formalized payroll strategy

EY Global Payroll Survey, 2021

Globally mobile workforce – the payroll tax implications

While not the riskiest part of the payroll process per se, the new norm of a globally mobile workforce has the potential to impact on all other areas. With people more likely to work in different jurisdictions throughout the year, it’s incumbent on the organization they work for to keep track of this movement and pay accordingly.

With the pandemic making work from home so accessible for people, a whole new world of opportunities have opened up. Immigrants may choose to go home for several months and see their families and friends, young people saving for a property may move to a place with cheaper rental prices, while high-earners may choose to swap one area for another throughout the year as a lifestyle choice.

Once they reach a threshold of time spent in the foreign country, all those elements that you need to consider for fully foreign-based employees come into play, including:

• Calculating and withholding employee income tax
• Paying and/or withholding employee and employer social contributions (like payroll tax in the U.S.)
• Calculating workplace pension contributions

Also added into the mix is the problem of overpaying tax authorities and either being unable to recover it or spend significant administration time doing so.

With this newly mobile workforce, tracking their movements becomes a compliance issue. Firstly, you need to set-up a system to identify and track internationally mobile employees. While self-reporting is a must, the organization itself must make this self-reporting accessible and known. This means set-up of forms, communicating its existence, and then getting people to comply regularly, which all sounds easier than it is in practice.

Once you’ve collected the data, what do you do with it? What’s the difference between an employee usually based in the UK spending six months in the U.S., Portugal or the Seychelles?

It’s down to the employers to get those initial payroll payments, and their tax implications, correct. If they don’t, they can be liable for governmental fines or committing the cardinal sin in payroll – not paying employees accurately and on-time.

Top solutions: Outsource payroll to a third-party to keep track of your mobile workforce and relevant legislation or track employee movements and hire-in expertise, or train internal staff.

Data protection, security, and accuracy

With more tracking comes more data, with more data comes more risk. Data laws differ (sometimes wildly) in different jurisdictions, so employers will need to manage these differences.

To take the U.S. versus the EU, the U.S. has generally weighted protection of data as a commercial asset, while the EU has put individual rights first through its GDPR legislation. While the two regions have similar requirements in lots of respects, in some cases what is normal in the U.S. will get you into hot waters in the EU.

When devising your payroll strategy, how you collect, store, and use data is a crucial element to consider and plan for.

Top solutions: Contract a payroll solution provider with the highest data security standards, including ISO27001, GDPR, and multilevel user access for transfers and approvals.

Currency fluctuations and FX fees

Payroll is particularly risky when it comes to FX rates because payroll payments have to be made. You can’t simply wait until the currency rate becomes more favorable or change to a different source, like you might be able to do with purchases of foreign goods and services.

Small fluctuations in the currency (on either end) can mean a higher cost to you in terms of meeting payroll obligations, or the employee having less spending power.

This is also not considering the FX rates you pay as the payroll payment crosses borders. With payroll generally being the biggest single cost for most businesses, small percentage cuts over time can add up to big costs.

Top Solutions: Lock-in/guarantee exchange rates, monitor exchange rates as a matter of the payroll process, use low-cost FX payment providers.

Payroll Fraud

A statistic that may surprise, and alarm, business leaders is that payroll fraud happens in 27% of all businesses. More than 11% of those frauds involve payroll loss of $48,000 on average, and on average the schemes went undetected for 36 months.

Payroll fraud happens in 27% of all businesses

Association of Certified Fraud Examiners

Overall, a study by the Association of Certified Fraud found payroll fraud cost an average of 5% of a company’s revenue.

One of the reasons payroll fraud goes undetected for so long is that it’s seen as a stable entity i.e. people do today what was done yesterday and don’t analyze what’s actually going on within the system. As such, even though it’s not a pleasant thing to acknowledge, payroll fraud is a genuine risk to every company and needs to be continually monitored.

Top solutions: Regular audits by management, leverage payment systems that flag unusual behavior, create a culture of anti-fraudulent behavior.

Inefficiency in the payroll process and systems

A risk to the bottom-line of the business, as well as reputational risk with employees, is inefficient payroll payment systems. Beyond usual Excel sheets, unnecessary manual processes, and just plain human error, inefficiency can come in the form of additional costs because of the payment rails being used for payroll.

The IRS estimates that 40% of small to medium-size businesses end up paying a payroll penalty each year.

If you are using an expensive provider or the traditional correspondent banking system, you may well be subject to high bank charges and FX rates compared to modern payment solutions. With payroll such a large percentage of the business, these unnecessary surplus payments are hard cash going out the door each and every month – for years.

These processes can also lead to shortfalls in payments, or delays in receiving payments, leading to unnecessary follow-up from your finance department. By leveraging the global payments infrastructure built by FinTech’s over the last decade and more, either through API integrations or white-label solutions, you’ll be able to pay in more currencies, for less, and in a fully regulated and secure environment.

Top solutions: Partner with a third-party payroll specialist using modern payment rails.

Prevention is better than cure when it comes to payroll risk

The biggest crisis generally come when the thing you think is working perfectly suddenly breaks down. In a business setting, payroll is one of those big risk elements.

Devising a coherent strategy in terms of regular audits on the current system, and looking for improvements, will make a real difference to a business – both in preventing damaging events, but also increasing revenue through the cutting of costs.

Knowing where to look for risk is the first step in devising that payroll strategy. After that, how to ‘make payroll happen’ will become much clearer.

To learn how TransferMate can support your payroll strategy, contact the team here.