By Alan McEwen
“My dog ate it.”
“It went through the laundry.”
No, these aren't excuses about your child's homework not being done, these are reasons employees have given for asking you to replace their paycheques.
First, you should probably be asking yourself why these payments were issued as cheques at all. Every employment standards jurisdiction in Canada supports direct deposit as a method of paying employees, and some, such as Ontario, permit employers to pay by direct deposit without employee consent. Apart from being more efficient, employers experience less problems with direct deposits than with payroll cheques.
There is also another reason why employers should insist on paying by direct deposit — it can be an effective fraud prevention technique. Banks are required to properly validate identities when bank accounts are opened. As such, paying by direct deposit can assure employers of the identity of the employees being paid. To be effective, employers just have to follow these simple rules.
First, only allow direct deposits to bank accounts where the employee is named on that account. Second, keep a copy of a void, preprinted cheque for that account in the employee's payroll file. This doesn't have to be a paper copy. An electronic copy is fine. If the bank account is not a chequing account, a bank statement or form issued by the bank will do. What you want is something directly from the financial institution that associates the employee name with the direct deposit account.
You might be asking yourself, “What about employee self-service?” Why should employers ask for a copy of an employee cheque if employees can enter their own banking information through Internet based self-service? Without such copies, employers abandon a key tool available to help prevent payroll fraud. This is particularly important in large organizations where a centralized payroll function may have little direct contract with employees.
Of course, paying by direct deposit will not eliminate all situations in which employers might be required to replace an employee payment. Employees can change banks and forget to tell payroll. Without this knowledge, you attempt a direct deposit to a bank account that is now closed. We are all human, so it might happen that an employee direct deposit will be returned, because the person's banking information was wrongly entered in payroll. And, of course, the problem with the payment might be that it is wrong, that there was an error in processing the employee's pay.
When payroll has to replace employee payments, whether these are cheques or direct deposits, what are the best practices for this replacement? Let’s first keep in mind that such replacements should only be required in exceptional circumstances.
Too many employee pays that need replacing, for one reason or another, are symptoms of problems in the quality assurance of other aspects of how payroll is processed. How many replacements are too many? As in many other areas of payroll, there are very few firm statistics on the number of replacements employers actually make on a pay period basis, so it's hard to give a well grounded answer to this question.
Two criteria should drive any discussion of best practices in this area. First, there is an obvious need to balance the obligation to pay employees on a timely basis against the administrative burden involved in processing replacements. Second, there is the need for proper accounting controls, so such replacements don't increase the risk of payroll fraud.
In some cases employers might be bound by collective agreements that require manual cheques to be issued, on the spot, when employees report problems with their pay. This may be particularly true when pay is centralized and employees deal directly with local management over payroll problems. And employees may feel justified in demanding such immediate replacement when the employer is primarily the one responsible for the problem in the first place.
From the best practice perspective, there are a number of problems with this scenario.
First, local management shouldn't get involved between employees and a centralized payroll function. That's just inserting another person into the process who can't likely contribute very much to resolving the issue at hand. A best practice would be a payroll call centre, adequately staffed by persons with access to the information and processes necessary to resolve an employee's complaint.
Second, manual cheques, issued remotely to replace employee payments, should be strongly discouraged. For example, if the initial payment was by cheque, and the employee doesn't physically have the cheque with him, it will take some time to confirm with the bank the cheque has not already been presented before payment can be stopped. Further, locally issued manual cheques either mean more bank accounts to reconcile or, worse, if remote staff have signing authority on a centralized payroll bank account, a significant weakness in accounting controls.
For these reasons, a better practice would be to issue any such replacements from a centralized payroll function. This means the likely time to replace an employee pay will be the next business day, whether the replacement is by cheque or by direct deposit. Even in a country as large as Canada, there aren't many places that can't be reached by courier on a next day basis. Similarly, if a direct deposit is processed in the morning, it should be in the employee's bank account the next morning. If the employer has to pay a minimum charge for each direct deposit transmission, the costs between a replacement cheque or direct deposit may not be very different.
The final point to consider is the record keeping for replacing employee payments.
Remember, that such replacements should only be exceptional events. In this context, the appropriate place to document such replacements is in the general ledger. One journal entry should credit cash for the cancelled cheque or rejected direct deposit and another journal entry debit cash for the amount of any replacement.
The back-up to these entries should identify the initial payment, as well as any replacement and explain the reasons for the cancellation/replacement. For example, if the employee returned a payroll cheque for replacement, a copy of the now voided cheque should be part of the attached backup. The reason for posting cancellations/replacements separately to the GL is segregation of duties. This segregation can be on two levels. While payroll would normally be responsible for preparing such entries, and the supporting back-up, other accounting staff should either be required to approve them before posting or to have access to them while reconciling the payroll bank account.
Alan McEwen is a payroll consultant and freelance writer with 20 years' experience in all aspects of the industry. He can be reached at firstname.lastname@example.org, (905) 401-4052 or visit www.alanrmcewen.com for more information.