Payroll blunders understandable but costly

System improvements, interdepartmental communication and training reduce errors

With 185 pieces of related legislation, tax laws continually in flux and compensation packages more complicated than ever, it’s not surprising Canadian payroll professionals might make a few mistakes. Add in the fact that payroll responsibilities are not always appreciated — and supported accordingly through improved communication or training — and it’s amazing payroll does its job so well.

“Payroll is not recognized as a profession, the area is underappreciated,” says Annie Chong, manager of the payroll consulting group at Thomson Carswell, a Toronto-based supplier of business and HR solutions. “Most payroll errors are not done by payroll people. Payroll is one of the most impacted areas hit by legislation. And there are so many internal players who contribute.”

Late paperwork from other departments, lack of direction or understanding of the rules by HR, provincial differences and varying opinions from government bodies are all factors when it comes to payroll errors.

“The calculations behind that (paycheque) summary can get crazy and that’s where employers, especially small ones, should not underestimate how complex payroll can be,” says Angela Haier, vice-president of small business solutions at HR consulting firm ADP in Toronto.

A disconnect between departments can be a huge factor. With salary or wage increases, for example, the paperwork approval process often lags, leading to delays. Other departments “don’t understand input deadlines and the challenges that exist from a system perspective,” says Steven Van Alstine, VP of compliance programs and services at the Toronto-based Canadian Payroll Association. “A lot of times there is a breakdown in communication within the organization.”

Termination packages are often negotiated by HR but payroll may discover promises to an employee that are not compliant. As a result, more organizations are revamping termination processes so HR consults with payroll before finalizing the package, he says.

Human error most common cause

But payroll professionals are not blameless and human error is the most common cause of mistakes. Many errors are made because the payroll system was set up incorrectly at the start, with the wrong deductions or remittances, whether in-house or through a third-party provider, says Chong.

Also common are incorrect entries, transposed numbers or failure to access accurate information. In setting up a new hire, crucial information, such as birth date or social insurance number, can be entered incorrectly, leading to trouble down the road, such as the wrong start of a pension or incorrect Canada Pension Plan (CPP) deductions.

Not knowing the proper rules will obviously lead to errors. For example, some payroll professionals don’t realize, when transferring a bonus into a registered retirement savings plan, they should make the cheque payable to the institution, not the employee, otherwise it’s taxable, says Linda Scott, a payroll consultant with Thomson Carswell. But they should also remember only the tax is sheltered, and CPP and employment insurance deductions still come off.

When people are paid on a salary basis, the opportunity for error is that much less, says Van Alstine, though delayed paperwork for changes in salary, for example, require retroactive calculations. For hourly employees, most slip-ups revolve around the tracking and inputting of hours; but time-and-attendance systems that directly upload to the payroll system help reduce problems.

“Anytime there’s an opportunity for some kind of intervention, such as keying or cross-referencing, mistakes can be made,” says Van Alstine.

Overtime is another tricky area, as people are sometimes not compensated in the same pay period, so a reconciliation has to take place. In unionized workplaces, collective agreements can expire while employees keep working, so salaries must be calculated retroactively after negotiations are completed.

The legislation and definitions around taxable benefits continue to be a challenge, says Van Alstine. Errors are often identified in a company audit and don’t just impact an employee’s net pay but the organization, too, through fines or penalties. Errors such as overpayments are often difficult to recover, thanks to differences in provincial legislation and time lags (particularly with terminations).

Incorrect tax calculations are also common thanks to complex legislation and formulas.

“By the time you have overtime and commissions and taxable benefits and bonuses, it is so easy to make a mistake,” says Haier. “All you have to do is input it wrong or call it the wrong thing.”

Also problematic is incorrect income classification, such as the distinction between regular pay or commissions, which is becoming more complicated along with compensation packages.

“As the economy goes up and down, people get creative about who they hire or ‘what’ they hire,” says Haier. Long ago, employers hired full-time employees who worked for the same company for 30 years. Now many workers are on commission or temporary or consultants and it’s easy to get it wrong or have trouble understanding the differences between all of those.

Another big issue is missed deadlines since, for small businesses in particular, payroll often takes a back seat, she says. Delayed electronic transfers can mean employees are not paid on time and late remittances lead to penalties for employers.

Ways to prevent mistakes

To prevent errors, payroll should ensure internal controls, backup and approval processes are properly in place, and reviewed regularly, so there are no security gaps, says Chong. Payroll processing should also be reviewed to verify system controls prior to payroll submission, to reduce the potential for overpayment or underpayment.

In addition, when payroll runs the first payroll for employees, it should encourage them to look over their pay stubs to make sure they are correct, so faults such as a mismatched SIN can be remedied quickly, says Haier.

And hopefully the trials and tribulations of payroll will improve.

“As it becomes more streamlined and there are enhancements and things like time-and-attendance integrated with payroll, and the technology integrates with HR, there’s less potential for errors,” says Van Alstine.

“As individuals recognize the need to be trained and ensure they’re meeting compliance obligations, you’re going to see potential for errors be reduced.”

Support from employers, through training and education and greater appreciation of payroll’s role, can help the cause considerably, says Chong.

Sarah Dobson is editor of Canadian Payroll Reporter, a sister publication to Canadian HR Reporter. For more information, including a special introductory subscription offer, visit www.hrreporter.com/cpr

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