Compliance: The questions payroll professionals are afraid to ask.

1. Do I properly understand the NZ Holidays act?

If you’ve ever doubted your understanding of the Holidays Act, don’t be hard on yourself. Since it came into force in 2003, it’s caused trouble and confusion for even the most sophisticated of organisations. Not only that, the act has been heavily criticised by accountants and professionals services organisations alike. Back in 2013, thousands of teachers sought compensation after being underpaid, overpaid or not even paid at all. This was due to software that didn’t properly calculate owed holiday pay under the new act. The act is complicated to interpret and the MBIE’s Holiday Pay working group only recently came to a conclusion with recommendations on how to best interpret the act. It’s critical that payroll specialists understand how to apply it. More importantly, you can’t take for granted that your payroll system is set up to interpret the act correctly. There’s more chance of holiday pay being miscalculated where your payroll system is non-specific to New Zealand, when you have a system that hasn’t been updated in a long time or where you find yourself regularly resorting to spreadsheets in order to calculate holiday pay. If you’re concerned about the Holidays Act, this is something that management should not ignore.

2. Do I understand the implications of the other laws and acts regarding payroll?

Wouldn’t it be simple if it was only the Holidays Act that you needed to consider? There’s a bunch of other laws relating to pay, tax and benefits. If you don’t feel confident about the various laws and legislation, ask your employer about doing a course (or a refresher course if you’ve done one already). A good starting point is the range of courses and e-learning available from the NZPPA.

3. Is the data being fed into the payroll system accurate in the first place?

Your payroll system is only as good as the data being fed into it. That means you need robust procedures for tracking time and attendance, holiday requests, sickness and absences as well as data on where bonuses and other payments need to be made for sales commissions, piecework or other benefits. You’re right to question the accuracy of the data that is being provided to the payroll team. Think about how regular checks and audits can help validate the integrity of this data.

4. I’m feeding this data into the payroll system; can I just assume that the calculations are correct and blame the system if something goes wrong further down the line?

It’s easy just to feed data into the payroll system and then hope for the best. Even despite your efforts to put the right data in, if your payroll system isn’t up to date and configured to meet the latest legislation, there’s a good chance that pay, tax and leave entitlement is not being calculated correctly. The greatest chance of success is where your payroll software is updated regularly, is cloud based payroll software and is specific to the country you’re operating in. On-premise payroll software might not have been updated for some time. If you have concerns about your payroll software, then it’s worth raising this with the other people in your team. Then collectively, you can share your concerns with management. It’s important they understand the level of risk and the unintended consequences of not being compliant.

5. Instructions from HR and Management are conflicting with what we do in Payroll — what should I do?

According to the NZPPA, conflicts between HR and Payroll is one of the most common reasons that people turn to their PayTech advice line. These kinds of issues often arise where the HR department or management team make a decision - and this then arrives with the payroll team to be actioned. However — without consulting payroll professionals, these decisions can often cause complicated compliance related issues.

For example:

• You’re asked to hold an employee’s entire pay since the worker owes money to the company
• You are asked to deduct overpayments from employees without informing them in writing and without their consent (this is a breach of the Wages Protection Act)
• Being asked by management to help find a way to tax an employee more favourably
• Employees are supported in tax avoidance — for example the avoidance of paying tax on benefits and for allowances and accommodation (this is a breach of the Income Tax act)

HR departments and management can often make agreements or put schemes in place that add risk or could lead to serious compliance issues further down the line. If you are concerned about these kinds of issues, it would be wise to seek confidential advice, perhaps from an organisation like the NZPPA.

6. Is the payroll department actually supposed to be involved in making decisions that affect payroll and compliance?

One of the most significant challenges facing Payroll professionals is the lack of engagement and consultation when it comes to making key decisions that will affect payroll and compliance. Unfortunately, decisions are made with little thought of their longer term consequences. As you may have experienced, often the first time the payroll department knows about a ‘change’ is when an employee is due to be paid under the new arrangement for the first time. No briefing, no warning, nothing!

Common decisions that are pushed onto the payroll department include:

• The choice of provider of payroll software. For example, the HR department may have pushed for a new platform or set of tools. This then impacted the choice of payroll software and management neglected to consider the impact this would have on the payroll workflow (and whether this new platform actually supports the way payroll needs to flow in the organisation). Even worse, the HR department may have adopted a platform that has little or no local support — without local laws and compliance in mind.
• The resulting non-compliance from new tools mean that the payroll department need to resort to time-intensive and error prone workarounds to get the data to where it needs to be
• The ‘filling in’ work that the payroll team needs to do adds time and cost - brings risk and inefficiencies into the business
• Management offer new and improved benefits for employees (which is commendable and fantastic of course) — but changes are announced without due diligence on the impact this will actually have on people’s final pay. These ‘added benefits’ may not actually leave employees better off overall.

It doesn’t help that payroll can sometimes be perceived as a back-office process — and for that reason it doesn’t necessarily command the same level of management attention and mind-space. That doesn’t mean that management don’t appreciate what the payroll team does. It’s often that management are more preoccupied with the very real commercial realities that the organisation faces. Therefore, payroll teams should push for more representation and involvement when it comes to decision making. By staying silent or invisible you aren’t doing yourself any favours. By making yourself known and heard, it will be more commonplace for management to give payroll a voice.

7. Are our employment agreements in-line with legislation? — and can our payroll software actually deliver on what they promise?

That’s a million dollar question — do the employment agreements used across your business actually meet the legislative requirements? — and of course, your payroll software needs to be able to turn those promises into an accurate and legal pay packet.

Employment contracts and agreements formalise and set out so many critical things. Unfortunately, these agreements are sometimes poorly worded — and management may have added their own wording or clauses without turning to a lawyer or solicitor.

Common examples include:

• Agreements don’t actually match up with what happens in payroll; how employees need to be paid, how they will be taxed, how deductions need to be made and how these will be applied
• Clauses about deductions that are poorly worded — leaving them at odds with the Wages Protection Act
• Grey areas that are open to misinterpretation. Especially around gross vs net payments when it comes to bonuses, commission payments and incentives
• Lack of clarity around which payments relate to the interpretation of the Holidays Act
• Additional leave being linked back to the Holidays Act — leading to miscalculations
• Clauses that contravene several acts — e.g. where people are told that they’ll lose their holiday entitlement if they don’t take it, suggesting that certain payments don’t count towards gross earnings and even around cashing up more leave than is allowed
• Inconsistencies in agreements from one employee to the next
• Clauses that lead to employees ‘double dipping’ — where staff can be overpaid whilst on leave. This is due to them being paid their average rate of pay and an additional allowance being wrongly paid on top.

You are absolutely right to question these issues — and rather than just brushing them under the carpet, it’s a legitimate issue to raise with key people in the business. Organisations who choose to ignore these kinds of inconsistencies or risks can look forward to investigations, possible fines and the need to potentially pay $millions in back-pay.

8. Is it acceptable that my payroll team is heavily distracted with new HR responsibilities?

More and more payroll specialists report that they’ve been given various HR-themed responsibilities on top of their payroll remit. This can be an unwanted distraction and can lead to a loss of focus on what should be one of the most important business processes — that of managing what is potentially the highest cost source — people. The need to support the HR team may work for some, but fundamentally, any additional commitments shouldn’t steal your focus away from getting payroll spot-on.

Management’s insistence that payroll teams stretch themselves beyond their core focus might be a short sighted one. Whilst in the short term some time and money might be saved (killing two birds with one stone) — over the long term, payroll mistakes could come back to bite the business hard later on!

So if you’re spinning plates between your payroll position and added HR responsibility — remind the powers that be of your core competencies and the need to laser focus them on making payroll run like clockwork.

9. Does there need to be a separation of duties in payroll — when it comes to compliance and audit?

Great question! According to Baker Tilly (New Zealand), payroll fraud has flourished in recent years. A good example was seen at the Te Papa Museum in Wellington. An employee managed to defraud the institution of more than $120,000 by falsifying the data for over 100 casual staff, over a period of 16 months. This type of fraud can happen in organisations of any size. Entrusting one person with total control over any one part of the payroll process presents a massive risk. Therefore, separation of duties is best practice and is the first step in preventing payroll fraud. It’s essential that different people are responsible for authorisation, distribution of pay and for pay reconciliation. Have senior managers from different departments be involved in checking and signing-off pay. Furthermore — where possible, rotate people around different parts of the payroll department to minimise the opportunity for fraud to take place. When it comes to compliance and audit — you need to be able to show that you’ve taken steps to remain compliant. The separation of duties in the payroll department is a fundamental part of this.

We hope this payroll piece has brought to the fore some of the compliance issues you have on your mind but haven’t had the confidence to raise in the workplace. When it comes to the practical application of the payroll and employment laws, there’s no such thing as a silly question. It’s only when people remain silent that problems get bigger and bigger, until they’re out of control — as seen with the giant payroll disasters surrounding the Holidays Act. Be confident and don’t be afraid to speak up and put your payroll department on the map, earning a place at the table (or even setting your own place at the table).