Payroll errors cost your business time, money, and employee trust. We look at how to use automation and analysis to avoid them without the addition of expensive new software programs regardless of which payroll processing company you currently use.
Why It’s Important to Avoid Payroll Mistakes
Everybody knows that payroll errors are a thing to be avoided, but we think it’s important to recognize how payroll errors can have a disproportionate impact on employee’s.
An underpayment at the wrong time could cause an employee to be unable to make their rent payment, or put them out of compliance with a court ordered garnishment, requiring them to go through a lot of hoops to get back into compliance.
On the other hand, overpayments to employees can be difficult to explain. Some employees will also not understand that they were overpaid or the cause of it. When the company acts to pull back the overpayment it becomes a reason of distrust or puts employees into an uncomfortable place if they’re depending on consistent cash flow each pay period.
Another unfortunate side effect of payroll errors is the opening up of your company to potential legal liability. States have increasingly stringent regulatory requirements and equally punitive policies around incorrect payment of employees.
In addition to distrust, and potential legal trouble, dealing with correcting payroll errors can take a lot of time and focus away from your team. Rather than having time to accurately process upcoming payrolls they can be stuck trying to fix prior errors.
The Importance of Testing Data Before Processing Payroll
The only time to prevent payroll errors is prior to the processing of a payroll batch and paying employees. While obvious, very few companies actually put much effort into testing the data that is being loaded into a payroll batch for processing.
Some employers will manually review pre-processed payroll registers for any mistakes that stick out but trying to rely on payroll clerks to identify a payroll error before it happens is a lot to ask of a payroll group.
Don’t Rely on Your Payroll Team for Manual Error Detection
A traditional approach to identifying payroll errors is relying on a team of payroll processing experts to manually review payroll registers to identify issues before payroll batches are submitted.
There are two problems with this approach. It does not scale efficiently when you have a large number of employees. Second, it is incredibly difficult to find skilled payroll professionals in today’s job market. Even if you do find a skilled payroll professional, it can take several months for them to learn the nuances of your organization and the different states that you operate in.
What is Automated Payroll Error Detection?
An alternative to manual payroll review is the use of technology to identify errors. At a high level, this typically consists of running payroll reports out of your payroll software and comparing it to prior period data or indexes of standard setups.
Automation can come in the form of specialized data analytics software that can prep and blend reports together, and at times even directly connect to your live payroll data depending on the payroll systems that your company currently uses.
A less automated way to detect the most common payroll errors involves running reports out of your payroll system and combining them into Microsoft Excel templates.
How do You Check for Common Payroll Errors?
Let’s first define some of the most common payroll errors and look at some ways that they can be detected. There are errors which can occur for hourly, salaried and commissioned employees.
Incorrect New Employee Setups
Whenever a new employee is onboarded, there is typically a packet of information that they have to fill out for compliance purposes. There also has to be several determinations made, such as full time, part time, benefits eligibility or elections, start date, salary vs. hourly etc.
Making a mistake on inputting these key pieces of information can cause a payroll mistake when the payroll batch is processed.
One way to avoid these are to create a template or standard setup that you would expect for each type of employee in a department or job role. This could be as simple as saying that all employees that work in a factory or hourly, full-time, non-exempt.
The next step would be running a report out of your payroll software prior to processing each employee payroll to show the employee setups in the system and compare the two. Any deviations from expected standards and the system would be researched further.
By comparing the two lists ahead of time, it ensures a smooth payroll process. Many automated payroll software solutions will take information entered in from an employee and automatically assign different pay codes and elections but even these systems require a level of setup on the backend that can have errors if a setup requirement changes.
Incorrect Timekeeping and Unapproved Timecards
A best practice is for employees and their supervisors to review timecards daily or weekly to ensure that no punches are missed. This unfortunately rarely happens at many companies.
Payroll teams can help improve this process by either setting up automated reports that check payroll timecard data and e-mail a supervisor when an employee appears to have missed a punch. These are easy to spot when you have a clock-in but no clock-out. Or other scenarios where an employee works a full 8 hours without a lunch break.
There are instances where these things really do occur within a workplace but it’s best to identify and correct them as soon as possible. It can be very difficult to figure out if someone took their breaks when it was almost two weeks ago.
Initiating a Timecard Approval process every week is a great way to ensure that employees and supervisors reviewed their employee hours timecard prior to payroll processing. Unfortunately, the challenge is more cultural than technical as many employees will still not approve their timecards. Withholding payment in these cases can cause an employee to be put in great legal risk if they do not pay an employee for hours worked regardless of the approval status.
Using Flux Analysis to Prevent Payroll Mistakes
Flux Analysis is a type of analysis where you look at data across a period of time. For example, you could have a table of data, where each employee has their own row. Then the columns are a pay period. Each net check amount should be roughly the same.
If you see a large spike in employee pay from one pay period to the next, or a significantly lower amount of pay in a pay period it may be worth researching. These types of analysis can take some time setup, as you do not want to research everyone when there are different number of days in a pay period due to a longer time between payroll dates, or if someone takes PTO.
However, after adjusting the calculations for the specifics of your business, you can quickly identify changes from period to period.
Use Power BI or other Business Intelligence Tools to Mitigate Overtime Wages.
While not necessarily an error, many companies struggle with limiting the amount of overtime or meal premiums that some employees earn. Many supervisors and managers will state that they were unaware that an employee was receiving so much overtime.
By utilizing a software solution such as Power BI, a dashboard or automated e-mail can usually be setup that directly connects to your payroll software and publish either publishes or makes available real time data on overtime wages for a manager’s employees.
The enablement of real-time or near real-time reporting can mitigate the amount of overtime that people receive.
Identifying Terminated Employees
Another common payroll mistake is not terminating an employee after they have left the company. This process can break down in several areas. Either a payroll team does not receive the required notification that an employee has left the company or the information is received but not processed.
By setting up a routine check each payroll period, you can look for employees who are active in the payroll software but have not received wages in the last 30 days. You could also check for a fixed number of payroll periods. Typically employees who have terminated will not have any hours on their timeclock sheets and will not have any payment on payroll records or previous pay period registers.
Calculating Overtime, Commission and Regular Rates of Pay
Payroll calculations can be a big bottleneck every payroll cycle. It depends on how often your company pays commission or variable compensation but not receiving the needed information on time can mean working long hours and missed deadlines.
Whenever possible, we recommend automating the calculation of commissions and variable compensation rates.
Regular Rates of Pay and Variable Overtime Rates can sometimes be setup in payroll software. Other times the software either doesn’t support it, or in the case of commission calculations the calculations are too complex and are based on data that the payroll team does not have access to.
When this happen, companies could explore utilizing more specialized analytics software to calculate commission and prepare an upload sheet that could be imported into the payroll software.
Avoid Manual Data Entry to Avoid Common Payroll Mistakes
Manual data entry is one of the top causes of payroll errors. It is best practice to avoid it whenever possible. Most modern, payroll management systems will allow people to upload a csv of an Excel file with detail that cannot be calculated from the initial setup of the payroll processing software and the time keeping software.
You do have to ensure that the calculations are accurate prior to loading them, as a miscalculation goes from being a payroll error for one person to a payroll error for an entire department.
Pay Rate Change Approvals
Some payroll systems will allow users to automatically route rate changes for approval. They either get submitted by a supervisor and routed to a manager for them to approve prior to the start of the next payroll batch.
If your system does not offer this feature, or you are using a paper based approval system, there are many inexpensive web form solutions that allow you to build in dynamic workflows that digitize the process.
Once you are using a digital approval process, you can either directly connect the data collected to your payroll system, upload it, or manually enter it.
Regardless of how it is entered, you can use this data source to cross-check the employee setups prior to starting a new payroll batch to ensure that requested updates have been approved and have actually been processed.
Tracking and Analyzing Past Payroll Errors
Our final tip for companies attempting to avoid payroll mistakes is to make sure that issues are being tracked and logged on a regular basis. When payroll errors occur the number one priority is to make a payroll correction and make things right with the affected employees.
After you correct payroll errors, they should be logged and categorized. This list becomes the foundation for continued process improvement. It lets you know which part of your payroll process causes the majority of your problems and informs which other payroll processes and tasks should receive the most attention.
Investing in automation and automated error detection can help prevent overpayments, and underpayments which both save your organization money. Equally important is the amount of time that they can save your payroll department and improve the employee experience.
Payroll staff are often hard to find and may have to work long hours to avoid missed deadlines. By front loading your payroll process with automated and semi-automated checks, you can ensure that the payroll data moving through the process is clean and accurate which will ultimately reduce errors and allow your team to focus on other payroll tasks instead of trying to fix problems retroactively.