Payroll has come a long way since the early days of payslips, cheques and the good old postal service. With the modern internet, it is now possible for companies to pay employees no matter where they are located. However, the human element often makes this process less than perfect.
In this article, we outline some of the most common mistakes in payroll and offer some advice on how to prevent them.
Misclassifying employees
Sometimes the simplest mistake comes down to naming. Not everyone who works for an organisation can be called an ‘employee’ in the payroll system. The Employment Relations Act 2000 states that ’employee’ means anyone who is employed by an employer to do work for hire or reward under a contract of service.
This covers full or part-time, permanent, casual or fixed-term staff. It’s important to get this classification right because other forms of employment such as independent contractor and working holiday maker can fall under very different categories.
Misclassifying a contractor as an employee, or the other way around, could lead to overpayment or underpayment. The consequences of misclassifying a worker can be significant in terms of unpaid wages, holiday pay and tax.
Make sure you understand exactly how a new hire fits into your organisation. Employment New Zealand has great resources available to help determine if a worker is an employee or an independent contractor.
Miscalculating pay
Keeping track of time worked sounds straightforward at first. Simply enter in the time an employee starts work, the time they stop work, then pay them accordingly. But with situations like overtime, holidays and different pay rates, it’s easy to let little miscalculations compound into a snowball of payroll problems. These mistakes can affect taxes, accruals, superannuation and much more.
Even when errors are caught, it can be time-consuming to fix them. And the last thing any payroll professional wants to do is wrestle with an employee to retrieve money that may have been incorrectly paid.
To avoid stress all round, each payroll error should be fixed as soon as possible by a payroll expert. If the problem stemmed from a human fault, then a good solution may be to let the machines do it.
A robust payroll system with a comprehensive employee database will automatically — and correctly — calculate salaries every pay period.
Confidentiality and privacy
It’s great that everything is digital these days. Things move much faster when technology does the heavy lifting. But with digitisation also comes increased expectations around data privacy, which can be a ticking time bomb for payroll if the implications are not fully understood.
It is perfectly legal for employers to collect personal information about their staff for payroll and other company purposes. But that freedom comes with a responsibility to secure this sensitive data, from both internal and external breaches.
The New Zealand Privacy Act 2020 was a long-overdue update to the previous 1993 Act. Back then, mobile phones were just a gimmick used by Wall Street executives.
Nowadays, with so much personal data moving around, the updated Act makes it mandatory for businesses to report any data breach that may cause serious harm.
The Act also includes a provision that if an organisation refuses to make personal data available on request, the Privacy Commissioner can demand that the information be released. The Commissioner can also issue compliance notices to require an organisation to do something (or stop doing something) in order to comply with the Act.
In Australia, updates following a broad review of the Privacy Act 1988 are expected to introduce more transparency and accountability. In particular, Australian companies will have to be confident that their outsource partners — in terms of processes, technology and cybersecurity measures — can fulfil their contractual provisions relating to the handling of personal information.
The financial and reputational risks of privacy breaches mean it is of paramount concern for companies to keep a tight hold on personal data. Sensitive information should be stored safely to protect against breaches, either by using an internal security system or with assistance from a trusted third party.
Every company should also have clear privacy policies for collecting and storing payroll records, along with strict controls over who can access the data.
Not reporting all forms of taxable employee compensation
A small gift to a top-performing employee may not seem like a form of remuneration, but that’s exactly how the IRD sees it. Not reporting gifts — even a $25 gift card — can result in tax filing penalties that could impact both your company and the employee. Not a good way to build your company’s reputation!
Fringe benefit tax (FBT) will automatically apply to free, discounted or subsidised gifts and to vouchers and Prezzy Cards. Cash bonuses, on the other hand, are taxable under standard PAYE rules.
However, there is an exemption which allows employers to offer gifts to employees without triggering FBT. This requires that the benefit is valued at not more than $300 per quarter or $1,200 per annum. You will also need to report stock options and other equities, travel awards, and even the personal use of a company vehicle.
The IRD has some guidelines on how to think about non-cash compensation options.
Incomplete or disorganised records
In New Zealand, companies must keep payroll records for seven years, and in Australia they must be kept for five years. That’s a long time for some businesses. Many companies don’t survive that long in the market and others will start out keeping records in a messy fashion, only to become more organised as the company grows.
But when it comes to payroll records, you can never be too thorough.
Doing payroll by hand can lead to a room full of boxes by the time those five or seven years are up. Should a problem arise in the meantime, it can be a headache to dig through screeds of paper. Yet, that headache will be nothing compared to the penalties from the government if your company fails to provide payroll information when requested.
Most payroll providers offer an efficient system for recording, storing and maintaining every possible bit and byte of payroll data generated by your company. Even if you have an on-staff payroll specialist who’s obsessed with record keeping, it makes sense to use digital payroll solutions designed to ensure accurate and compliant storage.
For over thirty years, Affinity has been a trusted partner for mid-market and enterprise businesses in Australia and New Zealand, empowering them to transform their payroll operations. With a focus on turning payroll from a cost into an asset, we have established ourselves as industry leaders in delivering innovative cloud-based payroll software and exceptional payroll services.
