The complexity of payroll

The complexity of payroll

Business, Human Resources, Payroll / eTorQue

In our experience, CEOs, CFOs and HRDs are largely oblivious of the payroll workings within their organisations. It is not considered a key operational area but rather an administration function, so it is largely assumed that ‘no news is good news’. And when an issue does arise, they are often confronted with a ‘this is the way we have always done things’ attitude. However, if the issue is not resolved, timeously and correctly, serious problems could plague your business.

Payroll is important for a number of reasons. If you get it wrong, it can result in ‘downed tools’ and costly work stoppages. Employees offer their productive capacity to be paid. If you do not get this right, then they may feel under-valued which could lead to decreased productivity levels. Not to mention increased levels of dissent and unhappiness.

However, payroll in South Africa is complex. It is governed by thirteen different pieces of legislation (often ones which tend to disagree with one another – an article for another day though!) It is also where the money is, and subsequently the target for audits from SARS, the Department of Labour and the Compensation Fund. Very few payroll departments can keep up to date with all the legislative changes. Typically, payroll departments tend to lurch from one payroll deadline to another with little time in between to keep up to date with legislation and best practice. They are also over-reliant on payroll systems and seldom understand how packages are put together and what the impact of changes are.

Given the complexity and the multiple ‘grey’ areas in legislation, payroll software developers are increasingly pushing the onus onto clients to make sure they are compliant – and clients seldom realise this before it is too late.

One of the biggest issues we see is inherited problems – where a process once worked but was never reviewed or updated as systems change. We have encountered several instances where these inherited problems have resulted in huge penalties from SARS, incurred significant costs to fix, and resulted in extreme employee dissatisfaction.

A good example of this is an employer that was processing medical insurance contributions as a proper medical aid, thereby allowing employees to incorrectly receive medical aid tax credits. This went on for at least two years, and while it seems a small thing, ultimately cost the employer a significant amount of money due to:

  • The cost of remedial action:
    • Correction and resubmission of all employee tax certificates
    • Resubmission of all EMP201s and EMP501s
    • Consultation with employees to recover the tax credit benefit they received in error – not to mention the employee unhappiness and lack of trust that this created
  • Having to foot the bill for employees who were no longer employed
  • Penalties and interest from SARS for ‘late’ declaration and payment

Whether your payroll is processed in-house or outsourced, it is advisable to have regular independent reviews of your payroll and its processes to mitigate against costly scenarios such as this. In fact, we recommend a review annually when tax legislation and tax tables change, when you change key payroll personnel, as well as when you change your payroll outsourcing service provider or software. These reviews highlight legislative compliance and internal process shortfalls. Industry best-practice and the required remedial action necessary to comply with legislation is provided in a report. This is then often used as a discussion document and roadmap to achieve legislative compliance.

Should you be in the transitioning period of settling in new payroll personnel or migrating to new payroll software, we offer specialised review and support. Contact us on [email protected] for more information.