6 pitfalls in payment of wages

6 pitfalls in payment of wages

Legislative changes. Supplements and incentives to be entered manually. New calculations after the salary review… The procedures regarding salary payment to employees can be complicated in several areas – even for the most seasoned payroll employee.

Therefore, errors unfortunately happen in payroll administration. These can be anything from human mishaps, like typos while entering supplements and commissions, to a lack of knowledge about the latest changes in collective agreements or legislation.

It can be difficult to fully guard against errors, as both systems and people can fail, but it is possible to reduce errors and often to eliminate them completely. If you know these 6 pitfalls, you are therefore well equipped to avoid the typical mistakes that can occur in connection with payroll processes.

Salary payment pitfall 1: Typographical errors

If your company does not have time registration systems and has a lot of paperwork procedures between employees, managers and payroll employees, there is a greater risk that an error will occur when entries are made into the payroll system.

In many companies, employees who are paid by the hour hand in a timesheet, which the team leader checks through to see whether the numbers are correct. The timesheets are then sent to the payroll department, where a payroll employee enters the timesheets into the system. In the case of weekly timesheets, for example, four timesheets must be entered into the payroll system at the end of the month every month.

When sick leave and holidays are registered, this often happens via forms requiring more or less manual processes.

Regardless of whether employees are paid by the hour or are paid a salary, these cases involve a risk of incorrect entry, which can be expensive in terms of cost or trust.

Practical solution: Prepare Excel templates

If there are many paperwork processes in the company, customised and easy-to-understand Excel templates that structure input from managers and employees can be a great way to reduce data errors. The entries in the well-considered Excel templates are passed on to the payroll administration, which can import data into the payroll system directly. This reduces the risk of typographical errors and calculation errors, while also optimising processes.

Proposals for preventive control: The four-eyes policy

In many payroll functions, there are no control functions or a four-eyes policy. However, it may be a good idea to introduce the 'four-eyes-on-everything' principle so that all salary outputs are given an extra check. Salary is a sensitive area to which great attention and importance is given – both by the company and its employees. Therefore, it is important to be aware of who should approve and control the procedures. Is it a controller, a colleague, an HR manager, an accounting manager or another superior?

If it has not been done habitually, getting a four-eyes policy started can be difficult, as employees and departments may feel that they are being monitored. Here, it is important to inform those involved that it is not about monitoring but about quality assurance and error prevention.

Salary payment pitfall 2: Agreements

Collective agreements contain many rules regarding pay and working conditions. This applies to employees of employers who signed a local agreement directly with a trade union or follow a national or industry agreement through an employers' association.

In a number of areas, collective agreements are supplemented by legislation on e.g. working environment and sickness and parental leave pay. Therefore, it is important that, as a payroll employee, you stay updated on the rules and process salaries based on these.

Solution in several steps: Payroll system – access to knowledge – external supplier

The easiest solution is to update the payroll system to automatically take into account the terms of individual collective agreements. Another solution is to ensure that payroll employees are continuously updated on changes in the collective agreements, as well as on rules and legislation in the area. Regardless of the payroll system, it is crucial that payroll employees are aware of the individual collective agreements in the company – thus access to knowledge should be a priority.

Another option is to enter into a collaboration with an external supplier which specialises in payroll administration – and is up-to-date on legislation and regulations – who can handle all or part of the payroll administration.

Salary payment pitfall 3: Legislative changes

Every year, the EU or national parliaments in the company's markets make new decisions that may affect the salaries and benefits of employees. These could be anything from the new Holiday Act to ATP rates being changed, to new rules regarding free telephones, subsistence allowance and transport deductions, severance pay as well as pension and insurance matters.

Solution: Knowledge + well-written descriptions of procedures

Knowledge and competence are linked – and this is also true for salary payment. Therefore, it is crucial that payroll employees are continuously updated with the latest knowledge about rules and legislation in the area. Another good tip is to introduce understandable and well-written procedures which are continuously updated with the latest knowledge to ensure that employees are up to date and incorporate new procedures in connection with changes to legislation.

The procedure descriptions can also ensure that a backup or new employee in the function can more quickly familiarise themselves with how legislative changes are to be interpreted and handled in relation to salary payment in the company.

Salary payment pitfall 4: Reimbursement of disbursements and expenses

Reimbursement of expenses – or on-account payments in connection with travel and purchases during trade fairs, etc. – can give rise to unnecessary misunderstandings between the payroll function and the individual employee when these transactions are implemented in practice on the individual payslip. For example, this can be an issue in the case of payment of travel advances or deductions from salary in the event of missing receipts for travel reimbursements or other expenses.

Solution: Well-described procedures + employee manual

Here, the solution is to prepare well-written procedures in the company's employee manual on what is covered and not covered in connection with work in the company's service domestically or abroad – e.g. whether TV use or the hotel room mini-bar is covered when the salesperson is travelling abroad. Or whether the company or the employee is responsible for paying parking fees and parking fines. Grey areas or ambiguities can give rise to many unpleasant misunderstandings and should therefore be described unambiguously in the employee manual or in relevant internal guidelines.

Salary payment pitfall 5: Bottlenecks

Bottlenecks are a known problem – especially in areas that are often relatively sparsely staffed, such as the payroll, HR and finance functions. Most payroll employees are specialists and superusers in their field and rarely have colleagues outside the department that can fill in for them. It is always good to have experts with thorough knowledge of their tasks, but what does the company do when the employee in question is ill, attending a course or otherwise not available?

Solution: Backup + status meetings

Here, the solution may be to have an internal or external backup for the payroll function that reduces the company's vulnerability in cases of illness or absence. At the same time, you can hold regular meetings, where the department learns more about the current state of affairs, as well as what has happened since the last update within the individual payroll employee's work area. For example, such updates can concern legislative changes or new collective agreement requirements for a specific group of employees. Here, too, well-written procedure descriptions can help ensure correct salary payment.

Salary payment pitfall 6: Salary output

In addition to input for the individual employee's payslip, output must subsequently be provided to the accounting or finance department, which can process these for integration into the monthly accounts and distribute data to external actors and bodies. E.g. reporting to The Danish Customs and Tax Administration, ATP, job centres, the municipalities and to Udbetaling Danmark. A lot of actors are involved in a single payroll process – and incorrect reporting to these can result in incorrect key figures in the company's accounts and, for example, incorrect provisioning of holiday pay, pension payments, etc.

Solution: Excel templates and insights into the next step

Here, Excel templates or file readouts from the payroll system are good ways of ensuring more valid and correct data at all levels. You might also want to set up a team of employees formed from middle managers and employees from the payroll and accounting departments so that everyone knows what data the next link in the chain needs in order to be able to solve its part of the work with the company's payroll, HR and accounting data efficiently and correctly. Understanding each other's work can also help reduce bottlenecks between departments.

Avoid pitfalls when paying wages

Whether you recognise one, several or all of the payroll pitfalls above, there are a number of methods that can typically help you to avoid them:

  • Prepare well-written and comprehensible procedure descriptions
  • Develop well-considered templates, e.g. in Excel, which will reduce typographical errors and streamline processes
  • Introduce four-eyes policy
  • Clarify who can approve and verify reports
  • Always have a backup for the payroll function – either internally or externally
  • Make sure that the company's payroll employees always have access to updated knowledge about legislation, rules, collective agreements and news within the payroll area
  • Collaborate with an external supplier who specialises in payroll administration.

Get expert help for payroll administration

If you need a professional sounding board for the processes of payroll administration – or perhaps extra hands at peak times – then Azets' experienced payroll consultants can help. We review the current processes and system setups from an objective perspective. Through this, you will often be able to achieve an optimisation of existing workflows without the need to invest in new systems or solutions. See more information