Pay the price for your payroll errors

Simon Puryer, managing director of i-Realise, outlines the damage and solution.

Drilling down into the detail of payroll processes to fully understand them and to correct errors can save companies thousands of pounds in fines and legal costs as well as avoiding damage to their brand. The recent high profile ‘naming and shaming’ of 360 employers that failed to pay the national living/minimum wage (NLW/NMW) highlights how important it is to have a clear picture of all payroll processes within an organisation.

In February, both Argos and Debenhams – along with hundreds of smaller firms in retail, hospitality and other sectors – were named after falling foul of NLW obligations and identified through HM Revenue & Customs (HMRC) checks to have underpaid some employees. They now have to repay employees £995,233 and pay penalties totalling £800,000 to HMRC. This is in addition to the negative publicity and the administrative costs to identify, contact and make appropriate repayments. 

Since 2013, more than 1,000 firms have been publicity shamed for underpaying their staff by a total of more than £4.5million. They were required to pay fines of more than £2million on top. Debenhams reported that the error originated in a misinterpretation of the number of weeks that should be used when calculating pay. For Argos, the problem seems to originate from some staff briefings or security checks taking place outside of paid working hours.

In March, Tesco apologised to 140,000 workers who were mistakenly paid below the NMW, with the reimbursement bill coming to £9.7million. The error was uncovered by a review of systems during the implementation of a new payroll system. Mistakes had been made for some workers who paid into voluntary schemes such as pensions, childcare vouchers and cycle to work schemes. It was discovered that their pay, after such salary sacrifice, did not reach NMW levels. Tesco said it had checked the pay levels over the last six years and notified HMRC and the shopworkers’ union USDAW of the error.

Business minister, Margot James, emphasised the government’s commitment to enforcing the NMW but it is clearly preferable for firms to identify the problems themselves, rather than to be publicly named, shamed and fined. She said: “We expose companies who fail to pay workers at least the minimum wage, but where there has been underpayment it is preferable that companies identify, and correct, that underpayment themselves.” As well as ensuring employees receive the NLW, complying with holiday pay legislation is another cause for concern. As most organisations are well aware, a significant change to case law relating to holiday pay was made by the employment appeal tribunal in late 2014. This new case law means that, as a general rule, an employee should receive what they would normally expect to receive if they had not been on holiday; i.e. if they regularly receive overtime or other allowances, they should also receive these as part of their holiday pay. Similar case law also applies to commission payments.

The impact of these changes very much depends on the nature of the business, the complexity of working arrangements and the holiday pay calculations that were in place prior to the new legislation. Many organisations will have put in place appropriate arrangements or will be in the process of doing so. Others are still working through the significance to them and looking at how to ensure they are fully compliant.

The risk of inaction (or of putting in place processes that are not entirely appropriate or are difficult to implement) is potentially enormous. In particular, the risk of future legal action could represent a high cost to the business both in financial terms and in terms of negative publicity. Both these examples illustrate the importance of having a clear picture of all payroll processes within an organisation to be able to remain compliant.

Payroll processes can be hugely complex, especially in large organisations that have grown through acquisition, or in companies with varying rates of pay, shift working, overtime working and salary sacrifice schemes. This combined with the pressures of completing payroll runs on a weekly or monthly basis, often means that there are not the resources or skills in-house to examine the processes in sufficient detail or with the objectivity required to identify non-compliance. It may only be when a new payroll system is implemented that all of the steps in calculating pay are examined, by which time the accumulated costs of errors are huge.

Our clients have found that a payroll operations health check, delivered by an independent specialist identifies errors, risks or potential areas of exposure to the business, as well as increasing efficiencies. It also enables companies to ensure that all of the business systems around payroll fit together seamlessly. By taking control of your payroll processes, you can identify and correct errors, avoiding unanticipated costs, fines and the effects of negative publicity.

This article appeared in the March 2016 issue of Payroll World