Payroll is a critical business function. After all, employees only work for a business under the condition of being paid for it. To ensure that payroll runs smoothly every month, the payroll responsibilities must be put in capable hands. But determining which department should be responsible for payroll isn’t all that easy.
There’s an ongoing discussion about where payroll should sit in an organization. Does payroll report to HR? Or does it belong to Finance? Read on as we dive deep into the question of whether payroll should be under HR or Finance.
Before jumping right into the discussion, let’s look at the status quo. The 2020 Deloitte Global Payroll Benchmarking Survey questioned 750 organizations across 55 countries about various aspects of their payroll operations, including where the payroll function reported to.
The results showed that payroll reported to HR in 38% of organizations, to Finance in 36% of organizations, and to a shared service in 24% of organizations. In 2018, the numbers were 31%, 51% and 14% for HR, Finance and shared services respectively, leading the study makers to the conclusion that “organizations are moving Payroll from reporting to Finance to either reporting to HR or reporting to a shared service”.
Their explanation for this trend:
“Organizations today are focusing more on end-to-end employee digital experience over operational efficiency, and Payroll is an area closely linked to HR, and the employee experience.”
Despite the common image of payroll as a back-office function that is basically cut off from the rest of the organization, payroll is an employee-facing function. Anything related to employee data needed for payroll and employee pay is highly personal and often involves dealing with employees directly.
Interacting with employees and answering questions about their pay and other payroll-related matters is a task HR professionals are generally better prepared to carry out than their colleagues in Finance or Accounting, especially given the high levels of confidentiality required.
Plus, it’s the HR department that handles employee files and information such as start dates, salary information, benefits, and more, and is in charge of timekeeping, which delivers one of the most important payroll inputs. Important updates such as salary changes or changes in the employee’s personal situation go through the HR department first, which means that changes can be processed faster and easier if payroll is a part of HR.
Last but not least, the HR department has the necessary competence to ensure compliance with labor laws, which is closely linked to payroll compliance.
Despite there being valid reasons for putting payroll under the control of the HR department, there are many voices claiming that payroll needs to be part of finance and not HR. Here are some of the arguments in favor of making payroll part of Finance/Accounting:
Payroll is all about numbers, which is the specialty of Finance.
Payroll compliance is incredibly complex and involves complying with various tax regulations and fulfilling numerous reporting requirements. Since the consequences of non-compliance are severe, it’s preferable to have payroll handled by financial and tax experts, since HR staff is usually not trained for tax laws and more.
Regardless of an organization’s industry and size, payroll is usually one of the largest expenses, which is why the Finance department should have direct control over payroll to be able to monitor payroll expenses closely.
Running payroll typically involves working with the organization’s finance and/or accounting system, which HR is usually not trained to do.
So, who handles payroll in a company? HR, Finance or Accounting? There’s no clear-cut answer to this question. As we’ve seen, there are many good reasons why payroll should be under HR and at least as many good reasons why payroll should be part of Finance and Accounting.
But there are also other aspects that can influence the decision, one of them being the level of integration between HR and payroll software. If the organization’s HRIS is properly integrated with the payroll software, employee information will be updated and saved automatically across all systems, which means that HR no longer needs to be involved in the data gathering process for payroll. The same goes for integrating payroll and finance software, which would give the Finance department access to all the necessary data without actually having to get involved in the payroll process.
The Lano Academy is for informational purposes only and should not be construed as legal advice. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this article.
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