Preparation for Payroll Implementations

Payroll is a complex and intricate system that requires special consideration and preparation prior to implementation. So critical is the pre-implementation phase that it can influence ultimate payroll implementation success or failure.

There are three areas of focus. The first is processes. What key payroll processes are important to your organization? If you don’t already have documented processes, now is the time to start. For some companies, payroll processes may be simple. Everyone is on salary and there is no overtime. However, the majority of companies have complex pay processes with a mix of salaried and hourly employees, commissionable sales, vacation and sick leave policies that may vary for the different types of employees or different seniority.

Compensation schemes and bonuses add to the complexities and could even determine which payroll application you purchase. Another process to consider is the termination process. This is often the most ignored business process. Yet there are regulatory, security and risk implications that could cost the organization much in time and money if not handled correctly.

Termination of employees touches almost every aspect of your payroll processes, from transferring benefits to COBRA to 401K contributions and vesting rules, to unemployment benefits. In addition, there are security concerns and transfer of duties and succession. Who will approve employee time sheets now that the supervisor is gone? Who will sign off on expense reimbursements? Terminated employees should no longer have access to your internal systems and information. However, they may need access to their medical coverage information or 401K account. If you have a layoff, your employee may be considered terminated, but payroll is still paying them a paycheck.

Expense reimbursements may be handled by accounts payable. However, if expenses are reimbursed through paychecks, then your payroll department and the system will have to include this process in the implementation.

Payroll processes differ for different types of employees. Salaried employees may not have to enter time but hourly employees may have to use a time clock or turn in time sheets. Part-time employees may have a different scenario. Are all your employees paid at the same time? Are some paid monthly and others biweekly? These types of varying business processes have far reaching implications during a payroll software implementation.

HR processes such as benefits management, though not directly tied to Payroll, have payroll implications and therefore need to be analyzed. Where calculations and deductions enter the payroll system should be noted and planned for, as well as when there are changes to those elements. Are these benefits deducted in each paycheck or just once a month? Are these benefits tax deductible? When do these deductions kick in for a new employee? When do they stop if an employee has been terminated? Who do you need to notify when an employee starts and when one leaves?

During this business process analysis and documentation process, it will become obvious to your organization that there are processes that are redundant, unnecessary or in need of change. Now is the time for process improvement. Streamline, optimize and standardize your processes as much as possible. Why do you need to have different payroll role schedules for different types of employees? Why do some sites use time clocks for hourly employees and others have manually entered time cards? Why are commissions different for different sales people? Do you need to have dozens of different sales commission calculation methods?

Secondly, there is data. Catalogue all the data you will need to convert either from spreadsheets and paper or from legacy systems. Find out where all your human resource and payroll data resides. Some of that may come from external systems or agencies. Determine what information you would like to save in your new system. Can you just transfer historical data as sum? Do you need year to date data or can you start from scratch? Once you have determined the scope of data, you then need to evaluate the quality of that data. Does it need to be scrubbed? Is it complete and reliable data? How old is the information? Do you need to validate that data again?

Terminated employee data are also important for regulatory, historical and research reasons. Different states have different archival requirements. This data may be necessary for litigation or regulatory purposes. If you have a policy that allows former employees to return with former seniority, you will have to consider that in data conversion strategy.

Consider how you will be collecting data for your new payroll system. Will you stick with the legacy time keeping function or add a self-service HR module? How will employees report sick time or vacation days? Will you require management approval for vacation requests? If your organization operates in more than one state or one country, how will you keep track of changing tax regulations and employment laws? Will you use a third party?

Lastly, identify third party players. These are your benefits providers, your federal, state and local government agencies, and your banks. If you use a third party for payroll processing and regulatory filings, their requirements will need to be included in your software implementation strategy.

How many benefit providers service your employees? Do you have different ones for medical, dental, and prescriptions? Do they have an interface to their system that you may be able to integrate with your new application? These companies may be able to help you validate the data you have. After all, if the data they have is wrong, your employees would not be able to exercise their benefits. Insurance companies for long term and short term disabilities and 401K administrators should also be contacted for data extracts and integrations.

Government agencies play a critical role in your payroll software implementation. Besides reporting taxes, there are different labor laws that your organization will have to comply to. Make sure that your application facilitates with compliance to these laws and regulations. Some states have such complex tax and labor laws that if you have employees living in one state but working in another, you will require some unique processes.

Unions are another third party stakeholder. Union regulations and rules may have strong implications on your payroll system implementation. You may be required to pay medical coverage for laid off workers or provide other compensation. They may require statistical information and reporting in many and varied ways. Your system must be set up to handle these scenarios.

Let’s not forget the banks. Whether you are going to use a third party to process paychecks or actually cut checks from your own printers, your banks will need to be notified. If you have employees that require direct deposit, you will need to provide this information to your bank. Many companies have different accounts and even different banks for operations and payroll. Make sure you identify the different transactional requirements as well as any required data elements that each bank will need.

Implementing a payroll system requires smart planning on the front side. Payroll processing is not customer facing and therefore may be challenged to get management focus or resource dedication. However, it is a critical system and if not done right, you will hear from your employees, your vendors and your government.