Payroll outsourcing—and technology—helps mitigate the risk involved with the intricacies of healthcare reform, immigration reform, and tax changes.
By Russ Banham
Pity the poor payroll manager no more. In an era when the world is regulation mad, heaping onerous tax and employee benefits compliance demands on overwhelmed payroll departments, thank heavens that payroll outsourcing service providers are in the background shouldering much of this burden.
Alleviating the tension produced by two major macro-trends—the rising tide of payroll-related regulations and rules and the impact of technology on payroll service delivery—is the value proposition offered by top payroll providers. With regard to the latter trend, cloud-based delivery platforms allow users access from anywhere in the world with a smartphone, tablet, or laptop computer and assist clients with their rising compliance burdens.
Just in time, too. “Every company has a target drawn on its back from a wage-and-hour compliance standpoint,” says Michael Busch, president of Valiant Payroll Solutions, a Woodbury, NY-based payroll outsourcing provider specializing in services to the hospitality industry. “The sheer number of rules and regulators boggle the mind. And it’s only going to get worse.”
Among the federal regulators policing payroll-related practices are the Equal Employment Opportunity Commsion, Internal Revenue Service, Department of Labor, Citizenship and Immigration Services, Federal Trade Commsion, and Office of Foreign Assets Control (to cite a few). New regulations, of course, continue apace, evident most clearly in the Affordable Care Act’s “pay or play” provions (REG 138006-12), the “most recent headache,” Busch notes.
“Healthcare reform alone is burdening companies to meet stiff obligations,” says Janet Klamm, director of product management and development, payroll and time and attendance services, at Rochester, NY-based Paychex Inc. “Companies must make difficult determinations over who is a fulltime employee, for instance. These changes are coming fast and furious.”
With regard to state rules and regulators, Klamm says, “They’re all looking for sources of revenue wherever they can find them, and are constantly changing the tax requirements insofar as [employment] filings and protections to generate it. It’s a hodgepodge [of regulations] out there.”
According to Mike Trabold, director of compliance at Paychex, the top three compliance sues confronting the payroll space, at present, include healthcare reform, immigration reform, and tax changes. The latter, he says, “encompasses IRS filing developments, state-level complexities, and potential tax reform/deficit reduction impacts.”
Somebody’s Gotta Do It
Fortunately, complying with this complex and evolving patchwork of rules is increasingly the responsibility of service providers such as Unicorn HRO. “We’re doing more and more of the compliance work for clients, simply because it is ever more confounding,” says Tim Diassi, executive vice president and general manager at Florham Park, NJ-based Unicorn HRO LLC. “There are so many regulations involving taxes that they just can’t keep up with, and be confident they’re in compliance.”
At the same time that myriad federal, state, and municipal tax agencies have stepped up their enforcement activities, the rules themselves are increasingly more complicated, making compliance a treacherous exerce. “With regard to the HR side and employee benefits, the rules seem open-ended—more of a gray area,” Diassi explains. “We can walk the client through the process from a consulting standpoint, but that doesn’t mean they always follow the correct [filing] process. One can’t blame them because this is complicated stuff. Mistakes are inevitable.”
Busch agrees, noting a set of particularly confusing rules affecting the hospitality industry, particularly restaurants. “There are all sorts of regulations affecting tipping,” he explains. “For example, the federal government requires that you file Form 8027 [to report employees’ tip incomes] every February. The form requires that you not only list total tips but track the source—was it paid with a credit card, check, or cash? You also have to track whether the individual who received the tip was directly tipped by a customer or indirectly tipped, the case with a busboy or assitant bartender drawing from a pool of tips.”
These various categories of tipping income require ways to identify and manage the source of money. When an employee works overtime, these burdens increase. “Different rules now govern the tipping that occurs when an employee receiving minimum wage, for instance, is getting time and one-half in overtime pay,” Diassi says. “If you have invalid overtime rates or you’re underreporting wages and tip income—even if it’s inadvertent—the door swings opens to a Department of Labor investigation.”
The Labor Department is not alone in investigating compliance abuses with new aggressiveness, he adds. “A major restaurant or hotel or celebrity chef found to be violating minimum wage laws is subject to zealous plaintiff attorneys filing class actions that tend to be reported with big photographs in tabloid papers, thus damaging that entity or person’s reputation,” Diassi sasys. “These entities, for the most part, are not deliberately, flat-out in violation. They’re just not aware [they’re out of compliance].”
This lack of awareness can be chalked up partly to the difficulties that legacy payroll systems endure in trying to stay apace of the shifting morass of record-keeping laws and regulations. “If you look at companies with more than 2,000 employees, they’re all fundamentally using payroll technology that is 15 to 20 years old,” says Larry Dunivan, chief information officer at Minneapolis-based Ceridian HCM. “These systems have been modernized in different ways, forms, and shapes, but they nonetheless have great difficulty keeping up with the shifts in regulations. In many cases, they’re forced to rewrite [the software coding] from scratch—not the most efficient or cost-effective process.”
As the compliance environment becomes even more complex, and Dunivan says this is “guaranteed as long as we have Democrats in the White House,” the burdens on payroll will exponentially increase. Not that many organations want to be in the business of payroll-related compliance. It is obviously not many companies’ core competency; nor is payroll IT. “If the technology is weak,” Dunivan asserts, “there will be unintended consequences.”
Enter the Cloud
Why tempt such consequences when one can essentially pass on workforce management, wage, and time-and-attendance payroll obligations to outsourcing service providers, particularly now that they provide such services in a hosted Software-as-a-Service (SaaS) environment?
Given companies’ intricate and constantly altering compliance responsibilities, a cloud-based payroll system provider can become the de facto internal payroll department, focused on a single responsibility that is, in fact, its core competency. “The payroll user gets real-time data from the swipe of a badge right to net pay, whereas today you have a series of interfaces and batch jobs eating up four to six days of the payroll cycle, with lots of process points of failure in between,” says Dunivan. “Payroll cycle time is dramatically reduced, there is no latency, and everything is validated in real time.”
Cloud-based systems also offer the opportunity to immediately recognize when there is a problem in the payroll/compliance pipeline. “If you have an employee who has been paid significant overtime this week, you can see that immediately and not schedule him again at the higher wage,” Dunivan explains. “Additionally, payments that fall outside parameters or guidelines that would get audit attention for being out of compliance are evident right away.”
A good example of the type of “red flag,” Dunivan notes, is a manager who repeatedly tries to get employees to waive their breaks.
The cloud also makes it more efficient for providers to conduct their specific business tasks. “In an on-premises environment, vendors would have to contact users to alert them to upgrades and the need to install the software,” says Klamm. This, in turn, costs money for expensive internal programmers to attend to the task, not to mention reminders when needed work goes undone.
“I remember situations where a client in the past would be three versions behind the newest upgrade, and when they tried to install the new one they couldn’t,” she explains. “The reason was they hadn’t installed the previous two releases. You really don’t have to have your own technical people in HR stay on top of this when you’re in the cloud, which creates huge gains for the employer, and providers as well.”
Diassi shares these views, also pointing out the enticing cost benefit for buyers—paying monthly operating expenses rather than funding an expensive capital project—opex versus capex. “No matter how you slice it and dice it, HR payroll is a cost to a company, a necessary evil—all work and no reward,” he says. “At least when it’s handled in the cloud, the costs, logtics and time-elements become predictable. Best, of all, someone else is taking on the reporting burdens.”
Busch from Valiant affirmed the value of cloud-based payroll for compliance purposes. “You keep up-to-the-minute with regulatory changes when it comes to payroll,” he says. “Even at the simplest level, tax charts change every year. To not be in the cloud and stuck constantly updating your system—utilizing resources that can be better put to other things—makes absolutely no sense. At Valiant, we are making the updates in the middle of the night while users are sleeping; they don’t have to worry about loading software or having people on staff to load it. We’re specialists—better to offload it to us. Then, when you come in the next morning, everything is up to date.”
Many of today’s cloud-based payroll systems also can effortlessly and seamlessly integrate with other enterprise technology platforms, Diassi asserts. “In the past, IT had to house [the system], build connections between one app and another, and keep everything synchronized,” he says. “We handle that for the client now.”
Mobility is another positive technological trend changing the payroll landscape. “It certainly has become more important insofar as scheduling and time-and-attendance, where you need flexibility to easily update the data,” Busch says. “We also see mobility as important to employees from a self-service perspective, insofar as accessing their pay stubs and W-2 information, particularly at tax time. Finally, we see a few people making direct deposits of their paychecks with their mobile devices, which will grow in use. Really anything that reduces the need for paper, whether it’s payroll checks or W-2 forms, is critical.”
Klamm from Paychex concurs. “We have users who are active with our mobile apps, checking balances and paystubs and things like that, or HR staff wanting to check and be sure that there is enough funding for payroll checks going out,” she says. The plan is to unveil additional mobile apps in the coming year, “responding to what are clients our looking for,” she adds.
“The trend is definitely toward BYOD—bring your own device,” Diassi chimes in. “This is what employees want, and the fact you can provide so much in the way of interactions through a mobile smarphone packed with a variety of useful apps means you are effectively compelled to do so. You simply cannot not do this.”
He adds, “This is a trend with sturdy legs.”