Unravelling payroll complexities

Navigating down the payroll pathway continues to be a challenge for many Kiwi businesses. To help get you up to speed on payroll systems, services and strategies, Glenn Baker spoke with some of New Zealand’s leading payroll providers and experts.
When the Government announced its October 1st tax changes last year, it not only created one of the biggest updates of the New Zealand tax system in many years, it also presented Kiwi businesses with a major compliance challenge. Aside from the much-publicised GST increase, business owners and payroll managers had to grapple with a raft of changes. These changes not only affected rates of pay, particularly for middle and upper income earners, the Government also sought to offset the GST increase with changes to a number of benefit payments, some of which employers would also have to factor in to calculating earnings and contributions.
Add to the mix changes to KiwiSaver, ACC, the Holidays Act, parental leave and the addition of payroll giving, and you could understand if payroll staff are looking a little frazzled nowadays.
Fortunately we live in an age where software processes, often managed off site, easily handle such legislative changes – making life much easier for business owners and payroll managers. Obviously October 1st 2010 would have been a much different day for them, had we all still been reliant on manual systems. You have to wonder if business compliance would be much simpler if we didn’t have computer software to facilitate all the new laws!
Another factor which makes such monumental tax and payroll changes happen smoothly is the improved relationship the IRD now has with payroll software developers.
David Jenkins, CEO of the New Zealand Payroll Practitioners Association says the IRD is proactively consulting with developers and identifying any issues with legislation coming through that impacts not just on payroll, but the whole accountancy software suite.
Formed in 2007, NZPPA already has 600 members, and Jenkins says the Holidays Act and Parental Leave provide major ongoing calculation problems for many of them. He says his association represents payroll practitioners running New Zealand payroll on both sides of the Tasman (reflecting the fact that many New Zealand employees are paid by Australian companies, and vice versa). It consolidates information from the likes of IRD, DoL, ACC, etc, to one central point so members can instantly see what the changes are.
Another factor that can cause grief for payroll staff, according to Jenkins, is that some 95 percent of all payrolls haven’t been set-up by the people using them. “There is no documentation of the set-up of a system.” So when you go to a set-up table, he says, certain things can be turned off or on by a previous payroll person, and you’ve got no idea why. “What was valid five years ago, may not be today.
“Nearly all payroll systems, apart from very basic ones, can be customised,” he says. “Just by changing some of the settings in the set-up tables you can have a fully compliant system become non-compliant.
“Another problem is that employers don’t talk to their payroll people. They introduce all these wonderful incentive and bonus schemes and they don’t realise that the system they’ve got can’t implement them.”

More changes
2010 was a busy year for payroll people, and it’s not looking like there’ll be any let-up in 2011. Julian Smith, general manager of MYOB reminds us that the next round of changes payroll professionals will need to address are those that come into force with the Holidays Amendment Bill. “These include the introduction of an average daily pay concept for employees working variable hours, the ability for staff to trade one week’s annual leave for a cash payment from their employer and the ability for the observance of public holidays to be transferred to another working day.” The majority of the changes will take effect on 1 April 2011.
Expect changes to ACC levies and there’s a murmur going around that KiwiSaver will become compulsory, says Jenkins.
As for payroll giving – while the scheme has been welcomed by the charitable sector – its adoption by businesses and employees has been relatively slow. The intention of the legislation is to allow the employee to claim an immediate tax credit for the donation (within the same pay run), rather than wait until the end of the financial year. For every dollar an employee donates they receive a third back as a tax credit in the same pay period.
“The key challenge of this new scheme is that the process can only be used by those employers who file with the IRD electronically via irFile – it will not be supported in any paper-based filing,” says MYOB’s Smith. “However, with more and more business owners preferring the ease of electronic payroll processes, it’s unlikely that this will be a barrier for much longer.”
Evan Lyon of KeyLink Payroll Services believes that companies with big staff numbers potentially have a major job on their hands administering the payroll giving process. His advice to employers is to identify a set number of charities that they can support and stick to those. He points out that in the UK, where payroll giving has been around for many years, the uptake has still only been around four to five percent.
PayGlobal’s Donna Frew agrees that limiting the number of charities is the best approach. “Ensure you have a company policy that will work for the business so you minimize admin cost and company risk. Employees must want to use the service and contribute to the charity – so make it relevant,” she says. “Also, use an employee self-service solution to assist in the administration of the company policy to empower employees and managers.”

Areas of concern
Although the Holidays Amendment Bill is expected to tidy up a lot of confusion surrounding the Holidays Act – calculating leave entitlement is still expected to be an issue for business owners and payroll staff. KeyLink’s Lyon says when you factor in all the legislative requirements of a business payroll system – including child support, student loans, court orders, WINZ deductions, and so on – “it effectively means payroll has become a vehicle for social policy and you wonder where it will all stop.”
“To make matters worse, employers almost need to be lawyers these days – because if something’s not done right, it’s he or she that’s liable.”
And working out something as difficult as a rolling 52 week average for the Holidays Act, is no easy task, he says. “It just goes to prove that manual payrolls are no longer an option.”
In case you’re under the impression that most businesses have now switched to automated payroll, NZPPA’s David Jenkins has the surprising news that some 80 percent of Kiwi businesses are still managing their payroll manually. “Consider that payroll is the second to largest cost a business has, and there’s absolutely no risk management.”

Weighing the options
So you’re aware of the challenges of payroll management – so how do you make the big decision on which option or provider to go with? And which method of delivery? It’s not an easy choice – the market is extremely competitive.
“Whether businesses choose to manage their payroll in-house or outsource – as is becoming increasingly popular – is a matter of resourcing and control,” says Julian Smith. “If businesses don’t have the experience or time to manage a payroll, then an outsourced bureau can be worth considering. There are a large number of specialist bureau services, and accounting practices, providing payroll services – often using MYOB Payroll to support their systems.
“In considering the platform for your payroll, it’s a question of choosing the best solution for your business. Online (SaaS) solutions allow access from ‘anywhere’ but are generally less feature rich. Installed solutions allow users to have greater control over their data, which is a key issue for many users, particularly when private employee information is involved. New Zealand’s broadband quality is also a limiting factor for many businesses – for example, anyone who works in a rural area could struggle with online applications.”
Martin Gleeson, managing director of iPayroll regards SaaS (Software-as-a-Service) or ‘cloud’ solutions as the way of the future. “It’s what every small and medium business wants these days. The old shrink-wrapped market is on its way out. It’s interesting to note that virtually no angel investment in the US is going into the shrink-wrapped market today – it is online or nothing.

“Manual systems or Excel-based spreadsheet systems cannot be compliant with current legislation without an inordinate amount of time managing and maintaining systems,” adds Gleeson. “Cloud-based systems enable SMEs to get on with managing their businesses and valuing their time, for relatively insignificant fees. There is no need for SMEs to deal with ‘back office’ issues including interfacing with the IRD, when these are all standard services provided by cloud-based solutions.” 
PayGlobal’s Donna Frew’s advice is to weigh up the advantages and disadvantages of all delivery options. “Invest in the most appropriate and correctly sized solution for your business – and it must be fully compliant. Review the costs of each against the internal costs in your business case.
“Think about the strengths of your payroll team and the availability of good payroll people.” Your location, the availability of good IT resources and network connectivity are also important factors.”
Frew says bureaus are good in terms of resource coverage; less training is required, but in some systems a lack of access to information could be an issue.
“Outsourced [payroll] infrastructure is cheap and secure, the database is hidden offsite and therefore hidden from internal IT, and disaster recovery is all taken care of. But it does all depend on fast and stable Internet connection.
“The cloud strengths are the same as outsourced infrastructure, with faster upgrades but a lack of customisable processes and interfaces.”
Evan Lyon emphasizes the importance of compliance when it comes to choosing a payroll option. “If you don’t pay your employees correctly, then they may not come to work. Make sure you’re getting good value for money out of that compliance.”
Another consideration, he says, is the need to have backup if the regular payroll person is sick, on holiday, or decides to leave. “Unless you want two payroll people on staff, outsourcing can be very cost-effective.”
A successful in-house managed payroll outcome is all dependent on having good people and a good product, Lyon points out. “But outsourcing takes away all that. Bureaus not only have the software that is fully up to date on compliance, but the people driving it who know what they’re doing.” He says bureaus also use their own software for their own business purposes and are therefore proactive in making improvements they’ve identified as necessary.
“I’d also remind you that there is no certification process for payroll software required in this country. And there are more than 400 people registered with the IRD in New Zealand as payroll software developers. However, employers must accept total responsibility [for non compliance].”
NZPPA’s David Jenkins says, while compliance is important, functionality is also a major consideration when weighing up payroll options. “Functionality aids the business owner and the payroll person, so that what they see in front of them on screen is correct, they pay people on time and pay them correctly.”
For businesses with less than ten employees, using more basic payroll software, Jenkins says it’s about record-keeping. “Employment law requires six years of records to be kept, and tax law requires seven years.”
Jenkins also sounds a warning regarding payroll packages. “You’ve got financials and you want to add a payroll package. The salesman says, ‘yeah, yeah, we’ve got a universal interface’. Then you spend the next three months trying to get the thing to work. You’ve got to ask for evidence that the interface is already working elsewhere successfully, be careful about claims that a universal interface can be designed from scratch, this is not proven, can be expensive and what happens if it does not work?”
And if you’re using an external payroll provider to process your pay, he says, you must have a good quality service level agreement, so if they don’t perform, you can take them to task.
“A good payroll provider will stand by their product but there are 93 payroll systems known by NZPPA in New Zealand and some are not compliant but are still actively marketed to business. “You must ask for reference sites to talk directly to users of the system or service to ensure it does do what the salesperson states it can do.
“If you’re going to purchase a payroll system to use in-house, create a business requirements document that clearly states what you actually want from a system – otherwise you could choose a package that’s not really what your business needs. It’s a case of finding a system that matches their needs – not the other way around. I see a lot of businesses being pushed to change their policies and procedures to fit a payroll system – it should be the other way around.”

Time for an upgrade?
So when should a business look to upgrade its payroll system? According to Julian Smith, two key measures of the effectiveness of a payroll system are time and accuracy.
“If a business owner or payroll manager is finding it increasingly hard to process pay on time using a current system, or if errors are regularly turning up in pay runs, it is likely time to review your current system.
“Paying your staff correctly is one of the most important measures for any business, and staff will quickly become dissatisfied – as potentially will the IRD – if their pays are inaccurate or running late. Reporting, too, is an important feature of any payroll system, providing a useful window on what is typically a business’s largest cost. If a business owner is struggling to get timely, accurate information out of their payroll system, it is another good indication that a business has outgrown the system it is using.”
Jenkins says your payroll system should grow with your business – and some ‘little’ payroll packages struggle to deal with 24/7 operations. “Collectives, for example, usually have pages and pages of allowances. That becomes quite complex – you have to create rules to accommodate these allowances. And that’s why you need a higher level system, to be able to handle that.”
KeyLink’s Evan Lyon says payroll software developers don’t exactly make it easy to switch from one system to another brand. “There’s a lot of information to transfer over and little compatibility between systems – so it’s no wonder it’s a hard decision to make.”
But once you’ve done it, he says, you’ll be really pleased that you did.
Glenn Baker is editor of NZBusiness.