Ringing the changes in SME Payroll

The many complexities of payroll means that business owners, intermediaries and service providers are forever being kept on their toes. 2017 will be no different.

NZBusiness reviews the marketplace and identifies some key changes and trends. Download our 2017 Cloud payroll services guide at the end of the article.

Batten down the hatches, because the Government and Inland Revenue have announced another raft of changes coming for the payroll sector over the next few years.

The overall aim is to help businesses move from paper to electronic filing of PAYE. So for starters, new legislation will be introduced this year to require electronic filing from 2019. 

To quote from a BusinessNZ statement released in November 2016; “Employers above a certain tax threshold would be required to file electronically, unless they do not have relevant computer or Internet access, and PAYE filing would need to be integrated into their payroll software to allow electronic filing to occur.

“Smaller businesses would have the option of staying with paper filing or moving to electronic filing, and electronic filing would still be possible via the IRD website without having to purchase payroll software.

“Businesses would be able to choose whether to file electronically on the actual payday or to continue to file monthly or twice-monthly as currently.”

Steve Nathan, Crystal Payroll’s sales and marketing director, says while not coming into effect until April 2019, the pending major changes to how employers report PAYE (including IRFiling) to Inland Revenue need to be part of the conversation now.

Systems will need to be updated in 2018 and this is not a minor update, he says. He also thinks it likely that some payroll providers won’t be able to handle the change.

“Holiday pay-related issues will continue to be a problem for some employers too,” he says. “Even if it doesn’t directly affect them or their staff. 

“The fact that there’s been so much media coverage, and labour inspectors and unions asking questions, sows seeds of doubt and causes employers to second guess their systems. 

“The Holidays Act is a fairly simple piece of legislation which is badly applied, largely due to the fact that it was written for a time when employees took time off in large chunks, like weeks, when the reality is employees take time off in increments as small as hours.”

Another payroll issue impacting on business owners is the increasing shift from PC-based payroll systems to cloud-based ones.

“This year more and more employers will be looking at whether their existing PC-based system will meet their needs,” says Nathan. “And given projected changes like those mentioned around IRFiling, now’s the time to change [to the cloud].”  

Martin Gleeson, managing director of iPayroll, the provider that’s now in its 17th year of operation as a pure cloud-based solution, says the proposed IRD changes will be seamless for clients using payroll intermediary services as the payroll intermediary (PI) will be responsible for compliance as per usual.  

“Where the complications will arise and which have yet to be explained by IRD is how the variations – of which there are thousands every month – will be managed. Currently PIs and the majority of employers process pays for one month and file returns on the 20th of the following month. This give PIs and employers time from the 1st to say 18th of the subsequent month to reconcile everything and then submit the data, along with the payment, to IRD. 

“Under the proposed new regime PIs and the majority of employers will be required to submit electronically all payroll information no later than two business days after payday. 

“Any subsequent adjustments that may be required, including back loaded payments for employees (overpayments and underpayments), back loaded payrolls for new start-ups, and a multitude of other variations that occur every pay period will have to be processed by IRD somehow.  

“It will require a very interactive service with PIs and employers being able to delete or alter data already presented and this could happen for every payroll,” says Gleeson. “Currently the monthly process is complicated enough but at least there is reconciliation time available. This will disappear under the proposed regime.”

What may happen, especially since the Payroll Subsidy is due to be cancelled, is that PIs will no longer manage this process on behalf of employers though the PI scheme, Gleeson says. PIs will still enable the processing to take place but any variations will have to be dealt with by employers directly with IRD staff.  

“The IRD help desk will need to be significantly enhanced for this to happen.” 

Gleeson believes non-binding would be a far better proposition, at least in the early years.

Finding the ideal partner

When considering payroll providers, remember that a good payroll system should meet your needs now so you’re not paying for features or functionality you’re not using. At the same time it should have the ability to scale, integrate or ‘add-on’ new functionality as your business grows.

Scott Gardiner, strategic programs manager at MYOB, suggests you ask yourself the following five questions when weighing up providers:

1. Can you work online? 

The cloud is fundamentally about cost, security and flexibility. Choose to work online, offline, from any device and from any location. Plus online means peace of mind with superior security and regular backups. 

2. Does it help meet your employer and compliance obligations? 

Cloud-based payroll solutions are automatically kept up to date with IRD changes so you never have to worry about upgrading desktop installations again. You’re always kept compliant with tax, ACC, student loan and KiwiSaver rates. They store time and wage records and produce reports on demand to clearly track leave entitlements and meet your record keeping obligations. Plus, those with an intermediary feature help you meet your PAYE obligations and ensure PAYE payments and IR reports are filed on time.

3. Does it streamline payroll processing? 

Leave it to the software to take care of the pay and leave calculations for you. Use it to automate the data capture of timesheets, automatically generate payslips for employees, lodge PAYE payments and reports for you and integrate with your accounting software. This all saves time and errors by removing double handling and manual data entry and provides you with better visibility of labour costs. 

4. Is it easy to collaborate? 

The cloud lets you easily connect with your business advisor, accountant, bookkeeper and/or payroll provider. Set roles in your software so that you’re all working off the company file in real time rather than having to post or fax shoeboxes of timesheets and paperwork.

5. Does it come with phone-based payroll support? 

Payroll tasks are time-sensitive. When you’re under pressure and need help, make sure you have a support team to quickly solve any payroll problems. 

iPayroll’s Gleeson believes a prime consideration when choosing a payroll partner is the calibre and experience of the help team. “Ensure its nationwide support is not from just a sole office,” he says. 

Cloud confirmation

Cloud delivery of payroll is pretty much a given in 2017, and people have pretty much got over their initial security fears.

“Think back ten years ago to Internet banking,” suggests MYOB’s Scott Gardiner. “People had the same security fears about accessing their banking online with just a username and password. Yet now, virtually everyone uses it.” 

He points out that his company’s cloud accounting and payroll systems store client data in highly secure storage facilities – “just like Internet banking”. 

“Many businesses running payrolls on their desktop face greater risks of data loss or corruption,” he adds. 

Gardiner cites backup routines that are infrequent or non-existent, outdated operating systems and hardware that have a higher risk of failure, and company files stored on local devices like laptops without adequate password controls, all as examples of where desktop solutions can let businesses down.  

“In many cases, having your data stored in the cloud adds far more data protection than businesses can achieve themselves.”

Crystal Payroll’s Steve Nathan agrees. “You probably have more chance of someone stealing your laptop with your PC-based payroll on it than you do of someone hacking your cloud payroll.”

Chris Mar, manager strategy and compliance at Datacom reminds us of the highly confidential nature of payroll data. “Yet in many cases this information is held insecurely in a filing cabinet or a shared computer that is readily accessible. 

“Selecting a trusted cloud payroll provider to move this data out of the office and off a dedicated computer into a secure data centre is vital,” says Mar. 

iPayroll’s Martin Gleeson believes cloud delivery is now a given. “Most know the desktop days are over and cloud’s the way forward. [It means] better services, immediate updates, and 24/7 access for both employees and employers.”

He says when payroll personnel used to using iPayroll move to another organisation that’s not using cloud solutions, his company will frequently receive a call indicating they want to put the new business onto iPayroll. “They tell us they don’t want to revert to using ‘old school’ systems.”

Best practice

There’s no ‘one-size fits all’ solution when matching systems with business models.

Scott Gardiner says the most common issues MYOB comes across include payroll systems that are not set up correctly; Employment Agreements don’t exist or aren’t suitably comprehensive; there’s a lack of communication between finance, HR, operations and payroll teams; and changing work patterns aren’t always reflected in the systems.

Gardiner’s top tips for payroll best practice are:

1. Have written Employment Agreements for all employees and ensure they meet the new requirements. 
2. Set a reminder to review employee files regularly to ensure all contracts and variations to employment are documented. 
3. Make sure you have a record-keeping system that accurately calculates, tracks and stores hours worked for each day in a pay period and wage records evidencing pay for those hours. “If your business is ever audited, you will need to produce this on demand.” 
4. Check any employees that are set up as casuals. Are they really casuals or part-time employees with a clear work pattern?
5. Check casual employees have met the requirements and are correctly set up for sick leave.
6. Are you clear in which circumstances to use average daily pay vs relevant daily pay calculations?
7. Are all eligible payments being included in Ordinary Weekly pay and/or Average Weekly Earnings i.e.: back-pay, overtime, bonuses?
8. Are sick leave entitlements correct – including casual or part time staff?
9. Are leave entitlements set up correctly?
10. What does a working ‘week’ look like for each of your employees and has it changed?

Steve Nathan’s tips provide additional best practice insight:

1. Make sure you are compliant with all legislation such as the Holiday Act.
2. Ensure you are capturing and keeping as much data as you can. This will mean you can always answer a question from an employee or labour inspector.
3. Make sure you can verify the data your payroll is giving you. If you can’t drill in and interrogate the data how can you be sure it’s correct?
4. Make sure your payroll provides the information you need so you’re not doing manual analysis of payroll data for systems such as Accounting or Government agencies.
5. As much as you can, automate the capture and delivery of data. The less times someone has to touch (key) the data the less chance for error.
6. Payroll is a profession. Make sure your payroll person is valued and well trained. ‘Hand me down’ knowledge leads to errors. 

The future, for now

For the foreseeable future the payroll sector is all about continued migration to the cloud – and that includes larger organisations, many of whom have already started the process.

For iPayroll’s Martin Gleeson the future is also about better, timelier interaction with Inland Revenue once the department’s business transformation project is complete.

“However, in the meantime a lot of work needs to be done to improve the efficiency of Inland Revenue processing times and address how and when amendments to payroll adjustments will be made.”

Businesses will also increasingly opt for integrated accounting and payroll solutions, believes MYOB’s Gardiner.

“Payroll as a function will continue to become more automated. Inputs to payroll such as online timesheets, employee self-service, HR, leave management and notifications will become mainstream,” he adds. “These solutions were once only available for large business but adoption will increase among small to medium businesses.” 

Gardiner believes technology advances and payroll system improvements don’t have to come at the expense of good people either. “Payroll administrators will continue to play a vital role. Automation and streamlining tedious manual tasks and integrations with accounting software means they’ll be able to free up their time spent on payroll processing and help with employee management or other parts of the business. 

“And business owners will have better, real-time access to labour costs to help them understand profitability and inform better business decisions.” 

In 2017 Crystal Payroll’s Steve Nathan believes data capture and data delivery will become key components of payroll. There’ll be more tools designed to capture employee attendance data, much of which will be managed via mobile apps, as well as third party systems such as job costing, rostering, time-sheeting, leave management apps – all of which are easily distributed via the cloud.  

“Mobile delivery of data such as payslips to employees, and even communication or messaging apps which allow employees to communicate with the pay office or managers, will become more prevalent. 

“We live in an “always on” Facebook world where this method of communication is part of our everyday lives.” 

However, Nathan does have concerns over market consolidation. 

“There’re fewer independent payroll providers in the market and this trend will continue. The challenge I see with this is it reduces competition and has the potential to dumb down the market. 

“The more diverse the range of products is in the market the harder the vendors have to work, which leads to innovation, better service and more cost effective solutions.”

And the final word goes to Datacom’s Chris Mar.

“Most know the desktop days are over and cloud’s the way forward. [It means] better services, immediate updates, and 24/7 access for both employees and employers.” – Martin Gleeson, iPayroll.

He sees a future of more flexible working arrangements. “People working more than one job, and for more than one employer will become more prevalent. Payroll systems, and the legislation for governing these new working relationships will need to adapt to suit these changing work relationships,” he says. 

“It may not be too far-fetched for employees to expect to be paid at the end of each day, as opposed to waiting until the end of the week if they work multiple jobs for multiple employees.”