It’s the chicken and egg question. Should payroll be part of HR or Accounting/Finance? The question becomes even more pronounced once you start shopping around for payroll management software.
When not bundled in an ERP system, payroll management software is almost always a part of either HRMS or accounting software. Here lies the rub–if you’re not getting an ERP, which may be complex or costly for small and medium companies, where do you get payroll automation?
Let’s answer this in a bit. First, let’s take a look where the confusion lies.
The best HRMS solutions offer great payroll management featuring, among others:
- wage calculations
- tax processing
- employment contracts
- regulatory reporting
- benefits management
But so do the best accounting systems.
Just so it’s clear, we all agree payroll is one of the most important aspects of business; well, it is the most expensive cost. But it’s also greatly misunderstood who should take in this orphan that represents precious human capital.
Look closely at that last paragraph and you’ll realize the problem is a matter of perspective: payroll is either the most expensive cost or represents precious human capital. Accounting sees the former and HR sees the latter.
And the answer is…
So the short answer where payroll management should fall under is how you see payroll. If it’s a cost above all for you, then it belongs to accounting software. If you see the person behind the pay, payroll management is better as an HRMS module.
Now, for the long answer, let’s see why payroll is better an HR task than an Accounting’s.
3 Reasons Why Payroll Should be Part of HRMS
Payroll management software benefits the company in myriad ways, including accurate wage computations and scheduling, benefits and leaves calculation and tax processing. While all these are seen from an employer’s perspective, they can also be seen from employees’ point-of-view: they get the right pay at the right time. This is critical to employee morale. On the same breadth, payroll management software should be part of HRMS for these three reasons:
1. Payroll is more about employees than numbers
Unlike other capital and costs, there’s a breathing, dynamic and emotional element behind payroll: the employee. Other business costs can be delayed, suspended, scaled down in times of budget crunching, but payroll is holy ground.
Beyond labor laws, payroll is the soul of your relationship with employees. Any impact on payroll will impact on this relationship. It must be handled with care and empathy and HR is the better team to do this.
HR deals with issues and concerns of employees and a great part of them is about compensation. HR is trained to handle employee-facing questions and resolving problems that are mutually beneficial to both employer and employees.
Arguably, HR is also more aware of the time-sensitivity of delivering payroll. Any delay causes resentment and, worse, douses employee morale. HR is the department that faces the music.
On the other hand, accounting sees payroll as simply a matter of paying employees, a cost to be entered in the ledger. The relationship is only an afterthought. Of course, this is generally speaking based on the nature of both professions, one dealing with relationship, the other with income vs. expense.
2. The Bulk of payroll processes involves HR work
Payroll is impacted by changes in employee status, which fall within the HR realm. For example, regularization, promotions, benefits, deductions, bonuses, leaves, AWOLs, suspension, termination, transfers, etc. directly cause pay adjustments.
In short, payroll management software needs to be integrated with more HRMS workflows than accounting processes. These include HR administration, talent management and benefits management.
3. Payroll contains sensitive employee data
We know of accountants or CFOs who have had provided finance and accounting training to HR. This seems proof positive that payroll is an accounting discipline. But a closer look shows that most of these trainings revolve around quantitative elements: costing, savings, efficiency, assets and liabilities.
Buried in these trainings is the fact that payroll isn’t just a cost, but the value of one employee versus the other. In many cases, this information is best kept from others (except the recipient), especially among colleagues of the same rank to avoid comparison and resentment.
Putting payroll management in accounting may leak this confidential data to an unauthorized staff. On the other hand, HR is more adept at employee confidentiality rules, which also cover health-related data, legal issues and work history.
When payroll is better in accounting system
That payroll management software should be part of HRMS isn’t a rock-solid rule though. There are occasions when payroll management software is better to integrate in an accounting system. Here are three scenarios:
1. You already have an accounting software
Many accounting software either has a payroll management module or integrates with a third-party app. If you’re already using an accounting software it’s better to expand its functionality than set up another system just for payroll. Unless, of course, you plan to subscribe to an HRMS solution.
2. You don’t have an HR team
This is self-explanatory. HR is usually a budgetary option, unlike accounting, which is necessary to run the business. For small companies, HR tasks are usually delegated to accounting or someone who directly reports to the accountant.
3. Your accounting is much larger than your HR
Sometimes a small business has an “HR” guy and that’s it. This person does no more than recording attendance and calculating payroll and reporting it to the owner. The owner reviews the payroll and forwards it to accounting.
If this is your setup, it’s best to get an accounting software. You have more users needing accounting software than setting up an HRMS for that lone HR guy (and you as the owner).
Finding the middle ground
For larger companies, how to set up payroll management software is never an issue. They have an ERP system, which encompasses both accounting and HR processes, along with other key departmental functions like sales, marketing, support and inventory. If you’re a large company or a fast-growing business, investing in an ERP solution is a good option. Your HR and accounting can work closely together.
In fact, in a LinkedIn survey by Advanced Business Solutions more HR and accounting respondents believe payroll is a crossover function of HR and finance. Their notion is that payroll doesn’t belong to any department, but is closely tied to both functions.
In the same study, 15% of the respondents said payroll is better outsourced to a specialist. Payroll, they argued, involves complex employee data processing and regulatory issues and a small error can have significant legal impact.
Outsourcing keeps employee information processing an HR task, while cash processing an accounting responsibility. The drawback is you increase the risk of data leakage once employee information leaves the company.
The SaaS Advantage
Cloud solutions today offer companies flexibility on how to access payroll management. Whether it’s an HRMS, accounting or ERP solution, if it’s cloud-hosted it likely can integrate with other systems. The key feature here is integration, on which your SaaS software of choice should be closely scrutinized.
If you decide to get an HRMS with payroll functionality, make sure it features reporting tools that can be accessed by accounting. At the end of it payroll is better managed by HR, but should be audited by accounting, just like any other business costs.
Payroll involves a lot of HR processes and requires HR training to deal with its human-side issues. At the same time, accounting is necessary to ensure adequate controls are in place to reconcile costs with returns. All things being equal, payroll management software is a better fit in HRMS than accounting. But things aren’t always equal, and as we’ve explained, there are instances when payroll is better the function of an accounting software.