Introduction To HR Payroll

Introduction To HR Payroll

By Anurag Vasisht

Introduction

Payroll is one business area that is of relevance to all of us. We all work to get paid (or most us, anyway). In good old days, this payment used to be a straight affair of a fixed salary OR a simple multiplication of number of hours with hourly rate. Not any more. Nowadays, it’s a much more complicated process with concepts like deductions, contributions, exemptions, taxation laws, union contracts, commissions, loans, bonus payments and other special payments/deductions. HR Payroll also provides input to downstream systems like Finance Accounting, General Ledger etc.

For the purpose of understanding the nuts and bolts of HR Payroll, let us define employees under the following broad categories. This distinction is required because the Payroll processing is vastly different for these categories. Most employers, big or small, follow this segregation at the topmost level, drilling down to different levels of complexity based on size and diversification of their businesses.

1. Non-Exempt
These employees are required to accurately record the time that they spend on work. If different types of work have different payment rates, then they are expected to record time against different “attendance/work codes”. If time is not recorded for work done, then no payments are made for that work.

Such employees are setup with an expected daily/weekly hours and basic rate of pay instead of a fixed/basic salary. If these employees work more than their schedule, then they are paid overtime at a normal or premium rate as defined.

In some cases, such employees are contracted through Labor Unions and are paid as per the terms and conditions as defined in the respective contracts.

2. Exempt
These employees are exempt from recording their time on work. Such employees are setup with a schedule (such as Mon-Fri 9-6) and are expected to report time only if some exception happens from their normal schedule (such as vacation or jury call or military duty). Unless they report an exception it is understood that they followed their schedule. Though employers do set up in/out devices for monitoring purpose and deviations are questioned, but these typically do not impact the payments unless there is a drastic variation.

Typically, management employees fall under this category while non-management employees are under Non-Exempt category.

2. Stages of Payroll processing
1. Employee setup
This is the static information which is typically set up for an employee at Hire time and updated typically at the start of a financial year. This is expected to remain the same till there is change in status of the employee, caused by events such as promotion, termination, demotion, change of job profile or location etc. Setup information includes data such as type of employee, job profile, work location, work schedule, leave entitlements, payroll cycle (weekly, semi-monthly, monthly etc), basic pay (or rate of pay), compensation and benefits, medical and insurance plans etc. This setup pretty much defines the way actual processing happens at the end of every payroll cycle.

2. Attendance/Absence Records
Non exempt employees record each hour and minute of work against relevant attendance code. This time is compared against the work schedule and determined if any premium is to be paid against overtime, holiday worked etc.

In case of absence in scheduled work hours, time is coded against the relevant absence codes. This is applicable for both exempt and non-exempt employees. Absences are compared against the leave entitlements, and determined if they need to be paid out or any deductions need to be made.

3. Calculation of Gross Pay

It is typically the summation of all earnings. For non-exempt employees, the figure arrived from number of hours X hourly rate can start as the basis while for exempt employees, the basic salary can for the basis. In this figure, various garnishments are added to arrive at the Gross Pay. These include overtime/holiday worked premiums, commissions, bonus payments, arrears from previous salaries, misc benefits etc.
4. Calculation of Net Pay

This calculated by subtracting the various deductions and taxes from the Gross Pay. Deductions may include loan payments, union dues, overpayments of previous salaries, contributions to misc health/benefit/insurance plans. Taxes are generally applied after deductions and include federal, state and local taxes. Net Pay is what an employee gets in his account.

3. Key Considerations in Testing
1. Setup & Locale: Payroll processing is different for each country, and sometimes there are major differences with in states in a country. Even though generic rules are good to have an overview, a thorough understanding of the local (financial, labor and taxation) laws is essential. Similarly, HR policies of a company that govern all the Payroll processing are important to learn and comprehend before jumping headlong into IT solution that implements those policies. Finally, knowledge of IT solution (implementation) is recommended as each vendor differs vastly from the other, and even in case of black box system testing, it does no harm to know the vital aspects.

2. Movements: Any kind of movement brings complexity to the system. Whether it was a Hire, Rehire, Termination, Transfer from one location to another, Promotion, Demotion: all of these visibly impact the payroll processing. Much of the complexity can be removed if a company prohibits movements in the mid of a pay period. Then, there is a clear demarcation, and the process can be easily developed and tested to take notice of such a movement. However, if there is no such restriction, then it is a nightmare…requiring much more analysis in understanding, implementing and testing the solution.

3. “Worked/Earned” vs. “Paid”: This concept is critical in case of reports which run out of Payroll. Consider this example: An employee works for the period 12/16/07 to 12/31/07. His Payroll processing happens on 1/3/08 and gets paid on 1/5/08. Now, assuming there is monthly report which displays employee wages. In this case, should the amount for the work done between 12/16/07 to 12/31/07 appear in Dec 07 report or Jan 08 report? There is no default answer to this question, and depends from case to case – determined by the business that uses the report. So, this question must definitely be asked for any Payroll report testing.


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