I have stated time and time again that a payroll system is a tool and is not the actual payroll! The payroll practitioner is the one essential part of payroll that must be present to bring all the required components together to create a successful payroll.
It is essential for payroll practitioners to drive the payroll system and not the system drive payroll. I see more and more payroll practitioners totally reliant on the payroll system without actually knowing how and what the system is doing (especially with calculations). A payroll practitioner must know this and have full confidence in how the system is doing it. If they don’t, this creates a risk to the business by undermining payroll through complacency and non-compliance. There should never be a mindset in payroll that the system knows best; it is the payroll practitioner that does.
In this post, I want to cover an area where payroll should be asking more questions of the payroll provider when they send through an update to their payroll system. Payroll should treat this as a high-risk activity and question until they fully understand the update, why it is needed, and whether it is compliant. Any good payroll provider would be open to this as it should be part of the supportive relationship they have with payroll.
Payroll provider software updates fit one of three types:
- Annual legislative updates (1st April) or special legislative changes
- Reporting, filing and calculation changes (made by a government department and/or agency)
- Provider software updates (fixing bugs, new features).
Annual legislative updates (1st April) or changes to existing and new legislation
- There are annual changes that take effect on 1st April if the government has decided to make the change, such as:
– minimum wage
– tax rate changes
– ACC earner levy and earner threshold.
- And there may be other changes to existing legislation and new legislation that has been introduced.
It is important for payroll and the business not just to accept updates from the payroll provider on legislative changes. Payroll needs to fully understand and confirm these changes and how they will impact the types of employees paid through their payroll and payroll activities overall, including manual and automated.
Some legislative changes impact all employees (such as the ACC earner levy). Some may not impact any employees (such as when the employer always pays higher than the minimum wage), or payroll may find only a specific group of employees are affected. So, this is why it is essential for payroll to understand the changes and how the payroll provider has included them in their software update.
- An upcoming change for 1st April 2021 is the government’s promise to add a new tax threshold/rate of 39% for incomes over $180,000. IRD has already released its Payroll Calculations & Business Rules 2022 to help payroll developers make the change. In early March payroll should receive details from their provider on the 1st April changes. Payroll should spend time reviewing what the payroll provider is doing regarding the change, how it will impact on their payroll (if there are employees getting paid more than $180,000), how the payroll provider has stated the system will apply this and what that means for payroll (any additional manual activities that will now need to be included in payroll processing because it is not part of automated activities).
A recent example of a poorly implemented new legislative change that impacted payroll was the introduction of domestic violence leave (now called family violence leave) that became a minimum leave entitlement under the Holidays Act on the 1st April 2019. As MBIE did not show leadership or support for payroll with guidelines or a payroll specification, there was a wide range of different ways payroll providers accounted for the change in their software. These included adding the new leave type to sit alongside other types of leave provided under the Act, or not referencing domestic violence leave at all. The worst I saw was one payroll provider trying to charge for updating this minimum leave entitlement as an optional extra (they soon stopped following the backlash they received). We will see another change of this type when the bill for increasing sick leave entitlement (after the full select committee process has been undertaken) becomes law late in 2021.
Reporting, filing and calculation changes (made by a government department and/or agency)
There is a bit of overlap with the previous section, but this is about updating payroll software to comply with a government department and/or agency requirements. An example of this is the IRD transformation project that has changed how it interacts with payroll through payday filing. The final part of the IRD transformation is to be completed in 2021.
For payroll, there needs to be an understanding of the government or agency requirements and whether the software provides the option to meet the obligations fully.
Any change to a calculation requires additional work by payroll to ensure the change is correctly applied to the payroll system, focusing on compliance. This means confirming the calculation by testing it to ensure it provides the expected results. It is quite common to see in my travels that different payroll providers have interpreted the change differently (their view of the world). For this reason, payroll cannot just accept what has been provided but should assess whether it meets the requirements set by the government department and/or agency. The bottom line is the liability sits with the business and not the provider. This is why it is so vital for payroll to take a proactive approach and not sit back and think the payroll provider does this.
Provider software updates (fixing bugs, new features)
I have written about this before, but I would be very cautious about any update to a payroll system, especially regarding a calculation outside the updates for changes driven by law. If an update to legislation is not driving the change the provider is pushing; payroll must ask questions on:
- What is the reason for the change?
- What does it mean for the past? If the calculation has been used previously, does the change mean there are issues now in past payments made to employees?
I always refer back to the Holidays Act and annual holiday calculations that have not changed since the legislation was implemented on 1st April 2004. If the payroll provider states they are updating these calculations, ask why? The legislation has not changed, but the providers’ interpretation may have, and that could be the driving force. But if the past is wrong, does this mean leave already taken and paid was also wrong? This is what payroll needs to nail down and get the payroll provider to explain what has happened. From what I have seen when this happens, the payroll provider won’t be that open to admitting their system was non-compliant.
In conclusion, treat all payroll system updates as high risk to payroll. Clearly understand why the update is being provided and then assess, test and question until you feel certain it will not undermine payroll or payroll compliance. Stop falling into the complacency trap and challenge your provider on any aspect of the system you believe is not correct. Any good payroll provider would stand by their system and be happy to justify any update provided, if not then take the hint!
NZPPA supporting NZ payroll since 2007!