Determining Functionality: Should Payroll Cost Control Belong to Finance or HR?

Payroll and human resources (HR) are separate but interconnected divisions within an organization. While HR manages the onboarding and benefits of employees, Finance ensures that the necessary funds are allocated for payroll processing. This article explores the complexities of payroll cost control and the two primary departments involved—HR and Finance—which often work together but require distinct roles for optimal efficiency and compliance.

HR vs. Finance: The Unique Roles in Payroll Management

HR plays a pivotal role in the initial stages by collecting and maintaining employee data and records, which form the basis of payroll information. Nevertheless, the ongoing management of payroll compliance, accuracy, and timeliness falls more heavily on the shoulders of Finance. HR managers often lack the necessary knowledge and experience in both legal and financial regulations that govern payroll operations.

HR's Scope: Focuses on personnel management, employee benefits, and the overall well-being of the workforce. HR handles onboarding, offboarding, and employee transitions through various lifecycle stages, ensuring accurate record-keeping and compliance with internal and external policies.

Finance's Role: Ensures the proper handling of payroll as a financial responsibility. Finance is accountable for financial accuracy, compliance with tax laws, and ensuring that payroll is processed accurately and on time. Finance is responsible for addressing any legal or compliance issues that arise, such as tax deductions, employee benefits, and adherence to labor laws.

Missteps and Clouded Responsibilities in HR Control

Through my 45 years of experience in payroll, I have observed firsthand the advantages and shortcomings of having payroll under HR control. In my opinion, Finance is the more suitable department for managing payroll costs for several reasons:

Financial Regulations: HR departments often prioritize employee satisfaction and benefits over financial regulations, which can lead to oversights. For instance, an HR representative recently proposed giving a signing bonus of $5,000 to a candidate who would not start for six months. The thought was to give the candidate an advance payment instead, without checking the necessary financial and legal requirements. This oversight can create significant complications with regulatory bodies like the IRS.

Accountability and Accuracy: Finance departments are better equipped to handle the financial nuances of payroll. An example from my experience highlights this: an HR member authorized a payment to an employee, but the details of the department or project weren't clear. This lack of information can lead to inefficiencies and increased administrative burden. Additionally, the latest trend in employee compensation strategies is to reimburse employees for home office expenses like electricity, internet, and phone service. However, these reimbursements must be carefully managed to ensure that the associated savings on transportation are not overlooked.

Critical Milestones: Finance plays a crucial role in managing critical payroll milestones, such as annual bonuses. I recall instances where I had to wait until 4:30 AM to receive the necessary information for the annual Christmas bonus from HR. The late submission of crucial data not only hinders payroll processing but also introduces risks of non-compliance and potential discrepancies in financial records.

Conclusion

The transition of payroll cost control from HR to Finance simplifies management, fosters better compliance, and ensures the accuracy and timeliness of payroll processes. Finance brings the necessary expertise in financial regulation, tax compliance, and financial reporting, which are critical components of effective payroll management. Transitioning payroll to Finance can help streamline operations, reduce risks, and enhance the overall financial integrity of an organization.

Organizations must carefully consider the roles and responsibilities of HR and Finance in managing payroll functions to ensure the best possible outcomes for both employees and stakeholders. Moving forward, the decision to place payroll under Finance or retain it within HR should be evaluated based on the specific needs and operational requirements of the organization.