What Is Payroll? Part 1

In recent conversations, the topics of a payroll curriculum and industry norms have surfaced frequently. Originally, I intended to address these in this article. However, I realised I had overlooked a foundational piece of information: a definition of payroll. So, I decided to shift gears and write about this topic instead.


A Definition of Payroll

At its simplest expression, payroll is the process that gets people paid accurately and on time. This, however, is a very simple definition for a very complex function. The term “payroll” can represent different realities depending on whether one works in an SMB or in a large corporation, in a public or private company, in a US (SOX) or non-US company, in-house or with a vendor, etc.

When asking generative AI for a definition of payroll, this is what it answers: Payroll is a critical function that ensures employees are paid accurately and on time, while also ensuring the company meets its legal and financial obligations.

This answer is pleasingly crisp and dense. However, while this definition is factually correct, it fails to grasp a key characteristic: payroll is a complex process, made of multiple tasks, of which not all are the responsibility of the Payroll team. This is also what so often causes misunderstandings with stakeholders.

What do I mean by that? Let us take a closer look.

Perhaps the most challenging part of the question “What is Payroll” is that, when taking deep dive, it turns out that there is a surprisingly large grey zone around payroll. Many companies tend to attribute to the Payroll team tasks are not strictly payroll, but payroll related or payroll adjacent. Historically, this makes sense since Payroll is very often part of HR and such teams are traditionally small whilst at the same time being entrusted with a tremendously broad scope: strategic HR, talent acquisition, management advisory, employee relations, compensation, benefits, training, performance management, compliance, HRIS, employee safety, diversity and inclusion, employee wellbeing, personnel administration, and… payroll.

In this context, it is logical to entrust part of the team, maybe even one single person, both with payroll itself and all payroll-adjacent tasks such as compensation, benefits, personnel administration, and employee safety since it requires a similar (but not identical) set of skills. In other words, a portion of the team would focus on so-called hard HR (focused on numbers and processes) while the rest of the team would focus on so-called soft HR (focused on people).

This organisational setup is still predominant in people’s minds to this day – often even amongst payroll professionals. This presents organisations with major challenges when they are prompted to single out “pure” payroll activities. There might be various reasons for this exercise: outsourcing payroll activities to a vendor, moving the payroll function to a shared services centre, stand square with compliance requirements such as segregation of duties and internal controls, etc.
 

Payroll and the Grey Zone

Typically, the payroll process consists of 4 major phases:

1. Pre-Payroll: The first step in the monthly cycle. It consists in gathering the data that is needed for the current payroll cycle, preparing it for processing, and sending it to the vendor (or entering it into the payroll software when working in-house).

2. Payroll: The second step in the monthly payroll cycle. It consists in actually running the payroll calculations, performing checks, corrections, and re-runs.

3. Post-Payroll: The third and last step in the monthly payroll cycle. It consists in paying employees and third parties, booking the payroll into the GL, and providing all of the reporting to internal stakeholders as well as external authorities and vendors, and answering employee queries.

4. Annual Activities: These activities usually take place outside of the monthly payroll cycle. Some of them might actually take place once a quarter or twice a year. They usually consist in sending annual reporting to external authorities and vendors as well as prepping the time and attendance and payroll engines with updates and legal changes for the new year.

Of all of the above, only phase 2, Payroll, is “pure” payroll, i.e., entirely within the scope of the Payroll team. Every other element involves stakeholders and third parties. Essentially, 3 out the 4 main phases of the payroll process are in the grey zone.

Before we take a deep dive into the grey zone, let us first discuss what the payroll process definitely does not include:

Tax: Payroll cannot provide tax advice. In the vast majority of countries, tax advisory is strictly regulated, and payroll professionals do not possess the required qualification nor accreditation. “But then how come the Payroll team calculates and withholds taxes on my payslip?” is the question often asked to payroll professionals. The payroll software only determines which pay elements are taxable. It does not usually determine the tax rate. That is determined by tax regulations, not payroll regulations.

Legal: Similarly to tax, Payroll is not qualified to provide legal advice beyond the scope of payroll regulations. For example, in the case of a termination, Payroll knows whether the severance is taxable, but (usually) does not know whether the amount of severance is compliant with applicable regulations. Calculation of severance pay is a typical example of a payroll adjacent activity.

Join us next time as we discuss Payroll as the Stewart of Data as well as why payroll should no longer be referred to as a function, but rather as something else.