Who owns the payroll function and does it matter?

4th December 2011

Payroll is an emotive subject – and not just among those being paid. As FSN writer Lesley Meall finds, the question of who does and does not own the payroll function divides opinion.

‘As payroll naturally spans both human resources and finance, in many organisations, it appears to be the precious orphaned child – highly valued, but without a clear home,’ says Simon Fowler, managing director of Advanced Business Solutions (Commercial). Earlier this year, when ABS surveyed human resources (HR) and payroll professionals in the United States and the United Kingdom, 36% of those questioned believed that payroll should sit in between an organisation’s HR and finance functions, 25% of respondents thought it should be part of HR, 24% believed that it should be part of finance, and 15% took the view that payroll should be outsourced to a third party provider. 

So, why the great divide? Well, the answer to this question depends on whom you ask; which is why the ABS survey results may tell us more about the people being questioned than they do about which part of a business should, or should not, be responsible for payroll. From an accounting perspective, it clearly makes sense for payroll to be part of the finance function, but some aspects of payroll are best be handled by human resources (HR). One example is maternity pay, as Sarah Coulson, payroll manager with the accountancy firm Rawlinsons, (which is a bureau provider) explains: ‘From the point of view of payments it’s financial, but from a contractual point of view, it’s to do with HR and employment legislation.’ 

But it isn’t always possible to draw a line between HR and finance when it comes to payroll; sometimes, you can’t even draw a line between HR and finance. Gary Miller, a partner at the accountancy firm Price Bailey, says: ‘Ask the bursar at Great Chesterford Primary where she thinks payroll should report to and she would laugh. They have so few staff that she is also the school receptionist, school nurse, head teacher’s PA, relief dinner lady, etc, etc,’ and as Coulson observes, even when HR and finance are separate, payroll can remain a rather grey area. ‘I’m not sure that some employers even understand the difference between payroll and HR,’ she says.

 But is one of the reasons why small businesses increasingly outsource both of these functions. ‘We are picking up a lot more payroll bureau work from clients, because the payroll person has been made redundant, or the position has been made redundant and they have been redeployed,’ says Coulson, (something FSN considered here), and as employment legislation has become progressively more complex, Rawlinsons has also seen increased uptake of outsourced HR services. ‘We work with a specialist consultancy that provides this service, and some clients pay other external providers a retainer or monthly fee,’ (something FSN considered here and here). 

As businesses grow, finance and HR do tend to evolve into separate departments. But even with clear delineation between the two, the best home for payroll can still be a contentious issue. ‘In larger organisations, it’s not uncommon for finance to handle the processing of payroll due to its integration to the accounting and business systems used, such as costing for timesheets and nominal postings of the payroll values,’ says Stuart Anderson, director of sales and marketing with Pegasus Software. But as Richard Anderson, sales director at Cascade HR adds: ‘Payroll has moved further away from finance, even though they have control.’ 

‘In my experience,’ says Andersen, ‘when it comes to selecting systems, HR and payroll tend to act as a department, and although finance gets involved, there’s less systems integration.’ Like the results of the ABS survey, this is an area where perspective and context are significant. Software vendors that offer integrated HR and payroll software indicate a rise in the use of this, and software vendors that provide integrated HR, payroll and finance, indicate a rise in the use of this, which seems to confirm, if nothing else, that businesses believe that there is much to be gained from integrating some of these systems, and there is, as FSN highlights here.

 But it is worth noting, that at the small business end of the spectrum, when software and system integration happens, it does not tend to involve HR software – for the reasons that Miller made very clear in his reference to multi-tasking admin staff. Among the small businesses that are serviced by the regional accountancy firm Rawlinsons, there is a very clear trend. ‘Some of our clients do use specialist software to do their own payroll, in house,’ says Coulson, and when this is integrated with another application, it’s usually accounting: ‘A lot of our clients use both accounts and payroll software from Sage, as the integration makes life easier for them.’

 The motivation seems to be the same, whether the systems being integrated are HR and payroll, payroll and finance, or payroll and finance and HR. Before WSP Group used SnowdropKCS to integrate its payroll and HR systems, both functions were much more labour-intensive: salary reviews required the manual integration of data across six operating companies, and payroll was an error-prone paper chase. By integrating finance, payroll and personnel, with Pegasus Opera II, Seawhite has been able to streamline processes and bring all of its most vital data together – and adding a business intelligence module (Pegasus XRL) has made the data easier to analyse, too. 

So, perhaps it doesn’t really matter who is responsible for payroll. ‘I think what matters more is whether payroll and HR and finance are integrated,’ says Fowler. ‘If payroll systems and processes operate in isolation from the rest of the organisation, then the payroll function is not operating as efficiently as it could be,’ he explains, and for a host of reasons (such as data duplication, admin errors, and unnecessarily lengthy processes) that remain the same whether the functional responsibility for payroll lies with the finance department, the HR department, or the sort of all-singing all-dancing individual that seems to characterise smaller organisations. 

However, integrating systems is not the same as integrating processes (which is one of the keys to exploiting integrated systems), and for organisations that do have separate departments for finance and HR (which may or may not include payroll), significant cultural and practical barriers may remain. ‘Technology is providing a vehicle to get them talking, but in many companies there is still a chasm.’ says Steve Foster, a managing consultant with NorthgateArinso, the global HR software and services provider. But at least the chasm is getting smaller. ‘They work together much better now than they used to,’ says Anderson, adding: ‘Years ago, just getting the HR, payroll, and finance people in a room together was difficult.’