What are the biggest compliance challenges for payroll professionals?

It should go without saying that the management of sensitive information has, and always will be, central to the roles of payroll professionals. However, in recent years the payroll industry, like almost every other, has had to deal with complicated factors such as the rise of remote work, shifting employee demographics and varying data privacy regulations. Locations around the world have become more accessible for businesses, driven by the rise of hybrid and remote working, making new talent pools accessible. However, this broadening scope of work has created new levels of complexity, making the roles of payroll professionals – and the wider function – significantly harder.  But what are the biggest payroll compliance challenges for businesses globally and how do they overcome them?

Geographical variations

As anyone operating within payroll, and finance will know, the increasingly global world has made hiring and paying employees considerably more complicated. Payroll teams now have to contend with a range of factors and ensuring that firms maintain pace with legislative changes is a full-time job in itself.  However, operating compliantly should be an absolute priority, and failing to do so can lead to costly fines, penalties and audits.

Dealing with potential non-compliance is challenging enough for finance and payroll teams, but it also has deeper knock-on effects on employee engagement and productivity levels. If businesses fail to pay their employees on time, file their taxes incorrectly, or late, it’s the workers who feel the pain. Whether intentionally or not, professionals will focus on ensuring they are being paid properly, rather than the job at hand, and the anxiety and worry this can create will only negatively impact morale and employee loyalty at a broader level.

Within payroll, all of these challenges are amplified because of the tight turnaround times that professionals face, as my colleague and Vice President of Product at CloudPay, Matt Hillier, recently explained in a payroll compliance report:

“Payroll information doesn’t only have to be accurate, it needs to be accurate from the start, because it can impact taxes and calculations—both in the present and later on down the road. What you don’t want is to have payroll teams scrambling around two days before payday to make sure that deductions and taxes are accurate in order to pay their employees correctly.”

“Tax and reporting deadlines are also part of the equation. These can vary— and often do—based on where employees are located. Brazil is an example of this. Income tax is due within the first five days of the following month, while social security tax is due on the 20th of the following month. That’s different from the U.S. or certain countries throughout Europe.”

Indeed, businesses operating in Latin America or specific parts of Europe face even greater challenges because of the close ties between payroll regulation, social benefits, unions and employment laws.

Pandemic pressure

The pandemic has also played a part in creating this increasingly complex environment that payroll is facing. Remote and hybrid working has been around for decades; however, its growth really kickstarted after March 2020. The ensuing ‘Great Resignation’ also placed greater strain on payroll functions with mass departures of staff leading to more instances of errors and mistakes in filings. Companies reacted by adjusting salaries and benefit offers in attempts to retain their people in skills-short markets, again, creating more administrative burden for payroll teams. The turnover of workers and volume of changes has created a more challenging environment that many functions are only beginning to effectively manage.

Changing nature of the workforce

As well as the rise of remote and hybrid working, another new workforce trend is the growth of the gig economy, which has led to a substantial increase in the number of people working as independent contractors and freelancers around the world. While the freedom this employment model offers benefits workers, for employers it becomes significantly harder to remain on top of employment statuses, classifications and benefits allocation for different types of employees.

Some firms have adapted by centralising their payroll policies and procedures, but this negates the fact that all countries are different, and some policies work more effectively in certain jurisdictions than others. Decentralisation helps firms to navigate these differences, but it also leads to reduced visibility into regional payroll and finance teams because of the number of systems and relationships that have to be in place to enable complete transparency.

Trying to manage global activities remotely isn’t effective and, without in-country expertise, the chances that teams like payroll, HR and finance will struggle with the administrative burden only increase. Put simply, without cohesion, there will be more mistakes.

The future

The best approach to take includes adopting a unified global payroll solution that is cloud-based and uses a single platform for all processing and data management, thereby acting as a single integration point for all data systems and streams from countries around the world. This improves the standardisation of data which, in turn, reduces complexity and leads to fewer errors.

The growth of AI and other advanced tech is providing a helping hand, as Matt outlines, “There’s no denying the importance of accurate and timely payroll data. But if issues occur with that data, the ability of a company to respond—to correct bad information or fill in missing data quickly—is just as important. A robust payroll platform provides embedded tools that are constantly monitoring payroll data to ensure that the information provided is current, complete and accurate. For example, when a company hires a new employee, there are numerous data elements that need to be recorded in the HR system in order to pay that worker accurately, on time, and with the proper taxes deducted.”

Leveraging the power of technology can free up payroll specialists from concerns over non-compliance and the subsequent risk of fines and penalties, enabling professionals to focus on more strategic tasks. And it also benefits employees outside of related functions as consistency in payroll is closely connected to a good employee experience.

With or without advanced technology, companies that do look to launch global payroll operations need to consider the complexity it can create. The range of factors like employment and data laws, tax regulations and local laws make keeping pace with changes exceptionally difficult, and that’s before we account for other socioeconomic and political factors. Essentially, any company operating in more than one country needs to have a focus on payroll compliance and risk management, or they are likely to face major issues remaining on the right side of the law.

Find out more about navigating global compliance traps in our report.