Few would dispute the importance of the payroll function and yet where this function resides within an organisation continues to be a topic of much debate. Where should payroll sit within an organisation and does it actually matter? Asks Simon Fowler, Managing Director (Commercial division) of Advanced Business Solutions.
Payroll naturally spans both human resources (HR) and finance and so appears to be the precious orphaned child of most organisations – highly valued but without a clear home. A recent survey by Advanced Business Solutions highlights that opinion is split as to where payroll should sit within an organisation with some HR and payroll professionals believing it should reside within the HR function, others believing it should sit within finance, with the remainder believing that it should sit between both departments or be outsourced. This article discusses these different options, examines the merits of each and asks – does it actually matter where payroll sits as long as it is integrated with HR and finance?
A recent Linkedin survey by Advanced Business Solutions reveals that opinion remains divided as to where the payroll function should sit within an organisation. The research was carried out with 79 HR and payroll professionals from both the UK and the USA. Twenty-five percent state of survey respondents state that the payroll function should reside within HR. One of the respondents, a UK HR professional, says: “Payroll contains confidential and financial information and for that reason it should stay within HR.” Another HR professional agrees: “As HR tends to be more employee-facing, I would opt for it to be part of HR as they will be dealing with the employee calls. HR is also generally responsible for the bulk of the items processed within payroll – salary, bonuses, and benefits deductions”.
So does it make sense for payroll to form part of the HR department? Payroll is about paying people and as dealing with people is the realm of HR, this department may be better placed to deal with questions and issues arising from payroll. Many payroll issues tend to be connected with an aspect of HR such as hiring, firing, salary increases, benefit deductions and bonus payments. As the information being processed by payroll is of a confidential nature, this also suits payroll’s positioning within the HR department. In addition, some may argue that HR departments are more understanding of the time-sensitivity of payroll processing due to the issues that come their way if payroll is not processed on time. However, finance professionals would no doubt find holes in this argument!
Twenty-four percent of respondents to Advanced Business Solutions’ survey assert that the payroll function should be part of the finance function. One respondent, a UK payroll professional comments: “Payroll is a big part of any department’s costs and so must be held under finance”. Another respondent, a payroll professional agrees, “Having worked in both, I strongly believe that payroll belongs in finance. Payroll is the largest expense for most organisations and therefore the reconciliations, and taxation compliance are vital to the financial health of the organisation”. Like the finance department, the payroll function is numbers driven. Running payroll involves accounting functions and requires accounting knowledge, such as posting to the general ledger. It also requires a detailed understanding of tax law. To ensure that payroll is processed accurately and that it is legally compliant, it can be argued that payroll is best positioned within the finance function because after all, HR professionals are not trained as accountants!
The largest number of survey respondents, 36 percent, believe that the payroll function needs to sit between an organisation’s HR and finance department. This popular approach recognises that payroll does not comfortably sit in either department and yet has ties to both. One respondent states, “We cannot differentiate payroll in the HR department or payroll in the finance department. Payroll must be in between both the departments.” Interestingly, 15 percent of participants took the view that payroll should not physically sit within an organisation but instead, should be outsourced to a third party payroll specialist. There are many organisations that successfully outsource their payroll with others believing that it is important to keep it in-house. One of the survey respondents is a firm believer in the outsourcing model: “Outsource it… there is no need for payroll to be done in house.” Another respondent has a similar view: “Neither with finance nor with HR…it should be outsourced wherever possible”.
There are no clear reasons given for survey respondents choosing an outsourced payroll function over an in-house function, however it can be assumed that cost and resources are driving factors for selecting the outsourcing route. With mixed and strong feelings about the positioning of the payroll department continuing to pervade discussion forums, the question remains as to whether it actually matters where payroll is positioned within an organisation? Perhaps there is no right or wrong answer and that the positioning of payroll is dependent upon the business that it is serving.