A business that has grown via a number of acquisitions is likely to have acquired a different payroll system with each acquisition, and is still maintaining each one. This situation can also arise when senior management allows local managers to install their own payroll systems. While having a number of payroll systems does allow for the adjustment of payroll to the preferences of local employees, this approach also results in a number of problems that can be most easily resolved by centralizing all of the payroll systems.
Problems with Multiple Payroll Systems
The following are all problems with a decentralized payroll system:
- Records. Employee payroll records are stored locally, and so must be manually shifted to a new location if an employee is transferred. This also introduces the prospect of data entry errors every time payroll records are re-entered into a different system.
- Status. When an employee is transferred to a new location, he or she must be terminated in one system and set up as a new employee in the payroll system of the location to which the employee has moved. This makes it difficult to determine the original hire date or term of employment, as well as eligibility for medical insurance and pension plan vesting.
- Reporting. It is difficult to aggregate information from multiple payroll systems for company-wide reporting purposes.
- Payroll taxes. The company as a whole must pay more social security tax matches for employees who are transferred between payroll systems, since the payroll cap must be attained in each system before the match is eliminated.
Because of these issues, it is more efficient to consolidate all local payroll systems into a centralized payroll operation that uses a single database of employee payroll information.
Issues with Payroll System Consolidation
Though a centralized payroll system is recommended, there are a variety of problems associated with creating it. These include:
- Cost. A single, centralized payroll system may require the purchase of a new payroll software package, though this cost will hopefully be offset by the costs of the smaller payroll systems being eliminated.
- Database conversion. There is a significant amount of time and expense associated with the conversion of all existing payroll databases into the format of the new payroll database, as well as testing the data to ensure that the conversion is accurate.
- Tax rate conversion. The tax rates associated with all employee locations must be properly integrated into the centralized system.
- Timing. It is generally easiest to implement a payroll conversion project as of the beginning of the new calendar year, in order to avoid converting data into the new system for a partial year.
In short, the cost of payroll system centralization is significant, and so should be reviewed in detail before the decision is made to undertake a full or partial system consolidation.