Fundamentals of Payroll Operations FPC 2016 Chapter 2

The Payroll System Components Hardware- Physical Components Software- Programs Network-Communications People-Operators of the System

Computerized Systems help with these tasks: Compliance w/Regulations and Policies Timely & Accurate Paychecks/Direct Deposit Periodic Reporting Record Retention Control & Security

Processing Methods Batch or Real-time Batch Processing Data is coded and collected Computer center processes the data with similar jobs to be processed Generally no access to view as processing Less expensive than real-time But not as timely as real-time

Processing Methods Batch or Real-time Real-Time On-line system Calculations and results automatic Immediate availability View and interact with the processing

Processing Methods Batch or Real-time Most companies utilize a blend of batch and real time processing for the most cost effective and efficient processing results

Employee and Manager Self–Service Availability Employees and managers can update data to the master files online View / Print earning statements View/ Print W2 forms

Interfaces- Definition: The point where two distinct data processing elements meet Example- 2 pieces of hardware; 2 pieces of software or hardware & software. Automated interfaces are only entered once. Automated interfaces are more accurate and timely.

Interfaces- Most Common Payroll Interfaces: Human Resources Benefits Data Collection- special labor costs Time and Attendance Check Reconciliation Electronic Funds Transfer General Ledger/ Cost Accounting

Integration-Ideal Processing Environment Single integrated (shared) data base: Reduce data integrity issues Eliminates timing issues Eliminates interfacing

Interfaced or Integrated Reconciliations Ensures the data shared between the systems is accurate. General Ledger accounts Regular interval balancing Utilization of zero balance accounts Reconcile 3 rd Party Payments 401K, Liens, unions insurances Reconcile payments from AP or PR to ensure compliance

Control Procedures Why? Control Procedures: System Edits Balancing & Reconciliation Documentation Data Auditing & Validation Batch Controls & Correction Procedures Accumulator Totals Updating/upgrading system Security External Audits

Control Procedures System Edits or Validity Checks Alert for termed ees w/ pay New hire tracking Error if no pay for an active ee Alert for inactive ee w/ pay Alert if pay over a specific amount Alert for negative or zero pay Alert for hours over a specific amount Pay rate changes

Control Procedures Balancing and Reconciliation Master record of ee payments to substantiate tax returns Payroll liability accounts reconciled to verify liability and unpaid taxes (monthly) Liability accounts for deductions balanced to ensure accuracy for AP Bank accounts reconciled, unclaimed wage account, stale dated payments, outstanding payments

Control Procedures Documentation Ensures Uniformity Simplifies Training Provides a reference tool

Control Procedures Data Auditing and Validating Sampling of data for verification and internal parameter control Substantiates validity of data Promotes accuracy Batch total verifications Correction Procedures Accumulator Totals

Control Procedures Updates/ Upgrades Updates: Quarterly Year-end Tax Updates Be sure to back up the system prior to the update Upgrades: More Complex New Features Process enhancement Be sure to consider this as a project

Control Procedures Security Of the utmost importance against Embezzlement Check fraud Identity theft

Control Procedures Security Guards Job Segregation Personnel Rotation System Restrictions Internal controls for specific functions Internal audits Independent reconciliations Employee payment verifications

Control Procedures Security Guards (Cont.) Reconcile bank accounts monthly Password levels –system accessibility Physical payouts Written procedures for undelivered checks Procedures for processing void pays Audit trails

Control Procedures External Audits Appropriateness of financial statements Safeguarding of financial assets Level of risks to the company financial futures

Paying Employees State laws dictate frequency, pay options and may dictate bank be in state ee work. Employer’s choice to pay by: Cash Check Direct Deposit Pay Cards

Pay by Check Special zero account for payroll checks Voiding/ check cancellations need to be processed through payroll and then notifications to other appropriate depts such as GL, tax, treasury, finance  Precautions/ security for blank checks  Proper handling procedures a must

Pay by Direct Deposit Electronic Funds Transfer (EFT) Employee Advantages  Immediate funds availability on payday  No delay in constructive receipt of pay  No bank interaction necessary Employee Disadvantages  Comfort level of payment method  Lack of bank account

Pay by Direct Deposit Electronic Funds Transfer (EFT) Employer Advantages  No lost checks  Reduction of paper flow  Eliminates early manual processing  Reduction of loss potential  Cost reduction  No check signing  Minimizes cancelled check storage  Reduction of escheatment  Reduction of balance and reconciliation

Pay by Direct Deposit Electronic Funds Transfer (EFT) Employer Disadvantages  Not paperless  Multiple pay methods  Stop Payment Challenges  Costs imposed by originating bank  Loss of “Float” Def- Float is the time between the writing of the paychecks and the actual withdrawal of funds to cover the paychecks.

Direct Deposit Process Regulated by the Federal Reserve Board’s Regulation E. NACHA’s ACH Requirements NACHA Operating Rules State Laws

Direct Deposit Process Three pieces of information needed: EE Bank routing number EE Bank account number Type of Account –Savings or Checking Prenotification-Are they optional?

Direct Deposit Process Flow Employee authorization Company set up ACH file(Automatic Clearing House) ODFI- Posts on us –>new ACH file sent RDFI Posting to account-> Descriptive statement

Direct Deposit Corrections/ Reversals Single entry reversals Must be corrected in 5 days Does not require employee authorization Corrections /reversals must be same amount as deposit on settlement date

Resolving Late Direct Deposit Verify routing and account numbers ATM may have a later posting time than the actual bank processing time Funds should be available by 9:00 a.m. on pay date-internal bank challenges –bank should honor based on voucher ODFI can be contacting as resource and resolution agent Federal Bank Holiday

Payment by Pay Card Pay cards are solutions for the unbanked Prepaid cards that are host based, stored value cards for the unbanked employees to obtain cash, pay bills, by a convenient and secure medium

Payment by Pay Card Employer Benefits Reduction of costs Enhanced efficiency Increased employee productivity /satisfaction Employee need not have a bank account

Payment by Pay Card Employee Advantages Cost savings – especially for unbanked Independence Prestige Safety/Security Freedom Convenience Time

Payment by Pay Card Employer Advantages Cost reduction Enhance efficiency / productivity Legal compliance requirements

Payment by Pay Card Cost Advantage Cost reduction Check loss –theft Fraudulent checks-duplicate payments Check printing, storage, retention, and reconciliation Special payment and exception payments

Payment by Pay Card Efficiency Advantage Eliminated payroll checks Electronic pay statements Funding via ACH Administration via web- application Ease of Constructive receipt No loss of production time

Payment by Pay Card Compliance Advantage Constructive receipt is immediate and meets many stringent timeframes imposed for payment to employees.

Payment by Pay Card Starting a Program Ensure agreement with a participating financial institution Market offering to employees Establish a funding pool with bank Institution establishes employees account*Card When the pool is funded the bank loads the cards with the appropriate net amounts Funding is via ACH or intra bank transfer Adjustments made via web application

Payment by Pay Card Reversals Specific policy & procedure to provide stop payment /reversal Procedure steps may include Notification to bank to reverse card payment Reissue the payment

Payment Timing Regulations States laws govern: The method of payment Frequency of payment Time period between the end of the pay period and pay day

Unclaimed Wages Escheatment State laws governing the procedures for unclaimed wages Length of time payment held Notification of held funds process Wage turnover to agency

Thank You!! Good Luck with your FPC test!! Christine O’Hara, CPP