If there is one truth in life, it’s that everyone makes mistakes. While this is a simple and unavoidable fact, it’s worth noting that payroll mistakes are an altogether different beast – even a small payroll error, if it happens often enough, can lead to employee dissatisfaction, affecting the engagement and productivity of your workforce and ultimately the overall health of your business.
Whether it’s an incorrect pay calculation, a missed payment, or a tax miscalculation, payroll errors can not only lead to legal troubles, which is bad enough, but can also increase your turnover rate and tarnish your reputation.
Understanding why payroll, as well as payroll mistakes, hold such power over your employees and overall business is crucial to maintaining a happy and productive workplace environment.
Why Payroll Errors Negatively Affect Your Business
When done right, payroll is not something employees think about – everything runs smoothly, correctly, and on time, and therefore everyone’s happy and productive. However, when done incorrectly, payroll mistakes can have far-reaching consequences, impacting not only your employees but also the health of your entire company. Here are just some of the ways that payroll mistakes affect your business:
Financial Strain on Employees
Your employees rely on their paychecks to cover essential expenses, including rent, utilities, and groceries. And so, a delay in payment or getting paid less than they deserve for their work (usually happens when payroll staff fails to account for overtime) can disrupt their entire life and cause undue stress.
According to an MIT study, employees who are worried about their finances find it hard to concentrate at work. In this same study, researchers found that workers who get paid earlier become more productive: to be precise, their output increases by 7%, plus they make fewer mistakes.
Another study, this one by Unmind in the UK, shows that financial stress has a direct impact on workplace productivity and anxiety, causing 27% of workers to experience brain fog and consequently make more mistakes at work.
To underline the importance of correct payroll, we’d like to remind you that a single missed paycheck can mean the difference between making rent or facing eviction for some of your employees. Remember, for your employees, timely and accurate payment isn’t just a nicety – it’s a necessity. Which brings us to the next point…
Loss of Employee Morale
When employees encounter payroll inaccuracies several times, this is the message they receive: your contributions are undervalued and your well-being is not our priority. Who would want to work for such an organisation?
Late or inaccurate paychecks naturally lead to employees feeling undervalued, which, in turn, leads to them disengaging from their work and becoming less and less productive. Eventually, frequent payroll inaccuracies lead to employees leaving the company.
Research shows that after only two payroll errors, 49% of employees go on to try to find a new job. But that’s not even the worst part – the same survey shows that a whopping 24% of employees will look for a new job after the first payroll mistake.
Furthermore, stats show that financial stress, whether it’s caused by late or inaccurate paychecks or simply by low wages, causes employees to be:
- 10 times more likely to not finish their daily work tasks,
- 9 times more likely to have poor relationships with their colleagues,
- 2 times more likely to search for a new job.
Damage to Reputation
Once your employees start experiencing payroll errors, you can be certain of one thing: everyone willing to listen will hear about it. Remember, we live in the age of social media, where airing one’s dissatisfactions (mind you, in this case very justified dissatisfactions) is incredibly easy but can have far-reaching consequences.
This can be especially problematic when employees start leaving your company. The costs of turnover are incredibly high – it can cost employers 33% of an employee’s annual salary. But there’s another side to this cost, too – a tarnished reputation. This, in turn, can deter top talent from seeking employment with your company, as well as clients from doing business with you.
Surveys show that 69% of prospective employees would reject a job offer from a company with a bad reputation – even if they were unemployed.
Legal Troubles
Last but definitely not least, certain payroll mistakes can have legal ramifications for your business. Non-compliance with labor laws and payroll regulations can result in fines, penalties, and even potential lawsuits, all of which can pose considerable challenges to your business.
Whether it’s accidental misclassification of employees, failure to withhold taxes accurately, or improper record-keeping practices, each misstep opens the door to legal liabilities.
Common Payroll Mistakes
To reduce the risks associated with the various payroll mistakes – and we do talk about preventative measures in the next section – it’s important to be aware of common pitfalls in this department.
- Incorrect Deductions: Wages that are incorrectly calculated can create financial strain for employees or lead to unexpected windfalls that disrupt budgetary plans. On the one hand, underpayments can leave employees feeling undervalued and financially insecure, and on the other, overpayments can result in awkward conversations and potential resentment.
- Misclassifications: Misclassifying employees, whether as exempt or non-exempt, full-time or part-time, can have legal and financial consequences. Errors in employee classification may lead to violations of labor laws, eligibility for overtime pay, and employee benefits, and can result in costly litigation, regulatory fines, and, as we mentioned, damage to the organisation’s reputation.
- Tax Calculation Errors: Mishandling taxes, whether that’s income tax withholding, Social Security contributions, or Medicare deductions, can result in serious consequences for both employees and employers. Inaccurate tax calculations can also lead to underpayment or overpayment of taxes, which can leave individuals open to penalties and interest charges from tax authorities.
- Failure to Account for Benefits and Deductions: Not accounting for employee benefits, like health insurance premiums or retirement contributions, can result in discrepancies in net pay and employee dissatisfaction. Also, not deducting voluntary and involuntary deductions, such as child support payments or garnishments, can lead to legal liabilities and damage employee trust.
- Omissions and Delays: We mentioned earlier that late or missing paychecks can cause undue stress and financial hardship for employees as they rely on timely compensation to meet their obligations. It’s important to highlight the potential consequences of this mistake, as it can erode trust and confidence in the payroll process and undermine employee morale.
How to Avoid Payroll Errors
With common payroll errors out of the way, let’s talk about some proactive measures you can take to shield your business from the dangers of these often easy-to-make mistakes.
Educate and Train Your Staff
To recap, payroll mistakes cost you time, money, and can have serious legal consequences. And yet:
- 10 – 30% of companies misclassify their employees (NELP),
- Around 54% of American workers experience pay issues (Workforce Institute),
It follows that one of the most important things you can do for your business is equip your payroll staff with the knowledge and skills they need to deal with complex payroll regulations. You can do this by investing in your team’s ongoing training and professional development to ensure they remain vigilant and competent in their roles.
Invest in High-Quality Payroll Software
Did you know that around 34% of businesses still manage their payroll manually? If you’re one of them, you should know that automation can reduce payroll processing costs by 80% (American Payroll Association).
After all, we live in the 21st century, so why not take full advantage of the technology at your disposal? Modern payroll management solutions automate many aspects of payroll processing, plus HR tasks, helping minimise the risk of human errors and freeing up valuable time that you can use to focus on growing your business.
Lenovo, for example, has invested in Robotic Process Automation (RPA) in order to improve efficiency and optimise processes across various departments, including finance and HR. As a result:
- Their employees need less than 10% of the amount of time to submit their expenses,
- Their HR team saves at least 6,000 hours per year,
- And their process efficiency in the HR team has increased by 5 – 8%.
Stay Up-to-Date on Laws and Regulations
Finally, to avoid any legal issues related to labor and payroll, it’s essential to stay informed about the latest changes and regulations. To do so, consider following relevant news, joining professional associations, or subscribing to industry publications to stay ahead of the curve.
Bear in mind that if you choose to automate your payroll, you’ll already do plenty to minimise errors and, therefore, will be much more likely to stay safe from legal consequences.
More and more companies realise this, and a 2022 Global Payroll Survey from Ernst & Young confirms it. According to this survey, 67% of organisations invest in their payroll strategy, which is a whopping 61% more than in 2019.
Final Thoughts
The impact of payroll mistakes on your employees and your overall business cannot be overstated. The consequences can range from financial strain and reduced morale to legal issues and reputational damage, and more.
However, by understanding the role of payroll and common mistakes in this department and then implementing preventative measures, you can minimise the risk of payroll errors and protect the financial health of your business. Remember, by investing in staff training and a robust payroll management solution today, you can save yourself from costly headaches tomorrow.
Author: José Luis Martín Cara – Writer & Head of SEO, LinkBuilder.io
Photo credit: Monstera Production
