The Challenges of Payroll and Compliance in 2022-23

How remote work, security breaches, fast-changing regulations and continuous innovations have made payroll more complex

Processing payroll has always been a critical, compliance-driven endeavor, but thanks to recent global events and current economic conditions, it has become increasingly complex. In an era of remote and hybrid work, costly security breaches, and threats to employees’ financial security, payroll experts must be up to a wide range of new challenges.
 

To understand these issues, the HR Research Institute conducted new research in partnership with Greenshades, an organization specializing in payroll, HR and tax compliance problem solving. The survey ran in the third quarter of 2022, when we gathered 233¹ responses from HR professionals in virtually every industry vertical.

Compliance with wage, hour, and taxation policies is seen as a core focus by a plurality, and about three-quarters of large organization say it is core

Our survey started with capturing the perception of HR professionals regarding compliance with wage, hour, and taxation policies. Respondents are most likely to view compliance as a core focus and valuable part of their job, with 13% deeming it as a “necessary evil” that distracts from the core mission. This indicates that respondents understand the importance of compliance, but a small proportion is struggling with handling it. Nearly three-quarters (74%) of large organizations (with 1,000 more employees) see compliance a core focus.

There is no consensus about how challenging or time-consuming compliance is

To clarify how challenging it is for organizations to comply with all wage, hour, and taxation policies and regulations, we asked respondents to rate it on a scale of 1 (very easy) to 5 (it is a significant challenge). Forty-seven percent say compliance is easy (1 or 2) while a quarter of respondents view it as difficult (4 or 5). Another 28% rate in the middle between easy and challenging. Automation could be the key to dealing with these challenges, as we discuss below.

On a scale of 1 to 5, how challenging is it for your organization to comply with all wage, hour, and taxation policies and regulations? (Note: this includes local, national, and corporate)
 
Similarly, when asked about how much time and effort goes into compliance, a third say it requires considerable time and effort and another 28% say it required moderate effort. Only about two-fifths indicate it requires little time and effort.

The bottom line is that there is no consensus about how challenging or time-consuming compliance is. Some organizations find it relatively easy and others continue to struggle. Our next step was to investigate why so many still seem to struggle in an area where most companies have established practices and long experience.

Remote work brings with it numerous challenges to compliance

The dramatic increase in remote work in recent years has impacted organizational processes at multiple levels, including payroll processing. An overwhelming majority (84%) of respondents say some or all of their employees are allowed to work remotely. Consequently, payroll professionals must be aware of local and state regulations, and tax implications based on the physical location of employee etc.

While most organizations have adjusted to these changes with minimal disruptions, almost a third (29%) say compliance with wage, hour, and tax regulations has become harder with the increase in remote work.

A significant proportion of organizations struggle with automation and collecting tools and expertise needed to manage compliance

Automation is another area where there is no consensus. While a third say the compliance processes in their organizations are automated to a high or very high degree, only a slightly lesser proportion (29%) say automation of compliance in their organization is done to a very low degree or not at all.

Compliance requires substantial support in terms of tools and expertise. While three-fifths (61%) agree or strongly agree that they have all the tools and expertise needed to manage compliance, this still leaves 39% who do not agree. Some organizations (16%) disagree or strongly disagree that they have the tools and expertise needed to manage compliance.

The risk and costs associated with non-compliance are serious, and organizations must understand the importance of investments in automation, tools, and expertise to ensure compliance. Organizations that improve automation are seen to have overall better efficiency and results in compliance related processes.

Security breaches may be relatively rare, but their effects are devastating

More than one in ten (13%) of organizations say they have been impacted by attendance, scheduling, and payroll system security breaches in the past two years. While this number may seem low, we view it as quite significant given that this was only over a two-year period.

Of the organizations that experienced breaches, about half (45%) rated the disruption as major and a further 40% rated the disruption as minor. Only a few, 15%, managed to handle the disruption with ease.

Of the various impacts of security breaches, the most prominent is the effect on employee morale, with three-fifths saying it brought down employee morale. About half (47%) say the breach disrupted the whole employee management system from HR to payroll, and two-fifths say it damaged the employer brand and reputation. About a third also say that the breach resulted in higher turnover. Employee turnover has multiple short- and long-term consequences for organizations and can cause major severe financial losses beyond the cost of recruiting and training a new employee. ²

Organizations that faced security breaches responded by improving security training for personnel (72%), changing security policies (67%), changing payroll providers (44%). Interestingly, 28% moved payroll from an outsourced provider to a self-managed model in response to security breaches. With a range of increasingly affordable self-managed payroll options available in the market, it could provide a cost-effective and customized solution for organizations to have greater control over the security of their payroll systems.

It must be noted that two-fifths (43%) of organizations that had not suffered security breaches decided to audit or review their own business continuity, security, and privacy policies when learning about other organizations' security breaches. Most organization also believe security breaches to have multi-tiered effects, with over two-thirds of the respondents say a security breach would disrupt day-to-day tasks and over half of the respondents say a security breach would damage the employer brand and reputation.

If there is a future security breach and your ability to process payroll and/or ensure paycheck accuracy is impacted, how do you think that would affect your business? (select all that apply)

Earned wage access has become a more common add-on

Many organizations are investing in complementary payroll solutions. The most widely selected add-on is earned wage access, a financial service that gives employees access to a portion of the wages they’ve earned before the end of their payroll cycle. About a third of responding organizations offer earned wage access.

Earned wage access is also the add-on respondents are most likely to believe has a positive impact on employees (cited by 48%). And, it is the one most likely to be assessed over the next year by organizations that do not already provide it.

Automation is key to improving the efficacy of the compliance process

We compared organizations with a high to very high degree of automation of compliance processes with organizations that had a moderate degree, low degree, very low degree, or no automation at all. Results indicate that organizations with highly automated compliance systems are almost twice as likely as less automated organizations to find compliance very easy, and they are nearly 10 times as likely to say compliance takes little time and effort. Automation apparently helps in reducing the manual labor and making the process more streamlined resulting in cost and time savings.

Automation also makes tracking regulatory changes easier at the local, state, and national levels. Highly automated organizations more likely than less automated ones to say their ability to track national regulatory changes is above or well above average.

On a scale of 1 to 5, how challenging is it for your organization to comply with all wage, hour, and taxation policies and regulations? (Note: this includes local, national, and corporate)

Key takeaways

Organizations that are struggling with compliance may look to audit their processes to identify areas of concern.

Automation seems to be one key in reducing the burden of compliance in terms of the effort it takes to do payroll and ability to track regulatory changes. Organizations may be well-advised to investigate automation solutions to reap these benefits.

Despite lower incidence of security breaches, their impact on the organization as a whole is significant. Organizations must consider revamping policies, increasing training, and/or changing the payroll provider to minimize these risks.

With the prevalence of remote work, organizations must also focus on developing policies and procedures that help in remaining compliant while accommodating a variety of work arrangements.

Lastly, organizations must track regulatory changes at various levels of government through assistance from experts, partners, and information resources to help stay abreast of legal and compliance issues associated with various levels of government.

¹ Count includes both complete and partial responses.
² Basiouny, A. (2022, August 2). Employee turnover costs more than you think. Knowledge at Wharton. Retrieved from https://knowledge.wharton.upenn.edu/article/why-employee-turnover-costs-more-than-you-think/