USA Today recently reported that more American workers are suing employers for overtime pay under federal and state wage-and-hour laws. This should come as no surprise since the "Great Recession" squeezed employers’ bottom lines, meaning fewer employees do more work. However, overtime, compliance and other payroll issues are usually not rooted in malcontent by the employer. In fact, for most employers, payroll sits in the middle of a tangled web of HR and financial systems and the management routines that drive them. Many companies struggle just to post payroll to the general ledger each pay period. The result: payroll “leakage” and the countless hours needed to reconcile current payroll and resolve past payroll runs.
What is payroll leakage?
ISG defines payroll leakage as (hard or soft) dollars that are unnecessarily paid out by a company due to inefficient processes that do not align with company policies and procedures and/or compliance with federal and state laws. Leakage can take the form of settling class action lawsuits brought on by employees or as “death by a thousand cuts” in which employees reap untold additional dollars in their paychecks or get additional soft benefits for which they’re not entitled. ISG estimates that poorly designed payroll processes that lack the proper technology and management routines can cost a company between .5% and 1.5% of total payroll dollars each year. When you consider that a typical Fortune 500 company pumps anywhere from $1 billion to $2 billion into payroll each year, this leakage can rob as much as $30 million from cash flow annually.