Why Is Payroll Part of HR and Not Just Finance? Seeking Clarity on This Confusion

Dear members,

I have a query - what is payroll, and how does it fall under HR functions? Why can't it solely be handled by the finance department? I'm not sure if I'm asking the question correctly.

Can anyone help me with this query?

Regards,
Jennifer

Dear Godchild,

Payroll in India was once considered to be part of the Accounts Department 10-15 years ago. During that time, payroll was viewed merely as a compliance and financial/accounting function due to the involvement of money. Performance appraisals were seen as a ritual conducted once a year, with performance not being adequately tied to pay. Additionally, only Accounts personnel were deemed suitable for handling statutory compliance tasks like PF and ESI in organizations.

In contrast, in countries like the US, Payroll had already been integrated into Compensation & Benefits Management, a core HR function, even before 15 years ago. Payroll is essentially an event occurring at a frequency determined by country/company rules and is governed by the Compensation & Benefits Management policy of any company. Other countries gradually followed suit in adopting this concept.

Payroll is a sensitive matter as employees often have queries upon receiving their payslips. Generally speaking, Accounts personnel may not possess the appropriate human relations skills to address these queries with empathy and patience. Consequently, Payroll evolved into a function of human relations over time, emphasizing the importance of employee engagement.

Furthermore, salaries have increasingly become linked to employee performance and retention, with a significant portion paid as performance-linked incentives. Given that Performance Management falls under the realm of HR, payroll management within a performance-oriented reward system has naturally transitioned to become an HR function.

The Accounts department primarily serves a control function, creating a bottleneck in the process. In a dynamic business environment where rewarding performance is crucial, a bottleneck approach is not suitable. Therefore, the payroll function has been shifted to HR to ensure closer proximity to the employees for prompt responses to queries and performance-related matters. Although Accounts will oversee expenses and provide guidance on control lapses through audits and other tools.

Ultimately, the handling of payroll by HR must be distinct and purposeful; otherwise, whether Accounts or HR manages it becomes inconsequential.

I believe I have addressed your query to the best of my ability. Other members may have differing perspectives or reasons to offer.

Govardhan

Dear Jennifer,

Govardhan has given you an excellent reply, and I have nothing more to add except the following:

1) It is necessary for HR to check and authorize Salary Details before processing. This is done to ensure that the person has been provided with all their variables, attendance has been properly calculated, and necessary statutory deductions have been made. This process is essential because in case of any Salary Discrepancies, it is HR to whom a person approaches, and HR has to deal with them. For example, leave availed but not recorded, special sanctions of leave or special payments, a person being marked absent while on Outdoor duty (common in Marketing), increments, and numerous others.

2) Various data need to be generated for MIS from the Employee Payments to calculate various indicators like Labor productivity and Labor Cost.

3) Proper Statutory Records must be maintained, and it is the responsibility of HR to keep all Statutory Records in order.

Regards,
SC

Hi Jennifer, Goverdhan & Swastik,

Payroll is the prerogative of HR. As rightly mentioned by Goverdhan, in fact, the Accounts personnel used to contribute only to the processing of the payroll. With the advent of ERP packages in recent times, there is nothing that either Accounts or HR can do. Everything is being taken care of by this ERP once we provide the inputs. Ultimately, when it comes to inputs, it is HR only - to provide the inputs that are essential to process the payroll. As HR plays a pivotal role in salary fixations and the finalization of other monetary matters for the employees, it is always better to handle the payroll by HR only. Accounts personnel have to act as a watchdog in case of any deviations and audit accordingly in case of discrepancies and to ensure that proper approvals are there.

Regards,
PRADEEP

Dear member,

HR has 4 important wings: recruitment, training and establishment, administration, and finance and accounting. The recruitment wing selects the right candidates for the organization, while the training and establishment wing trains them in a particular line and posts them. The administration wing monitors their pay, allowances, leave, and performance. The accounts wing has to process the pay and other monetary benefits for the employee in coordination with the administration wing. Without the support of the administration wing, it is not possible to process salaries or perks. The fundamental rules of the Government of India are guidelines for all such activities.

Hi!

There is much sense in the explanation provided above relative to the reasons or rationale for HR's right to handle payroll. What seems to have been overlooked (which are closely tied up with payroll and essentially integral to HR) are "timekeeping" and "salary administration".

But I have seen organizations with payroll still in the hands of Finance and/or Accounting. There are even organizations that put payroll in the hands of the MIS Department.

Indeed, functions (and locations of such functions) are essentially the prerogative and/or discretion of an organization's top management. There are no "fix or hard-and-fast rules" in this area. Hence, for people like us who implement JE projects, the need for open-mindedness is essential. Nowadays, the integration of two (2) to three (3) functions under one (1) position is very common (e.g. Receptionist doing both Receptionist & Telephone Operator functions; Security Guard doing both Receptionist and Entry Guard functions; HR Manager doing both HR and Administration functions).

The real reason behind organizational "innovations" or "flexibility" relative to functions and their location is "organization size" and "cost consciousness". Indeed, a one (1) man HR department will find it impossible to handle payroll in addition to the many other functions of HR. On the other hand, a small business organization will never be in a position to hire separate managers for Recruitment & Training, Compensation & Benefits, Labor Relations. Although this is a reality for big multinational companies, these are only images for those who belong to very small companies.

Best wishes.

Ed Llarena, Jr.
Managing Partner
Emilla Consulting
(landline)
(mobile)

Dear Jennifer,

I understand your query. Every function associated with Human Resources (not Employee/Personnel as these are narrow terms) should be considered the responsibility of the HR Department. The HR Department will determine their compensation package and be responsible for ensuring the remittance. The Finance Department needs to verify whether they have sufficient funds or not. Simply put, they are responsible for the financial aspect. PF, ESI, PT, IT of Human Resources should be handled solely by the HR Department.

For example, PF is linked with Financial Funds. However, enrolling them, handling Statutory Forms, Statutory Returns, Liason, and the account-wise bifurcation of PF Challan are not financial activities. The Finance Department will release the Bank/Cash funds for the remittance of the challan. Still, the HR Department will ensure that the amount has been transferred to the exact accounts or not. This is a simple description. If I haven't clarified your doubt clearly, you can reach out by sending your voice to 91-9885700350 or sending the waves to sathish.hr1975@rediffmail.com.

Best regards,
Sathish

Hi Jennifer, Goverdhan, Pradeep, and Swastik,

Thank you for your valuable information. However, I have a small request. I am interested in payrolls. Can anybody suggest how to handle payroll? I am completely new to payroll.

Regards,
Anil Kumar

Hi!

HR functions are related to Human Resources to extract talent from employees. Payroll is conducted for individuals in organizations. Therefore, payroll is a part of HR functions.

I wouldn't say that it necessarily has to be an HR function; in many cases, payroll is a completely separate department. However, in smaller companies, HR and payroll tasks are sometimes taken on by one person. HRIS software is closely connected to and often includes payroll software, so they are connected. I would argue that it is best to keep the HR and payroll functions separate because you can have issues in an audit when the person who gives the raises is the same person who pays those raises—checks and balances are always positive.

Thanks,
Dave

HRIS Systems Selection Resource | HR Software

I agree with Dave that the Payroll function is not necessarily an HR function. The salary structure of an employee is also their tax tool. Some benefits, allowances, and reimbursements (fringe benefits) are not taxable as per income tax rules, which can be better interpreted by the finance department or a payroll expert. Employees will try to reduce their tax burden and increase savings/take-home salary. So from a tax perspective, which is the main concern for employees, the finance department is in a better position to help or advise the employee.

Secondly, as already mentioned in this thread, from a payroll audit perspective, finance people are more competent in record-keeping and in handling auditors/audit queries. So, I feel the ideal situation would be HR giving attendance inputs and finance processing the payroll.

Hello Goverdhan ji.

You have given an excellent and clear-cut answer, sir. We are very glad and pleased to have you in this community to help newcomers like me. Thank you, sir, and this will help me in my studies.

Dear Jennifer,

Payroll refers to the process of calculating and distributing employee salaries, wages, bonuses, and deductions within an organization. It involves tasks such as tracking attendance, calculating working hours, applying tax deductions, accounting for benefits, and ensuring accurate and timely payment to employees.

Employee Compensation

Payroll is directly linked to employee compensation, which is a fundamental aspect of the employer-employee relationship. HR plays a crucial role in managing and administering compensation and benefits programs, ensuring fairness, compliance with labor laws, and alignment with organizational policies.

Employee Data Management

HR departments maintain comprehensive employee data, including personal information, employment contracts, tax-related details, and benefits enrollment. This information is essential for accurate payroll processing, as it determines factors such as salary, deductions, and tax withholding.

Compliance and Regulations

Payroll activities require adherence to numerous legal and regulatory requirements, including tax laws, labor laws, and statutory deductions. HR professionals are responsible for staying updated on these regulations, ensuring compliance, and avoiding any legal issues related to employee compensation.

Employee Engagement and Satisfaction

Timely and accurate payroll processing is crucial for maintaining employee trust, satisfaction, and engagement. HR departments work closely with employees, addressing payroll-related concerns, resolving discrepancies, and providing support during salary revisions or benefit changes.

While the finance department typically handles the technical aspects of payroll processing, HR's involvement ensures that employee compensation is aligned with organizational policies, legal requirements, and employee well-being. Collaboration between HR and finance departments is essential to ensure accurate payroll management and maintain a harmonious work environment.

I hope this explanation clarifies the connection between payroll and HR functions. Feel free to ask further questions if you need more information.