The risk of overpaying no longer active employees

Kimberley Orszulak, an HR administrator with Pattison Outdoor, asked the following on LinkedIn: How do you control the risk of overpaying an employee who has left the company as a result of a resignation/unpaid leave and where the managers may not communicate this to payroll?

The short answer is that there is very little payroll can do if it’s dependent on parts of the organization to report employee status changes, particularly if the reporting failure is deliberate or stems from a failure to understand the consequences.

However, there are two steps that employers can and should take to prevent such overpayments.

The first step involves payroll actively communicating pay period results to the managers responsible for labour costs. Managers with budget responsibility for organizational units should each pay period see the dollars, hours and employees charged to their units. Similarly, managers or supervisors responsible for approving employee time should every pay period see the employees and time processed for their units. Managers can either be provided with an extract of the payroll register for their organizational units or be provided with payroll reports identifying the active employees for whom they are responsible.

While such communication won’t eliminate the risks Kimberley identifies, at the very least managers won’t be able say they weren’t given an opportunity to prevent such overpayments. Ultimately, if the failure to communicate was deliberate, or even just negligent, payroll’s active reporting can be used as a factor in any disciplinary action contemplated.

The second step involves reviewing other data for signs of employees not actively working for the organization.

In most employers of any size there would be traces of active employment in a variety of non-payroll data. Employees may have several different types of access, security or expense accounts assigned to them. This could include log-on accounts to computer networks, e-mail systems or Intranet portals. Employees may also have credit cards for expense account purchases, cell phones for business use or cards for building access. One way of preventing overpayments to employees who are no longer active is for payroll to receive exception reports identifying status changes within these other non-payroll systems. Employees who simply disappear from such other system data should raise red flags in payroll if no corresponding status change has been reported.

Similarly, there would presumably be a red flag if an employee asked payroll for a Record of Employment, but no status change had been reported.

The risk of such overpayments is also related to how employees are paid. In payroll, we use three different terms to describe how employees are paid:

  • salaried employees;
  • exception pay for hourly employees; and
  • positive pay for hourly employees.

In the first two, employees will get paid whether or not there is evidence of active employment. Employees paid by salary means employees are paid a fixed amount, whatever the actual time spent working. The term exception pay means hourly employees are paid the same number of hours in a week. Exceptions, such as absences or overtime, require timesheets to change the number of hours regularly paid. The term positive pay means employees are only paid from timesheets. No timesheet. No pay.

The overpayment risk Kimberley raises is obviously greater for salaried and exception pay employees and less for hourly employees paid positively. If an employee is no longer actively working, it’s reasonable to assume there will be no timesheet, and hence no pay, even if the absence, leave or termination has not been reported to payroll.

While overpayment risks can never be eliminated completely, the measures described above can help payroll reduce its dependency on status change reporting from other parts of the organization. In the end, it’s all a question of balancing overpayment costs actually incurred against the cost of the preventive measures described above.

For further information please feel free to contact me at armcewen@cogeco.ca, connect with me on LinkedIn or follow my blog at http://www.alanrmcewen.com.

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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