Payroll's rightful place at a company has long been unclear, with some organizations making payroll part of their HR department, while others place payroll in the finance department. Both approaches have their benefits and drawbacks, and HR leaders should be aware of these when weighing in with other leaders on how to handle payroll at their own organization.
Companies seem to embrace both options. Thirty-eight percent of respondents have payroll report to HR, according to the 2020 "Deloitte Global Payroll Benchmarking Survey," while 36% of respondents have payroll report to the finance department. Meanwhile, 24% of respondents follow a shared services model.
Learn more about where payroll truly belongs and what HR leaders should consider.
Should payroll be part of HR?
One compelling reason for payroll to report to HR is that a company's HR information system (HRIS) software stores various data that payroll needs to access.
During onboarding, a new hire submits IRS Form W-4, which determines the amount of federal income tax to withhold from their paychecks, to HR, as well as forms about beneficiaries and healthcare benefits. Payroll staff refer to this information when determining an employee's deductions.
Other areas that HR oversees that also affect employee paychecks include employee contributions to benefits, equity compensation, paid time off, terminations, transfers to other states or countries, salary increases and bonuses. Since HR already possesses this data, locating payroll under HR seems to make more sense than putting it under finance.
In addition, HR professionals are well versed in labor laws, as well as local, state and federal regulations. HR employees' knowledge about these topics helps ensure that compensation is compliant with regulatory frameworks.
However, some potential drawbacks for payroll being part of HR are HR staff's potential lack of experience with payroll software and general lack of experience with payroll. To solve these problems, a company could hire a payroll specialist who reports to the head of HR, or an organization can outsource payroll to external providers and have HR oversee the providers.
Should payroll be part of finance?
One argument for payroll falling under the purview of the finance department is that payroll is a financial function that affects the bottom line. If payroll is part of finance, then finance can exercise oversight, track labor-related expenses, and produce payroll-based metrics to help inform financial strategy, budgeting and forecasting.
Placing payroll under finance can make sense if a company's HRIS is integrated with payroll software because employee information automatically updates in payroll software, eliminating the need for HR staff to provide data for each payroll cycle.
However, the majority of payroll-related data contains personal employee information, and finance employees have likely not received training on how to handle sensitive employee information. They are likely accustomed to being discreet about salary topics but may not know how to, for example, conduct a conversation about the Family and Medical Leave Act or a 401(k) loan.
Should HR and finance work together on payroll?
Since each department brings both strengths and weaknesses, HR and finance collaborating on payroll may be the best choice for companies.
Having HR and finance collaborate on the payroll function takes advantage of the strengths of both departments and strikes a balance between employee needs and financial objectives that benefits the company overall.