What is Payroll Leakage?

Payroll leakage can happen to anyone—especially as a business continues to grow and processes become more complex. The good news is, once you know what it is and how to identify it, you have a much higher chance of avoiding it and preventing it from hurting your bottom line.

Payroll leakage definition

Payroll leakage refers to unexpected spending or lost revenue from labor-related activity. Leakage can happen when workforce management solutions aren’t correctly integrated with existing systems or workflows or if the company policies don’t match what actually happens between coworkers and management.

Beyond unintegrated systems and mismatched company policies though, there are three common causes of payroll leaks.

What are the main payroll leaks in a payroll process

When it comes to payroll leaks, it’s sometimes challenging to know where to start in terms of identifying lost revenue. That’s why it’s often helpful to start with three of the most common common payroll leaks: manual errors, misclassification of employees, and frauds such as time thefts. Let’s break each of them down.

Manual errors- This occurs when businesses use tools that require manual inputting of information—such as Microsoft Excel—to manage payroll. These kinds of tedious processes have higher chances of human error.

Misclassification of employees- Misclassification is when businesses list workers as contractors when they’re actually employees. This can lead to government fees, employers paying back the cost of benefits, and resource-draining civil lawsuits.

Frauds – When employees embezzle money from a business using the organization’s payroll system. Time theft—when employees accept money from companies for hours they didn’t work—is one example of fraud.

Usually, reducing payroll leakage comes down to being aware of some of the sources that lead to this situation. We’ve already gone over a few sources, but there are other processes to keep an eye on to reduce risk.

Identifying additional payroll leakages

To identify payroll leakage, there are several aspects of your business you’ll want to pay attention to and the bigger your company gets, the more exposed you’ll be. Above, we covered the main sources for payroll leakage, but if your business is managing global payroll with more complex payments, you may want to look into these sources as well:

1. Foreign exchange payroll leakage – if you’re a global company, you might incur losses from currency fluctuations, commissions, and any necessary admin work caused by exchange and payment errors.
2. Tracking expenses –  As part of your company policy, you might reimburse employess for travel, food, lodging, or any other business-related expenses. But if you don’t set a limit on what can be reimbursed, it’ll be harder to avoid payroll leakage.
3. Tracking outsourced staff costs  – Just like with expensed business trips, you’ll need to set a figure for how much you want to pay outsourced workers for supplies, salaries, equipment, and so on.
4. Outdated payroll management software – When your company starts growing, manual payroll methods may become less ideal. Companies that manage large amounts of payroll data may need a more robust solution with built-in accuracy checks and automated reports.

If step one of preventing or reducing payroll leakage is knowing the causes, step two is putting this knowledge into action.

How to avoid payroll leakage

With a few strategies in place, you can greatly diminish your chances of payroll leakage:

• Implement accurate time tracking – automated time tracking solutions—such as those that immediately clocks when a person signs in or out of a system or a enters the office—prevent employees from bloating their hours.
• Proper employee classification – There are a few tests you can conduct to make sure you’re correctly classifying employees, but you can also gain peace of mind by implementing a global workforce solution that helps you eliminate risks and exposures.
• Fraud Detection and Prevention – With manual systems in place, you’re more prone to fraud. With a centralized payroll system that organizes your data, you can easily and quickly access relevant information that can point to payroll fraud.
• Use reports to your advantage – Regularly generate reports that help you audit your payroll workflows for a fuller picture of what’s going on.
• Understand employment laws – Whether you have an expert on staff or you use a solution that specializes in understanding and decoding country-specific employment laws, make sure you’re taking steps to avoid any legal or reputational pitfalls.

Securing your peace of mind

There’s a lot to consider when it comes to payroll leakage. You could manually take on payroll management and spend hours and hours keeping an eye all each moving part of your organization especially if its global, or you could simplify the process for yourself and free up some time to focus on other important matters.

With the help of our automated system and global labor law experts, you can easily prevent your company from overspending. Get demo and see for yourself how we make compliance easy. Book a demo today.