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Ernst & Young Reveals the High Cost of Payroll Errors

In a study of companies across the country, Ernst & Young (EY) found payroll errors aren’t rare; they’re routine. And the consequences are staggering.

On average, fixing a single payroll mistake costs a company $291. Errors also risk fines and penalties from noncompliance, as well as mental and financial consequences for employees. EY researched U.S. businesses with 250 to 10,000 workers and spoke to over 500 individuals who interact with the payroll process.

The data suggests it’s not enough for businesses to use payroll software. To avoid the climbing costs of errors, companies need to resolve issues before an inaccurate check hits an employee’s bank account.

Do payroll mistakes plague your organization? Use this overview of EY’s study to help understand errors and gauge their impact.

How common are payroll errors?

EY found 1 in 5 of the average company’s payrolls over the course of a year contain errors. The sources of errors range from precarious data reentry to widespread oversight, but the outcome remains the same: Payroll mistakes chip away at the bottom line. While the most egregious errors tend to stand out, the seemingly small errors hit ROI and productivity hardest. Because they add up.

Over one year, EY determined the five most frequent payroll mistakes per pay period in a 1,000-employee company involve:

1. Missing/incorrect time punches

Any of us who’ve held an hourly position have botched clocking in or out at least once. In fact, EY found that companies experienced more than 400 such errors per year — roughly four times for every 10 employees.

2. Missing expenses

Employees who travel frequently or simply take a client out to lunch have likely experienced this problem. EY identified an average of 229 payroll mistakes per year involving missing or inaccurate expenses.

3. Incorrect PTO calculations

An employee who earns their PTO expects it to pay off, right? With a traditional payroll process, hoping approved PTO shows up on their check is about all an employee can do. EY discovered 149 instances of PTO miscalculation and approval.

4. Shift availability

When an employee can work should always be clear; this isn’t always the case with an outdated payroll process. EY recorded issues involving employee hours and scheduling 147 times.

5. Faulty PTO accruals

What’s worse than not getting paid correctly for PTO? Not receiving it at all or taking it when you don’t actually have it. According to EY, PTO failed to accumulate an average of 120 times.

How much money do companies lose to payroll errors?

While the average payroll error costs a business $291, this doesn’t paint the full picture. Each incorrect payroll carries a direct cost to account for:

  • voids
  • wires
  • reversals
  • paper checks
  • and other costly solutions

But that’s not all. Payroll mistakes also carry their own indirect cost in labor. After all, somebody has to make the corrections.

One financially egregious mishap, unentered sick time, reaches $705 — more than twice that of the average payroll issue. And if it happens for one employee, it’s not a stretch to assume an issue that severe shows up again in a broken payroll process.

Considering their weighted average, a company with 1,000 employees could lose up to $922,131 due to payroll mistakes. An enterprise with 5,000 workers would waste over $4.5 million a year to lost productivity.

How much time do HR and payroll professionals waste correcting payroll errors?

EY found, on average, a full-time payroll employee spends over half the year (nearly 29 weeks) correcting the most common payroll problems. This time investment carries its own price tag depending on the involved employees’ salary, but it takes away from the entire organization, too.

Some HR professionals are forced to spend most of their time adjusting payroll records and correcting issues that could’ve been avoided. Doing so takes away from the opportunity to create strategies that enhance:

Like the most expensive errors, the most time-consuming payroll corrections involve:

  1. time punches
  2. expenses
  3. uniform charge errors
  4. sick time
  5. health savings plans

Time punches alone account for 11 40-hour workweeks, with expenses following at roughly six and a half weeks. No matter the type of error or how large the payroll is overall, fixing issues is an unnecessary time sink.

Which payroll errors risk legal issues for companies?

Beyond their average estimated cost, every mistake — from misclassifying independent contractors to missing due dates — carries the potential for litigation. In fact, nearly 1 in 6 (14%) respondents surveyed by EY said their company experienced legal, compliance and regulatory issues due to inaccurate payroll in the last year.

EY even found businesses could pay up to $250,000 a year in:

  • legal costs
  • settlements
  • regulatory fines

That’s not even considering unpaid IRS payroll taxes from issues related to incorrect W-2s and W-4s.

It’s not just about money, either. Almost half (44%) of the companies that faced legal issues were forced to cut staff. Even if a legal issue doesn’t force an organization to furlough or lay off employees, it could still sabotage the trust workers have in their employer.

Retention is essential for organizations to succeed; preventable issues like payroll errors push employees away.

How do organizations prevent payroll errors?

Mistakes happen, but they add up when they’re not caught early.

Beti® is Paycom’s employee-driven payroll experience. It guides workers to find and fix errors before payroll runs and before they harm your organization’s bottom line.

Pair Beti with the Vault Visa® Payroll Card to unlock more streamlined processes and secure a competitive edge in a tight labor market.

Explore all of Paycom’s payroll tools — available in one easy app — to learn how it gets ahead of costly errors.

Read this blog post to learn how unchecked payroll errors leave businesses open to noncompliance. And check out our white paper for a deep dive into how payroll errors harm businesses and their employees.

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