As payrollers, we all share the same pursuit: error-free payroll throughout the year.
Given the complexity of payroll, however, mistakes can happen. Hence, the importance of distinguishing between “one-off” errors and “systemic” errors.
The former are disappointing. Thankfully, they’re usually detected right away (and remedied just as quickly). Familiar “one-offs” include:
- Incorrect data entry
- Incorrect or complex “leaver” final-pay calculations
- Overtime submitted but not applied in the current pay run
Left untreated, you can expect employee dissatisfaction and loss of trust, incorrect disbursement of funds to employees and third parties, a basis for fines and penalties, and lasting reputational damage.
One-off errors disrupt what business owners and leaders ultimately seek – the silent running of payroll. Regular payroll controls can help detect these issues early, including:
- “Four-eyes” checks on complex leaver calculations
Pass your calculations to a colleague for checking before submission. - Payroll input versus payroll output reconciliation
Confirm that what was authorised and submitted is consistent with what has actually been processed. - Interrogate overtime submissions
Check overtime submitted but not yet approved (and overtime approved versus overtime actually paid). - Last month’s gross pay versus this month’s gross pay
Review individual variances greater than an agreed threshold, such as 10%.
These checks, performed every pay run, help detect one-off errors in time for payroll adjustments before finalisation or, at worst, correction in the next pay run.
But perhaps more damaging – and considerably more difficult to detect in time – is the second category. What we call “systemic” payroll errors.
Systemic errors are the ones you need to worry about
Systemic errors can often go unnoticed for months before they surface as significant underpayments or overpayments.
These errors usually begin upstream of payroll, and you can often trace their origins back to the employee onboarding process – an employee classification error or award interpretation error, for example.
Given the rules-driven nature of payroll engines, these have a tendency to become automatic. Shift, overtime, benefit, and other rules tagged to certain employee types bake themselves into the payroll solution and are repeatedly applied (if you let them).
The system isn't necessarily malfunctioning, either. In fact, it’s doing exactly what it was configured to do. That's what makes these errors so dangerous. Payroll controls can catch errors, but they can’t compensate indefinitely for incorrect or incomplete data entering the process upstream.
A similar philosophy applies to employees who continue to be paid long after leaving the business because their leaver or termination instructions weren't passed on to payroll. Those overpayments can continue for months because, as far as payroll is concerned, the employee is still active.
This is where your anomaly detection procedures need to go further.
One approach is to regularly sample a percentage of paid employees from payment to the payment source and workflows in HR. Ideally, this would include the relevant details of the employee onboarding record and the information that determines their payroll treatment.
Depending on the organisation and its risk profile, periodic broader audits may also be appropriate.
For the sake of efficacy, any anomalies detected through these process-related checks need to be formally recorded and surfaced to appropriate senior leadership, together with an analysis of cause and impact (and the remedial action taken or recommended).
RELATED: Payroll Anomalies Detection Guide
Use technology to look for what looks unusual
Today's advancements in AI and analytical technology mean we can apply checks to high-volume, complex payroll datasets more easily than ever before.
These guardrails shouldn't be treated as one-offs. They should form an ongoing part of your payroll governance framework.
Analytical and anomaly detection can help identify patterns that would otherwise be difficult (or impractical) to identify manually across a large payroll.
Useful checks may include:
Employees paid versus the employee system of record
Looking for “ghost employees” or continued payment of employees who have since departed from the business.
Duplicate bank accounts or employee identifiers
Additional vetting for duplicate or invalid employee records and possible ghost employees.
Unusually high or repetitive overtime payments
Which may indicate an issue with approved or unapproved overtime.
Overtime paid against employees whose contracts are overtime-exempt
Identifying payments that don't appear consistent with the employee's contractual arrangements.
Greater payroll movements per employee versus the previous pay period
A useful check for erroneous pay items at the employee level.
Employees on long-term paid absences
Verifying that an extended paid absence has, in fact, been authorised and appropriately recorded.
Overall payroll gross value versus the previous pay period
A high-level check that may identify a duplicate overtime file, erroneous bonus file, or other unusual movement.
Payroll authorised versus payroll submitted to the General Ledger
Confirming that the value authorised is consistent with the value ultimately posted.
These are, of course, just examples of the additional checks you could – and should – undertake regularly (every pay period if practical).
But the point isn't to investigate every variance as though something has gone wrong. It's to identify the variances that deserve investigation before they become a problem.
Go right back to the source
Whether you're leveraging technology in-house or analytical support from a third-party payroll provider, the important thing is what happens when a transaction is flagged.
Don't just accept the exception:
- Trace the transaction through the relevant records and workflows
- Establish whether the result is authentic
- Establish whether the underlying data is correct, and
- Establish whether there is a broader process issue that needs addressing
Where the issue is systems, the goal should be to correct the underlying process or control – not to just fix the individual payment.
For any situation that falls outside the expected parameters, raise it with senior leadership where appropriate – including the likely cause, potential impact, and remedial action taken or recommended.
The impact isn't necessarily limited to dollars, so look beyond the obvious monetary factor alone. You need to consider financial impact, employee hardship, compliance exposure, fraud risk, and reputational consequences.
And this is where the distinction between one-off and systemic errors becomes particularly critical.
A one-off error might tell you that something went wrong. A systemic error might tell you that the process itself is wrong – and has been quietly producing the wrong result for months.
RELATED: 25 Years In Payroll (Four Lessons I Learned the Hard Way)
Payroll governance demands evidence
Your focus on potential payroll anomalies has never been more crucial.
Internal business leaders increasingly rely on payroll to provide proactive leadership around risk, compliance, and control. Auditors, regulators and other stakeholders may also require that appropriate governance is in place.
In other words, it’s no longer enough to simply perform the checks.
Capture them. Maintain the results. Record what you found, what you investigated, and what you did to remedy it.
Ultimately, good payroll governance isn't about pretending errors won't happen. It's about having the controls to detect them, investigate the cause, correct the underlying issue, and retain evidence of what was done.
The most dangerous payroll errors aren't necessarily the ones that look wrong. They're the ones that look perfectly normal.
