Payment_Methods

INTRODUCTION To initiate this report it is first cautious to enquire into the background of current company history and payment techniques, along with summarising the scope of reviewing and comparing these techniques by breaking down the weaknesses and strengths and make recommendations where it is possible. X is a leading international, pharmacy-led health and beauty group operating in over twenty countries and it has a history spanning over one hundred and sixty years. Its main UK support offices are based in Feltham and Nottingham. (See Ref 1, About X[Online] The payroll department operates several payrolls which are divided into small teams with their own regions. This report focuses on the payroll for all X UK stores; this covers all retail stores wpith the X branding facia in the mainland, Channel Islands, Isle of Man and Northern Ireland (Nottingham support office) This equates to working sixty six thousand permanent paid employees and eight thousand temporary employees throughout the year which operates mixture of negative and positive payroll depending on their terms of contract. There are also an expected seven and half thousand seasonal employees (Christmas and summer school holiday periods) which paid through positive payroll who are employed between September to February for the Christmas employees and June to August for the student employees each year (figures from Bankers Automated Clearing Service (BACS) file November 2009) These employees are based in over the two thousand and five hundred X stores and almost three hundred field support offices (Area / Region and Divisional hierarchy based) known as X UK. The payroll department was outsourced to NG in 2006 with an aim of allowing X to concentrate on more strategic tasks without being bogged down with back office duties. Currently the payroll department operates the UniPay system commonly known as Legacy payroll, which has been in use for the last fifteen years. The system is dependable on payroll administrators, which involves manual keying without the capability to perform automated calculations for new employees, changes to contracts or leavers final monies. This report contains; * Analysis of current pay methods * Examine management outputs * Breaking down weaknesses and strengths of different pay methods * Propose improvement of new pay method Evaluating the internal process for Pay Methods and Managers information provided. One of the main employees’ expectations is to receive payment accurately and on time. The payment method and the pay dates are formally agreed between the employee and employer; this depends on the employees’ type of contract that is clearly stated within contact of employment. Failing to fulfil this expectation could cause breach of contract. The payment dates are on the 28th of each month for the monthly and every Friday for the temporary employees. (See Ref 2, Employment Right Acts (ERA) 1996, Part III Guarantee payments [Online] http://www.legislation.gov.uk/ukpga/1996/18/section/28 [accessed March 2011]) However, X has very rich business history, in the past it has operated all the various major payment methods. 1) Cash payments ( in early part of the business) 2) Cheque (cashless payment) 3) Electronic Payment (cashless and paperless payment) 4) Chaps (Clearing House Automated Payment System) 1) CASH Payment: At the beginning of the business X used a Cash payment method. (Late eighteen / mid nineteen hundred) All the employees received their wages were rounded in pounds shillings and pence, which calculated weekly with the output of timesheets. Each employee did have a clocked time card and by punching these cards into the machine daily (Appendix 1, Clock time card). Every Friday the management held banknotes and coins on the premises to pay their employees’ wages. However, evolving to banks and building societies, handling cash payment became more expensive due to security costs, fraud and theft risks; X discontinued cash payment by introducing a cashless process that includes cheque, electronic fund transfer. However, cash payment is the most expensive payment method for the employers due to labour intensive to organising. Out of all these payments cash is the most open to fraudulent means and it is nearly impossible to trace i.e. it is easy to forge the paperwork by creating a ghost employee and receiving money. To reconcile cash payment the payroll administrator could only use manual journals, which could be a balancing problem if person used the incorrect side of the journal i.e. the credit transaction entered as a debit entry. For the employee side, no need to wait and the money will be paid immediately at the end of week. 2) CHEQUE Payment: The cheque is first covered by The Bills of Exchange Act 1882, and defines a cheque as a written order from an account holder instructing their bank to pay a specified sum of money to one or more named beneficiaries. Cheque payments are more secure, though employees have to wait several days for the cheque clear. (See Ref 3, Background of Cheque payment [Online] http://www.chequeandcredit.co.uk/information/-/page/the_law_relating_to_cheques/ [accessed March 2011]) All the company cheques are crossed due to more security and can only be cashed by the name of the person and thus that avoids fraud. Writing cheques also creates a documented paper trail that helps reconcile the company bank account on which payroll cheques are drawn. Creating cheques involves two departments (finance and payroll) working closely together. The payroll department informs the finance department to create a cheque for the specific employee then the finance department checks to see if the request is legitimate. After the authorisation a cheque can be created by printing it with the individuals’ details and amount. However, employees have slight disadvantage of being required to cash the cheque so that can be converted to currency such as brokers, pawn shops rather than the bank. E.g., these types of shops may charge fee for exchanging to the cash. The main disadvantage creating a cheque is that involving a higher administrative cost and also it can be misplaced or stolen. To avoid these currently all the employees get paid their payments into their bank account. However, mostly cheque payments generated for staff that has unauthorised leave. To avoid a possible overpayment store managers or HR (Human Resources) representatives request in writing to stop BACS transaction with clearly stating employees whom reported “Absence Without Official Leave” (AWOL). Depending on the date of request (before/after the pay run) salary clerk will alter the payment method to a cheque. If the payroll department is informed, late after the pay run, the money will be recalled from bank, communicating with finance department and the same sum of BACS will be generated to a cheque. In addition to this in some cases the company pays employees at the beginning of employment due to unavailable or wrong bank account details. The disadvantage of generating cheque payment is that it costs more to the company where as transferring money electronically is not. This is why the company do not generate cheques unless requested by the store or HR representatives. 3) ELECTRONIC Fund Transfer known as BACS: First started in 1968 for alternative to paper payment known as cash or cheque. (See Ref 4, Background of BACS transaction [Online] http://www.bacs.co.uk/Bacs/Corporate/CorporateOverview/Pages/Overview.aspx [accessed March 2011]) From an employer’s viewpoint, the BACS transaction is significantly more convenient, and the same is true for the employee. Once the required information has been provided to the banks of the employer/employee, there is no need for either the printing of the employee’s check or the manual distribution of that check. From the employee’s perspective, there is no longer a need to pick up the check, nor is it necessary to drive to the bank in order to deposit the check. It has automates regular payments each months or weeks and payment can be fixed amount as a repeat transaction. The BACS transaction also means speed of money transfer comparing to traditional paper transaction, especially if payments need to be mailed over great distances. In addition, this method involves less manpower relieving some payroll employee’s duties to focus on more specialised payroll duties. (The creation, printing and distribution of employee earnings not required.) comparing with the cheque or cash payments, the BACS transaction helps to manage and improve financial control that allows management to reconcile with the business output reports such as BACS payments; high low payroll reports that can be used an investigation of any irregular transactions. X currently operates the BACS transaction method, as this is a convenient payment method for the employee and employer comparing with cheque payment. Being a very large company and obtaining a high volume of employees BACS is the most effective and efficient payment. Within the UK boundary, the credit amount will hit employees’ bank account in approximately three bank working days. However this time limit does not apply to building societies due to all the transactions go to head office first and this causes the delay for receiving money. Monthly pay run generally runs every month on or around the 11th and generates the payslip which goes to individuals’ bank account on the 28th of each month. On the other hand, weekly paid employees receive their money every Friday. The employee also benefits by not having to carry around large amounts of cash or pay costs to cash in their cheques. Besides, allows employee to receives an interest via bank accounts and will be able to withdrawn cash most of the banks cash machines (ATM) with free charge of cost. In order to receive prompt payment, an employee must ensure to provide sufficient bank account details and then, payroll administrator can update the payroll system. In addition, payroll department has a checking procedure to make certain, the system has accurate individuals’ bank details. This is to prevent sending wages to an incorrect bank account as once the money sent electronically there is no way to cancel the transaction. If this happens, to make a payment into the correct bank account the payroll department has to wait money to return from bank. This could take up to ten working days depending on the bank / building societies. This means an employee will receive the wage with delay and the company incur cost to request another payment. 4) CHAPS: A computerised clearing system for sterling fund that began operations in 1984 and same-day electronic funds transfer service from one financial institution to another, provided by the CHAPS Clearing Company (which is owned by the commercial banks). There is a charge for using this service and this payment is only used for emergency payments required for the employees. (See Ref 5, Background of CHAPS [online] http://www.finance-lib.com/financial-term-clearing-house-automated-payments-system-chaps.html [accessed March 2011]) The CHAPs request can be requested for several reasons and falls into “Payroll Correction” categories. * Payslip errors caused by payroll department i.e. erroneous pay, inaccurate overtime history and keying errors. This can be detected with payroll output reports such as “Gross to Net” or enquiries raised by the store managers. * New company starters, whom started to work within the company but not yet in the payroll system. On the other hand, the company also can arrange special payments for achievements in business or as per their Contract of Employment, and other cases, e.g. Recommendation of Friend payments, Secondary ongoing payments (Honorarium, First Aider Payment) for temporary changes within the employees’ responsibility. These payments are requested by store managers by completing online forms and the payments are paid with salary into bank account. (Appendix 2, Payslip for Company Shares) 5)Alternative Pay Method: X operates a sharing profit pay strategy which employees receives as a bonus quarterly into bank account, the amount will defer to employees performance. Conversely, organisations are looking at alternative pay strategies to employees that can reduce cost and to boost efficiency and the company could introduce a forfeiture share system, this means employer gives free company shares to the employee and if an employee leaves for certain reasons within three year of the award date an employee gives up the free shares back to employer and there is no capital gain tax is payable unless the share is sold. (See Ref 6, Alternative payment [Online] http://www.parliament.uk/documents/commons/lib/research/rp2002/rp02-005.pdf [accessed March 2011] and Appendix 2, Payslip for Company Shares) Distributions of Payroll outputs: The main payroll output is Payslips which indicates all payroll details, including detailed make up to gross pay (hours and hourly rate etc.) all deductions, payment method, together with employer costs, such as pension contributions and holiday accruals. Also shown are name and address, NI number and category, tax code, year to date figures and date of payment with abbreviated bank details, if paid by BACS. Employer costs that can be requested in several payroll reports, which include labour costs (i.e. salary costs, overtime), tax paid by the employer and BACS transaction fees. (See Ref 7, A Framework for labour cost statistics [Online] http://www.statistics.gov.uk/articles/labour_market_trends/Labour_cost_framework.pdf [accessed March 2011]) The pay method can be vary, for instance, payment to the Child Support Agency (CSA) can be done by employer as a BACS, online, or telephone transaction, which defers to employers discretion and the payslip clearly gives breakdowns. However, X pays all the third party payment via BACS transaction, e.g. HMRC by using EDI (Electronic Data Interchange) method for the year-end process and Court Order payments. The results of each data entry for the individual the payroll department regularly perform payroll outputs i.e. payroll exception reports that could help to investigate any irregularities. After each pay run (for weekly and monthly) the system automatically performs i.e. the main report used by payroll department is that “Gross to Net” indicates warning signs requiring an investigation by the payroll department. These caveat indicators are as follows: * Gross / Net pay exceeds maximum * Negative payments to the employee * Predetermine tax and * Predetermine NI payment * Payment made to an ex employee * Duplicate bank details * Variable BACS reports. (Employee BACS payment, Her Majesty’s Revenue and Customs (HMRC) receive BACS payment, Issue of BACS payment which indicates under/overpayments) * Employers Annual Return P35, which used for reconciling year-end figures. By scrutinizing these outputs, the salary clerk would be able to recall salary from the bank to preclude any overpayment to employees. The company does this, because the cost of recalling from the bank is cheaper than the cost of recovering overpayment i.e. avoiding administrative cost to retrieve money within the UK regulation. The Company also operates checking standards that is included BACS, and cheque transactions. The Automated Return of Unapplied Credit report uncovers any payment that came back to company and is needed to be investigated. The reason may be an employee gave incorrect bank details or closed his/her bank account, which requires this to be placed into the new bank account. CONCLUSION AND RECOMMENDATIONS TO IMPROVE STANDARDS Operating the business in over twenty countries, the management should consider introducing alternative payment methods that are more convenient for the employee who is required to work outside of the UK boundary. Introducing a new payroll system will affect the employer costs however; the benefit will be greater over the period. Likewise, implementing a new payroll software would bring in a new modernised payment method is called “Prepaid Master Card” known as Payroll Debit Card. With this card, the foreign seasonal workers will benefit from the card along with employees migrating to UK i.e. graduate pharmacist from overseas. The card can be used at ATM’s or retail outlets allowing employee cashless shopping like a credit card, with exception that purchases are deducted from employees prepaid balance rather than being applied to credit account. In addition, employee does not incur monthly fees as banks operate these on current accounts. For employers, issuing staff with pre-paid cards can save administrative resources as these cards can be uploaded with staff wages via BACS electronically each pay period allows employer to streamline the payroll while eliminating paperwork. (See Ref 8, Prepaid Master Card [Online] http://www.prepaidforum.org/viewPDF.php'type=PublicPDF&PDFid=212 [accessed March 2011]) The only restriction to this card is that a new employee must be able to prove that they are eligible to work within the UK territory. Employees who are travelling for the company which are based outside of UK i.e. Thailand, France, and Netherland could also use this card... By launching prepaid Master card, the payroll department will be able to transfer money into employees’ bank account within minutes and this method efficient and cost effective. This means, an employee would be able to use this card as a replacement of cash and foreign currency. The downside of this should take into account such as purchasing the cards, allowing for various security platforms in case the card is cloned or the details stolen, as this will incur costs to the employer. However, these must be looked thoroughly and offsetting all the advantages and disadvantages (in this case costs) of the introducing the pre-paid cards and then only consider if the benefits are greater than costs along these includes of checking technical and system requirements and the training available for the payroll staff and also for the employees. Employee needs to know how to access their “cash” on the first try, on the first payday that the program is in effect. (See Ref 9, A Guide to Running an Efficient Department, by Vicki M. Lambert, CPP and IOMA, 2005, Page from 221 to 228) However, the Stein Mart (off price retailer with eighteen thousand employees) in United States (USA) can be shown as operating Prepaid Visa card has resulting significant reduce of payroll overheads. (See Ref 10, Prepaid Card Case Studies [Online] http://www.transactionservices.citigroup.com/transactionservices/home/corporations/university/corp/docs/pcw0309.pdf [accessed March 2011]) Although, the current payment method (BACS) works well; the management must be open minded to an alternative payment methods that could benefit both employees and employer. On the other hand, may some employees rejects to having a prepaid card and wish to continue to get paid through BACS payment method. In this case, an employer should negotiate by explaining the benefits of new payment method and if an employee is still opposing the change, the employer still be able to provide BACS payment into the employees preferred bank account as usual.