HR Challenges and Solutions - Maintaining Compliance and Mitigating Future Risk

HR Challenges and Solutions

Maintaining Compliance and Mitigating Future Risk

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2 | Maintaining Compliance and Mitigating Future Risk

IntroductionWhile the language of business is becoming more standardised, one thing remains as culturally complex as ever: employment law. Organisations must know the risk and compliance issues they face in every jurisdiction they do business – and it’s an almost impossible task for any business to attempt alone.

Managing HR, payroll and benefits generates a wide range of issues from compliance and risk management to costs. Changes in tax, regulatory reporting requirements and compliance policies and procedures impact not only HR but also line managers and employees. A recent Ernst & Young payroll survey found that the key

issues organisations face relate to legislative compliance (23%) and consistent payroll processes (18%) across the organisation. The survey also found that the most frequent payroll errors include incorrect tax withholding and existing payroll operations that are unable to remain compliant with increasingly complex legal or regulatory requirements.

So how can organisations know they are continually meeting their HR and payroll compliance obligations against the latest, ever-changing regulations? An over-reliance on in-house teams or historic legacy processes can leave organisations believing they are compliant when in fact they are exposed to potentially damaging non-compliance issues. Recent ADP research finds that 80% of organisations believe they comply with national regulations despite one third of the same respondents having been penalised for non-compliance in the previous year.

Compliance and Risk ChallengesFailing to address HR risk and compliance can open up the organisation to fines, reputational damage and high staff turnover. Understanding the specific legal requirements, is essential knowledge for any organisation wishing to remain on the right side of the law while benefiting from the time and resources savings offered by

working with an expert.

With the volume of tax, employment and payment-related regulatory changes continuing to increase, it is becoming more difficult than ever for human resources and finance executives to maintain compliance and mitigate future risk. For example, in 2011 alone, there were 17,000 proposed tax rule changes across 10,000 unique tax jurisdiction types in the US. In Italy, approximately 700 tax and contribution changes plus another 100 Collective Labour Agreement renewals were introduced in 2013 and the UK sees 20-30 changes annually to HR and payroll regulations, according to ADP internal data analysis. Additionally, recent research found that one-third of companies reported having been fined or penalised in the previous 12 months with an average of 6.4 fines or penalties each due to non-compliance (penalties typically made up 25 percent of the total tax amount owed, with some reaching 90 percent).

Failing to address HR

risk and compliance

can open up the

organisation to

REPUTATIONALDAMAGE and

high staff turnover

Over-reliance on in-house teams or

legacy processes can increase

non-compliance.

CFOs become more predictive (anticipating and preventing compliance failures, rather than reacting after they’ve incurred penalties) and can control costs.

Maintaining Compliance and Mitigating Future Risk | 3

The most pressing HR and payroll risk in Australia has to do with the correct application of legislative awards against industry, the role in pay calculations and/or HR legal requirements. Due to the large number of potential recipients, the complexity regarding electronic payments notifications is also a big issue for employers.

The growth of complex rostering requirements in the expanding services industry, and the need to roster according to varying award interpretations, has also led to a growth in Time and Labour Management (TLM) applications. Locally developed software is being utilised to manage the complexity and the results are then transferred to the payroll calculator. This leaves the onus on the TLM system to calculate the infamous Australian Award Interpretation requirements, which can sometimes fall short of fully addressing the requirements.

Stephanie Edwards, General Manager of Strategy and Marketing, ADP Australia, estimates that 40% of new clients have compliance risks due to the on-going nature of legislative changes. 2014 is likely to see many more changes regarding superannuation, minimum wages, gender equality reporting and paid parental leave. In each case, companies need to work closely with government departments to fully understand the implications of legislative changes as they are drafted and before they are imposed upon firms operating in Australia.

Edwards identifies five key areas of compliance for clients to focus on [see top tips below]: “If you address those five elements well from the beginning, you have at least some of the basics covered. Otherwise, unforseen consequences will emerge in the future when you cannot do anything to fix them.”

Australia at a Glance

Top compliance tips:

• Maintain legislative knowledge by monitoring the FairWork Australia website

• Subscribe to news alerts from national and state government departments

• Join relevant professional or industry associations – they often provide advice and alerts onchanges to legislation

• Outsource to specialist vendors where compliance may be at risk

• Organisations no matter how small are expected to consider markets beyond their borders. Assoon as an employee crosses an international border, it is necessary to know what potentialregulations and compliance issues have been triggered.


Increasingly complex

Michael Magotsch, partner and employment lawyer at DLA Piper with over 20 years’ experience in German and cross-border employment law and author of ‘Employment and Labour Law, Jurisdictional Comparisons’, agrees that risk and compliance has been getting more complex for organisations in recent years. “We’re now talking more and more about a complete flexible HR where staff work across borders and are mobile, with people switching from one location to another – that immediately triggers HR, social security and tax consequences that need to be carefully looked at. Companies are totally overwhelmed by it because if they don’t hire experts in that field they end up in difficulties very quickly. The classic mistakes that large US companies made 25 years ago when they entered non-US markets you see now with young entrepreneur start-ups that grow so quickly: they hire many people, and are so successful that they don’t have the time to basically monitor all their rapid steps of growth, leading to serious consequences.”

However, it is not just rapidly expanding or multinational organisations that face complex compliance issues. The risks to small and medium-sized companies can be just as great, being without the level of internal expertise and resources needed to keep abreast of ever-changing local, regional and national employment laws.

Research findings from the 2013 SmartCompliance survey, ‘Managing Compliance in a Changing Environment’, which found that more than 80% of CFOs say the task of monitoring tax, employment and payment-related rule changes has become more time-consuming over the last two years. Nearly 75% of respondents believed that the increased complexity of newer tax regulations will take up additional company resources over the next two years. Additionally, companies are often not claiming valuable business tax deductions, which means missed opportunities to help reduce their effective tax rate.

More legislation, higher costs

National legislation and sector-specific regulation heavily influences the complexity of the end-to-end payroll process. Studies commonly show that payroll combined with personnel and benefits administration account for 35% of total HR costs, an amount of approximately USD 525 per full-time employee (FTE) annually with payroll costs representing nearly half of this. This cost of course varies by country: in Europe, payroll costs range from USD 100 to four times that in countries with complex rules.

The annual “time to comply with labour tax” corresponds to the time spent by a medium-sized company in a given country to prepare, file and pay labour taxes and social contributions levied on employees and from employers. It ranges from 10 hours in Singapore, 490 hours in Brazil, 45 hours in the UK, 148 in Germany and 214 in Italy.

Magotsch of DLA Piper explains how organisations can fall into difficulties internationally: “For example, if a company moves staff or operations from country to country not looking at issues such as ‘do I thereby create a permanent establishment?’ and all of a sudden have a social security or tax audit where any mistakes in not properly having withheld income tax or not having properly filed social security would result in criminal investigations and penalties. It’s a very costly issue. We have worked with a company who had, due not to intent but simply negligence, disqualified freelancers

At a GlanceHR compliance issues of most concern in Australia:

• Payroll taxes

• Pay requirements / worker’scompensation

• Terminations and employeerelations

• Risk and safety management

• Secure handling of employee data

• Management of leave entitlements

• Superannuation contributions

Value range of fines for non-compliance:

• From thousands to hundreds ofthousands of dollars.

HR Experts can do a better job and provide more strategic guidance.


“The HR and finance team have a much greater visibility as to what’s happening within the business.”

Air Livery is an aircraft painting and refinishing company, based across five airport locations in the UK, with about 220 employees in total. They have overseas sites in Bratislava, Slovakia, and recently in France through a subsidiary company and are part of an Indian-owned international group of companies.

Beverley Brooks, HR Manager sees that, “UK employment law and payroll is a difficult compliance environment to work in. For our company, payroll in particular is the area of greatest concern. We run two payrolls with only a small proportion of our workforce salaried monthly and the majority of our production staff on variable contracts – their gross pay is very good, but their hours are completely flexible due to the seasonality of the business, and are paid weekly. Holiday is also accrued as a proportion of each hour that they work, making it complicated to track and ensure that staff get their statutory entitlement.

One of our reasons for moving to an outsourced service provider was linking the time and attendance recorded on an hour-by-hour basis with an HR system for tracking and compliance. For the finance team that would also give them a full audit trail.

Workplace pensions are also coming in as of 1st of May 2014 and is our major focus at the moment. All employers are now obligated to undertake automatic enrolment of employees onto the company pension scheme; we have to have a pension scheme which we weren’t obliged to previously, and we have to make contributions. It’s a major change for UK employers. I can’t see how we would have implemented this in-house – the fact that we can now easily extract information,

potentially build an interface between the systems, just makes us feel more confident about the process.

The outsourced service provision went live in July 2012. I didn’t have an HR system previously. We have a reasonable turnover of staff so keeping track of who was employed at any one time was a challenge, as was how that linked across the business in terms of health and safety, inductions, quality standards and so on. Payroll was previously managed by a single individual – there was always a concern in terms of holiday or sickness and “what ifs” - the fact that we are now served by a large corporate organisation gives us that reassurance.

Now not only myself but also the HR and finance team have a much greater visibility as to what’s happening within the business. Because it is internet based, all the hours worked and recorded against each project can be looked at by anyone, anywhere, at any time. While there may have been cheaper options than the service we went for, from our perspective it was important to have something that was compliant across the board – if new legislations come in or things change, a ‘bespoke’ route might cause problems further down the line, whereas using a standardised system means the outsourced provider can be expected to update each time to meet the compliance needs of hundreds of thousands of clients. We’ve got the security of a team of HR and payroll specialists, plus the IT support that backs everything up.

Our international operations are not using the same provider fully from a payroll perspective, but I can still access a database of information that gives me an oversight, keeping track of who is at which site. As part of a larger group of companies, I know the Group IT Director is very keen on the fact that we have gone with an external, global outsourced organisation. He has the assurance of the compliance and IT systems that our provider offers – whilst we are a relatively small part of the group, we are seen as best practice.”

GREATER VISIBILITY AND AUDIT TRAILS


HR Directors can maximise productivity and engagement in their department by focusing on employee productivity rather than compliance issues.

and so-called contractors - the authorities looked at it and said ‘no they are employees’ and they were faced with millions in retroactive payments including unpaid social security and taxes.” This can happen within local companies too. In Italy for example there are over 9,000 cities each with independent tax laws. The smallest firm in Foggia might have to brush up on their tax law were they to branch out into nearby Bari. But even the most static of companies would still require the resources to understand employment law and compliance legislation as it changes, is updated or amended.

Ignorance is no excuse

Many organisations live in ignorance of the payroll and employment law that their operations breach. Given the costs in fines and potential damage to brand reputation, ignorance is not bliss. In the words of Ernst & Young’s Global Payroll Survey of April 2013, “When looking at why organisations operate their current payroll model, the old adage of ‘if it isn’t broken, don’t fix it’ seems to apply. Historic practices still dictate why organisations continue to operate many of their processes and systems. Of course, if little has changed in the way of business strategy, size, geographic scope,

acquisitions or mergers over the past several decades, then this may be a perfectly appropriate response. In reality, however, relatively few organisations can make that claim.”

Simple changes result in large repercussions

Due to the complex nature of employment legislation, there are often seemingly simple changes or new obligations that require substantial changes to systems of record and reporting.

Drop into any office around the world and you’ll find a similar story. For example, tracking legal changes and legal compliance is one of the biggest issues for HR because the legal environment is constantly changing, ambiguous and not predictable. Knowledge of links between different regulations is also crucial, as change in one area may influence regulations in others.

Payroll risks also vary across companies according to other factors including industry sector, company background and culture, company size,

and organisation structure. In high turnover sectors such as retail, construction, catering and processing industries, for example, payroll has to cope with a large number of hires and leavers, and complex time and absence management.

Compliance handling process

While technology has revolutionised many aspects of business over the past several decades, many organisations are still tied to the manual compliance management processes or multiple vendor contracts put in place years ago by their counterparts. While these processes may have once been effective, they have, in many instances, become a significant obstacle as companies work to improve the efficiency of the compliance process. Untangling the web of spreadsheets and paper documents, or the paths of information from various vendors, often proves to be extremely difficult internally.

The SmartCompliance 2012 survey found that 65% of CFOs believe reducing the number of touch points in compliance processes could increase efficiency and productivity. More than 75% of finance executives had no access to real-time, consolidated compliance data. That means low efficiency and high risks to overlook mistakes caused by the very high frequency of changes after a new regulation has started and the very high complexity of different worker types which need to be taken into consideration.

In difficult and highly competitive market conditions, the need for organisations to effectively manage their risk and compliance issues has never been greater – and at the same time, has never been more difficult to do internally. Compliance

have been fined or penalized in the previous 12 months.

33%OF COMPANIES


Adapting quickly to legal changes requires skills and knowledge.

isn’t optional – which means gaining control over and improving the efficiency of compliance management isn’t just critical, it’s a business imperative.

Adapting quickly to changes requires significant skills and knowledge. Even where new laws are intended to simplify or consolidate existing regulations, a large or sudden change can be just as difficult for organisations to cope with. Changes can be so fundamental it would not be possible for an individual company to easily

incorporate the vast specifications and alterations with the breadth of systems and compliance expertise required. The experience of long-established in-country teams allocated exclusively to changes is vital to having an overview of all the rules, which is the base for correct HR and payroll compliance.

For Terry Troost, HR Director for the Netherlands at SPIE (an international energy and communication services company that employes 2,800 people locally), “compliance is never a risk as we leverage the skills and expertise of our partner and have only 6 payroll professionals in the team. For the tax changes that came into effect on 1st January 2014 we did not have to do anything as our partner made all the necessary changes. The system and process were automatically upgraded and all we did was attend regular information sessions to learn about the new laws and their impact on our employees and processes.”

Tackling Compliance and Risk The increasing volume and complexity of regulatory changes is fuelling the demand for people with the ability to implement and understand their impact across HR systems and processes. And shortages of these skills can only get worse as compliance becomes more complex. The question for companies is: how are they possibly going to attract and retain that talent to maintain their compliance?

Comprehensive skills and expertise

Companies are increasingly looking to the benefits of maintaining co-ordination and overview skills internally. HR managers need to have an operational overview of the HR risk and compliance issues that their organisation faces. However, there are areas of knowledge that no internal professional, no matter how competent, could be expected to know. For example, as countries change labour laws at either a local or national level, payroll experts from outsourced service providers are often called in to advise on the law and help with its implementation. In the US for example, not only does one major payroll company maintain a permanent team of compliance experts embedded at the IRS, the IRS also has a team embedded at the payroll provider in order to learn from each other. Similarly in Brazil, the new eSocial system designed to standardise labour, pension and tax information, was drawn up over three years with the same provider as part of its pilot group working to validate their models.

This level of expertise would require significant investment outside of any organisation’s core business. The global war for

75%of finance executives have no access to real-time, consolidated compliance data

Line Mangers are more confident when answering employee queries.


“At Bosch, costs are very important, but efficiency and operational excellence is even more important.”

Roberto Zecchino, Vice President Human Resources & Organisation South Europe for Bosch Italy, is responsible for ensuring that 5,800 employees throughout Italy from the German technology and services group are fully compliant.

“The Italian legislative structure is very complex. The labour laws change quite often, and within that there are different national and local regulations. In Italy the local laws vary from city to city - with 19 different locations it is very important that there is a clear information flow between Bosch and our payroll provider,” stresses Zecchino.

“We have a special time management system, the Italian pension and retirement calculation, production safety, payments upon service rewards, calculations in case of illness, and last but not least in Italy we have a lot of expatriate workers who come with a different calculation. We must have total alignment with our provider to ensure local laws are respected and there is flow of information – this means we have to stay very close and synchronised with one another.

From a compliance point of view, internal control is crucial to Bosch. All the payroll processes have to be according to the law but

also according to the Bosch company policies regarding compliance and risk-management procedures. We need to secure the necessary level of data management visualisation so that we can monitor all the data and in case of any problems occurring can recover the system quickly. This is one of the key aspects for us.”

The benefits of working with an outsourced provider versus in-house for Bosch “include flexibility, cost control and agility. Greater agility means greater flexibility. The constant speed of new legislation and new information means that every time something changes from a compliance point of view, our provider has everything we need. This is very important especially in the complex environment of Italian legislation. Over the years there have been many organisational changes on our sites, so we need to have a clear structure and communication flow for our HR processes so that a new manager can easily understand the background. That also means having a back-up solution no matter what the movements of people or changes are.

Our payroll partner must provide the technical knowledge and expertise. Frankly speaking, when we are doing any outsourcing projects, the most important factor is efficiency of process. At Bosch, costs are very important, but efficiency and operational excellence is even more important. Our aim is to create a dynamic organisation with lean structure and efficient process.”

COMPLIANCE IN COMPLEXITY


talent also means that the best minds are attracted to the global companies that specialise in their area of expertise, working at the cutting edge of compliance, rather than within small in-company teams where playing catch-up often happens. It is the core business of a provider not just to have the technical knowledge to offer a service, but also the level of insight to know what legislation is coming around the corner and be ready to comply to it before other organisations are aware of the

changes being proposed. According to research by the Loughborough School of Business and Economics, the benefits of outsourcing “go beyond the one-time cost saving. They strongly relate to the firm’s competitive advantage and therefore often represent the key success factors in a particular industry.” In other words, organisations unencumbered by maintaining cost and time-consuming in-house capabilities can find it a competitive advantage to work with outsource partners instead.

Consolidated and automated approach

One of the more efficient ways for human resources and finance executives to mitigate risk is to manage compliance proactively. However, nearly 30 percent of senior finance executives surveyed by ADP say their approach to managing compliance is more reactive than proactive. Having a consolidated and automated approach to managing regulatory requirements is an effective way to proactively manage compliance risks.

According to the 2013 research report ‘Managing Talent Risk: Data Management to Ensure Workforce Compliance’ by consultants Aberdeen Group, “Even top-performing companies must find ways to deliver HR data to business leaders to guide decision making, and in order to do this they must use automated tools — instead of relying on manual processes — and find ways to integrate their HR data and systems. Tools and technology that help organisations consistently apply policies and rules around leave, overtime, and other critical workforce management activities are critical to maintaining a compliant environment.”

Michael Magotsch advises his clients that a pro-active compliance and risk strategy requires a whole group of service providers specialising in investigations, tax, social security, and payroll to work together.

65%of CFOs believe reducing the number of touch points in compliance processes increase efficiency and productivity.

is the more efficient way to mitigate risk and manage compliance.

PROACTIVITY

Employees are more engaged in their work without having to worry about pay slips and their employer.


ConclusionIn the past 20 years, the number of employees working for a subsidiary of a multinational corporation has more than tripled. The complexity of managing payroll in multiple countries however is not only an issue for multinationals, but also for the multitude of small and medium sized businesses who increasingly find themselves operating across international markets.

Ernst & Young’s Global Payroll Survey in April 2013 of more than 160 multinational organisations spanning five continents concluded that, “85% of respondents desired improvement in their current payroll policies and practices.” Outsourcing provides the knowledge and infrastructure necessary for ensuring compliance. Executives need to look beyond solutions and platforms that help simplify compliance management, but select providers that are on the cutting edge with the best local experts, not just to advise on the law and help with its implementation but know what legislation is coming and be ready to comply before other organisations are aware of the changes.

With the heightened challenges and complexities of risk and compliance comes a unique opportunity for human resources and finance executives to help drive organisational change. By finding new ways to help maintain compliance and mitigate risk, improve business process efficiencies and, ultimately, help to drive organisational growth, human resources and finance departments can demonstrate the strategic value they provide to the company.

Risk and compliance complexity provides

an opportunity to drive outsourcing

and transformation

CEOs can manage overhead, regulatory burdens and mitigate risk so that they can grow the business without legal distractions.


About

Automatic Data Processing, Inc. (NASDAQ: ADP), with more than $11 billion in revenues and approximately 600,000 clients, is one of the world’s largest providers of business outsourcing solutions. Leveraging over 60 years of experience, ADP offers a wide range of human resource, payroll, tax and benefits administration solutions from a single source. ADP’s easy-to-use solutions for employers provide superior value to companies of all types and sizes. ADP is also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine, recreational vehicle, and heavy equipment dealers throughout the world.

www.adppayroll.com.au

CorporateLeaders is an exclusive independent network that inspires business and leadership by providing a trusted forum for executives to network, exchange ideas, share lessons learned, and drive business forward in an ever-changing environment. We focus on providing exclusive membership services, intimate and content-rich networking events, research, thought leadership and advice on business transformation with executive needs and experiences at its core.

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The ADP logo and ADP are registered trademarks of ADP, LLC. All other trademarks and service marks are the property of their respective owners. © 2014 ADP, LLC.

HR Challenges and Solutions - Maintaining Compliance and Mitigating Future Risk

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