Hourly pay rate calculation between Recruiting and Payroll Systems

Question

My recruiting system's pay rate calculation differs from my payroll system's calculation resulting in penny difference in actual hourly pay to employee.

How can I handle such to avoid payee confrontation/complication in the future?

Example, yearly rate is 45,000 and appears on the offer letter as such, along with a calculated hourly rate. The payroll software, when a 45,000 yearly salary is input computes a slightly different hourly rate.

Thus both systems calculate a slightly different total yearly salary when the successive hourly rates are used to calculate. This has caused employees, in some cases, to inquire as to where their penny is.

How do organizations typically alleviate the difference in calculation issue? Any suggestions?

Answer 1

I currently see one comment in this thread with the correct answer, though serveral people hint at it.

1. Make sure that your payroll system is working correctly, according to local law.

2. Make sure that your employee contracts match what your payroll system is actually paying. Maybe this is a yearly salary divided down, or more likely from what you say, it is an hourly rate multiplied up. Whichever it is, THAT is what the contract MUST say.

End of story. No fudging allowed.

Answer 2

Please note that the following methods work on humans. They do not work on the tax authorities. Make sure your accounting, books and taxes are in good order, otherwise employees will be the least of your concerns.

So what to do when you are owing people a miniscule amount of money?

• Overpay. If you cannot correct your payroll system to the exact amount offered because of rounding problems, then instead of slightly underpaying them, slightly overpay them. Nobody will complain about a cent too much. Okay, correction: somebody will, just because people are weird, but you can safely ignore them, they have no case.

• At the start of every year, let your newest intern go round and give every employee a dollar. Explain that the payroll system will make rounding mistakes of half a cent and that the dollar more than covers that and you don't want to hear about it again. That is basically overpay, just more personal, more funny and less paperwork. Gives off more of a "we all cool here, we don't let get the algorithms in the way of fairness."

• Make them realize the value they are complaining about. Put a huuuuge jar of cents in the HR/Accounting office/floor and tell everyone that if they notice mistakes in the cent range in their payroll, they should come up and just take one from the jar. No questions asked, no red tape, no papers to sign or receipt to fill. Just take it. That jar of cents of probably cheaper than whatever your interior designer wanted to put there anyway. And while people love to complain about mistakes, nobody will even consider finding out which floor HR is on and go there, just to get a cent. Write angry emails on work time? Sure. Move their lazy body to actually get a cent? Hell no.

Again, I would like to caution you: I have seen these methods work successfully on humans to drop the complaints about total non-amounts of money to zero... but your accounting needs to be waterproof. If it is actually your accounting that is off, entertaining a few humans is not your problem.

Answer 3

The obvious answer here is to ensure that your offer letter is consistent with your payroll system; it's probably easier to change your offer letters than your payroll system.

Answer 4

You need to understand how the payroll system is doing it. Do you specify the hourly rate, or the weekly amount, or the monthly amount, or the yearly amount? That number is what is going to be used to calculate each paycheck.

Once you know the value that goes into the payroll system when you generate the letter use the numbers that result in a pleasant surprise for the employee.

This isn't just a new hire issue, it is also important when you give annual raises or promotions.

For example if you want to tell them they will be earning $45,000 a year, and you are using a 2080 hour year; if the payroll system doesn't accept fractions of a cent then enter it as $21.64 an hour. If they do the math that means they will be getting an extra $11.20 a year. Thus a pleasant surprise. If the system does accept fractions of a cent, then the letter should reflect that.

Answer 5

Don't look now, but...

01 Jan 2018 was a Monday; the start of a typical work week.
01 Jan 2024 was a Monday, too.

31 Dec 2018 was a Monday.
31 Dec 2024 will be a Tuesday.

All other things being equal (long weekends, holidays, etc.), there's an extra day to work in 2024 (compared to 2018) to earn one year's income.

If pays are calculated based on hours worked in each and every pay period, then you must make sure the letters claiming "annual amount" state "approximately $45000 per year".

The payroll software I was involved in developing (many years ago) allowed the pay office to specify whether the employee's pay was hourly, weekly, fortnightly, monthly or an annual amount. (And, it included quite comprehensive HR functionality, like Letters of Offer based on one set of data.)

EDIT:

Disregarding statutory holidays, there may be 20 (Feb) to 23 (Mar) working days in one month. Therefore, the basis of one's pay must be clearly stated as "$x per hour", "$x per week", "$x per month", etc. Any conversion from one time unit to another will vary considerably. Anecdotal evidence has been that competent software and/or payroll staff will, when necessary, work with "rounding adjustments" to the benefit of the payee to avoid "underpaid" complaints and the concomitant costly working hours spent resolving issues involving meager amounts.

Answer 6

The core of your question here is that you input a yearly salary, break that down to an hourly rate, and then use that hourly rate to re-compose a yearly salary, and it's not identical. That's not a workplace question, that's a computational inevitability of rounding errors.

Furthermore, mathematics aside, expressing a yearly salary is notably different from expressing an hourly salary. Salaried employees tend to receive a fixed salary with an agreed upon expected amount of hours worked during the year, but small variations in actual hours worked are often not corrected in salary (in informal scenarios, I'm not including things like legally protected on-call bonuses etc).
Comparatively, hourly employees will be paid specifically for the hours they worked, commonly measured by marking the specific start and end times of their work. What they get paid is pretty much regardless of how many hours they were expected to work across the year, it's based solely on the actual hours worked.

yearly rate is 45,000 and appears on the offer letter as such, along with a calculated hourly rate

When you have more than one source of truth, you open the door to those sources being able to contradict one another. Someone messed up here and likely forgot to explicitly point out that one of these numbers is the official number, with the other being an indicative approximation based on that official number.

Educated guess: did someone in HR try to be clever about using one contract template for all employees, both hourly and salaried? It sounds like it.

The answer on how to avoid this is to stop trying to express things as two different units at the same time, thereby avoiding both the mathematical rounding errors and the implied differences between hourly and salaried employees.

Answer 7

This has caused employees, in some cases, to inquire as to where their penny is :). How do organizations typically alleviate the difference in calculation issue? Any suggestions?

The typical approach is to have a single, sound method of payroll calculation.

And if for whatever reason there is a known systematic error in the computer programming that you won't or can't economically fix, then you acknowledge that state of affairs publicly to the employees, and either make a manual correction or apply a setting to the automatic calculation that results in an excess in favour of the employee.

I think a lot of bosses misunderstand that the issue is not always the quantum of error, but their fundamental attitude to the accuracy of the payroll.

We've almost all dealt with bosses, at some point in our lives, who thought they could renegotiate the payroll as they went along, who seemed think paying wages accurately and on time was not on their priority list, or who thought they did not need to employ a competent clerk to execute the payroll.

I suspect the fundamental problem here is that you're advertising a certain "salary" and then in fact calculating basic pay on an hourly basis. It might not be so much that the calculation is wrong, but that internal decimal amounts are insufficiently precise to express an exact yearly salary as an hourly amount. In that case, calculate your basic pay as a fixed salary amount instead, and only drop into hourly calculations if necessary to partially deduct or enhance the salary amount.

Above all, taking the issue seriously as a matter of principle when small errors do arise for the first time, will likely lead to much greater trust and forebearance if larger errors might arise.

It really isn't about the penny, but about whether you have the right attitude to a very important matter, in much the same way as the new employee waltzing out the door two minutes early isn't, if challenged, well-advised to justify himself to the boss by the small amount of time stolen, but to either ask permission for an allowance, or else sit back down for two minutes in a perfunctory way.

Answer 8

OK, this might seem like overkill with all the other answers here. If an employee is salaried for X, then you owe the employee X between January 1 and December 31. This satisfies the work contract, despite any miscalculation done with an hourly rate on the same contract. HR is often going to divide the annual salary by 2080 to give an estimated hourly rate, for sake of convenience. It's overkill to have HR generate a fake timesheet in the payroll system just to put a number on the contract before each hire.

There is no need to correct the work contracts as long as they read "salaried" and give an annual rate. You should find out how many hours per year the person generating contracts is using to derive an hourly number. Let's call that number N. One could infer that the hourly rate is a typo, UNLESS it's significantly lower than the annual salary divided by N.

At the end of the day, gross annual pay on a W-2 statement will tell you if the payroll system is accurate. (assuming you're in the USA).