Where Does Payroll Belong? Under Finance or Under HR?

April 1, 2019

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by Sheila Velazquez, APM

Sheila_Velazquez.jpgIf you want to start a heated debate between Finance and HR, just ask the question: Where does Payroll belong? Some C-Suite executives believe Payroll should reside within the HR function. Others believe it should sit within Finance. Still others believe it should be split between both departments (or outsourced).

Early in my career, the "payroll debate" was an abstract issue for me. Payroll's placement had no direct impact on my day-to-day responsibilities in Accounts Payable. Later, however, Payroll's placement in Finance had a profound influence on my role and the functioning of AP.

Payroll as Part of Risk Management

The first time I interacted with Payroll was at The Washington Post. There, Payroll reported to the Director of Risk Management in Finance. In that reporting configuration, some Payroll functions rolled over to me in AP.

The Risk Management department included Accounts Payable, Payroll, Purchasing and Internal Controls. Each group had a manager who reported to the Director of Risk Management. The Payroll department mainly processed Payroll, since The Washington Post was a company that processed multiple payrolls (exempt; non-exempt; guild; non-guild; multiple shifts, etc.). Accounts Payable handled some of the disbursements aspects of Payroll, such as T&E, with very strict internal controls in place.

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Payroll as Part of Accounts Payable

The second time I directly interacted with Payroll was at RLJ Entertainment, a small bicoastal company.

After a senior management discussion about where Payroll belonged within RLJ, a decision was made to pull Payroll into the Finance department in Maryland (from the HR office in California).

I was called into the CFO's office one morning after the change, and Voila! Just like that, I found out that the Payroll Coordinator was going to report to me! My title changed from Sr. Manager, Accounts Payable, to Sr. Manager, Accounts Payable, Payroll and Shared Services.

In my new position, I was to continue to manage the Accounts Payable operations in two locations—in addition to acting as the manager of the Payroll Coordinator. The daunting part of this arrangement was that I had never managed Payroll.

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Pulling Double Duty in AP 

Since I had the title and responsibility of managing Payroll, I felt it was incumbent upon me to quickly get up to speed. I worked with the Payroll Coordinator daily to learn the mechanics. I also searched for online resources and networked with others to learn the job.

I was quite proud of myself when I managed to run a couple of full-cycle payrolls. It was going to be a beautiful marriage. Just like AP working with Procurement!

However, I quickly discovered that there is much more to Payroll than processing paychecks. Payroll is an entire universe unto itself. It includes tasks and responsibilities such as time adjustments, compliance challenges, insurance coverage, deductions, tax issues, workers compensation, and 401ks, just to mention a few.

payroll_sidebar2.jpgIt was difficult to master all these areas of Payroll while handling the many challenges an AP Shared Services Manager had to deal with on a daily basis. As a result, I had to push the “pause” button on my intensive Payroll training and take a less active role in the hands-on functioning of the Payroll operation.

I learned the hard way that under the existing configuration we were working in, neither AP nor Payroll had the bandwidth to fully integrate with the other. In addition, for internal control purposes, a separation of duties was essential.

As a result, we developed a strategy of “interfacing.” What the Payroll Coordinator really needed was support and a connection with others in the Payroll or Human Resources profession who understood the complexities of payroll processing. I accommodated that need by supporting the Payroll Coordinator with training and resources. I also supported the Payroll function by taking on some of the accounting and auditing functions of Payroll, such as T&E.

What I needed was to step back a bit and manage the "big-picture" functioning of Payroll. I needed to ensure compliance, see that strong internal controls were in place, and leave the nuts and bolts functioning of Payroll to the Coordinator.

Does This Mean That Payroll and AP Don’t Mix?

Based on my experience—and despite the challenges I faced—I still believe that the logical home for Payroll is under the Finance Department umbrella along with Accounts Payable, Accounts Receivable, and General Ledger. This is where the monies are recorded, accounted, and analyzed. Considering that the “numbers” people at an organization are employed in Finance, it is logical to have Finance personnel handling some of the accounting aspects of Payroll.

Also, as reflected by my own experience, some small or mid-sized organizations may not have the luxury of assigning departments in the same way that larger companies do—with a fully-staffed, stand-alone Payroll department. In this case, Finance is often a logical place to put Payroll.

One very important proviso: In smaller companies, there are challenges that must be considered. For example, AP should never 'pay' employees out of AP if AP is responsible for Payroll. The issue of confidentiality can come into play, and strong policies and procedures need to be put into place to ensure the privacy of employee records.

In addition, some companies do not allow purchases from employees outside of the business in order to eliminate any type of fraud or any violation of 1099 compliance (should the work have been completed as an employee).

Finally, when Payroll is placed in Finance, it's important to maintain a vital awareness of the HR aspects of Payroll. Many of Payroll's responsibilities are connected with HR, such as hiring, firing, salary increases, benefit deductions, and bonus payments.

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