Employer Obligations for Employees and Pensions

3311 words (13 pages) Essay in Law

18/05/20 Law Reference this

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Compare and contrast the obligations of the employer specifically in respect of employees and its pension members

Introduction

The purpose of this report is to investigate the obligations that an employer faces in regard to their employees and pension members, with specific focus on how these obligations are carried out within a payroll bureau environment as opposed to a payroll environment in industry, for example, within the business itself.

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Many companies within the UK now use the services of payroll bureaus to assist with their payroll needs as it still allows them to have control over the end results and outcomes, but also gives them access to professional sources when it comes to the legalities of their duties to their employees. Whilst some larger companies may have a payroll bureau within their organisation, this report will e looking at those that outsource the payroll to an external bureau, for example it could be one that is within the accountancy practice that they use for other areas of the business.

The Obligations of the Employer (Statutory and Contractual)

Objectives of Payments Team

Compact Law (1996-2019) would argue that “Duty to pay the employee the agreed amount if the employee arrives for work and can work.” is one of the main statutory obligations the employer is required to undertake. It is important that payments to employees are done correctly and in a timely manner so the payments team must ensure that deductions such as income tax, student loans, National Insurance contributions and Attachment of Earnings deductions and both employee and employer pension deductions are processed in the correct way and paid over to the relevant party. Statutory payments such as Sick Pay (SSP), Maternity Pay (SMP), etc are also a key part of employee payments. It is important that the team have a thorough understanding and knowledge of current legislation, and ensure they have the latest training when it comes to these employee-related issues and others such as contracts of service.

Another key process in payroll is being compliant with Real Time Information (RTI) requirements. RTI was introduced by the government in April 2012, whereby “…information about tax and other deductions under the PAYE system is transmitted to HMRC by the employer every time an employee is paid….” (HMRC, 2014, p.1) RTI makes reporting easier for employers, HMRC and pension providers too. It is a system that allows data to be transmitted in an accurate and timely fashion. Whilst RTI brought about big changes and difficulties within the payroll industry, it has been a great assistance for payroll as it allows things such as the correct tax codes to be applied quickly and efficiently, as opposed to employees having to wait weeks for these to be updated.

Due to human intervention errors do occur; this can result in employees being under or overpaid “…payroll is an area requiring such a large volume of data collection and conversion that there is a high risk of errors being made inadvertently. Thus, in order to reduce…data errors, a variety of controls are required at key points in the payroll process.” (Bragg, 2009, Ch. 8). It is the processors responsibility to ensure that any errors are rectified as soon as possible as they can have huge impacts on both the employer but more importantly the employee.

It is widely expected that the payments team be available to answer pay-related queries that employees have. The expectations of this are different within a payroll bureau however, as the contract of business is with the client as opposed to an employee. Due to the introduction of General Data Protection Regulations (GDPR) in May 2018, this has become even more prevalent as “It will require businesses to protect the personal data and privacy of EU citizens for transactions that occur within the EU” (Brightpay, 2018), therefore it is important to know exactly who information can be given to. The team may also be required to liaise with third parties such as HMRC, Department for Work and Pensions, etc This would be the case when there is a discrepancy with a payment or deduction and these issues need resolving as soon as possible to avoid any financial implications. Further advice employees may need is about key deadlines for example, timesheet submission and changes in pay arrangements such as at Christmas. Such things not only affect the payments team and how they process the payroll, but also the employee as a late submission of overtime hours not being submitted on time can result in an employee not being paid correctly.

Finally, the team need to ensure that company procedures are adhered to. This is very important as failure to do so could result in severe financial penalties for both the business i.e. the bureau for not proving the agreed level of service to the client, and the employer because they have potentially failed the employee.

Payment Cycle

Payment cycles vary from business to business and depend on the complexity of the payroll and frequency; these range from weekly and monthly to annually. Within a bureau setting, it is likely to come across all pay frequencies as payroll is processed for different clients with varying business needs. Whilst frequencies vary, the basis to the structure of the payment cycle doesn’t. It is important for the team to be able to follow a set procedure when processing a payroll “In today’s challenging market, spreadsheets and manual checklists do not provide the visibility required to manage deadlines effectively and ensure that your clients’ employees get paid on time.” (Star Payroll Professional, 2019)

Many weekly processed payrolls include employees that are paid by the hour, shift or per item produced; this means that their pay could fluctuate on a week-by-week basis. It’s also common practice for weekly paid employees to be paid some hours at different rates of pay, for instance overtime hours may be paid at time and a half. Furthermore, it’s common for them to receive pay for the hours worked in the previous week meaning that a lot of them don’t receive any pay in their first week of employment, but in their second week instead; this is known as being paid ‘a week in hand’. As such, when an employee leaves, they will be owed 2 weeks’ worth of pay from their employer.

It is important within a payroll bureau that there are clear guidelines for the client and processor so that there can be some organisation when running the payroll. This could be in the form of a timetable for both parties to adhere to. By using a timetable, it is useful to clearly define when the payroll is expected to be processed however, there could be issues with such a timetable for example, when either party are on annual leave. Such issues could be easily avoided by coming to a prior agreed arrangement.

When gathering payroll information in a bureau setting, it’s likely to come from one source, whereas elsewhere it could be from several sources. The processor needs to assess whether the data relates to a permanent or temporary change, for example an employee address change, or sickness for one pay period. Before entering the payroll data for the current period, the processor should check the previous pay run and do a reconciliation of the data to ensure the figures on the payroll are correct and haven’t been altered since the last pay run. Any permanent data should now be entered and from here temporary data changes can also be entered. Temporary changes such as additional hours are expected to be submitted using a timesheet; it is likely that timesheets will be in Excel format as they are easily formulated therefore making the payroll easier and quicker to cross-reference. It would now be best practice to check information that has been entered to ensure it’s correct. If a processor is working alone, likelihood is that they will have to check their own work whereas in a bureau, there are usually a team who can check each other’s work before the required reports are sent to the client for final checks. Upon authorisation of the payroll, it is time for payment to be made. Within most businesses this is an internal process by the payments team however with a bureau, payments can be made either by the client via online banking, cash payment, etc or by BACs payment if they are a BACs accredited bureau. A BACs bureau has lots of stringent regulations to follow as they are handling lots of confidential data.

Employment Status and Eligibility to Work in the UK

HMRC (2016) state “A right to work check means that you check a document which is acceptable for showing permission to work. You must do this before you employ a person to ensure they are legally allowed to do the work in question for you. It is not enough to simply undertake the check on the first day of employment if the employment has already started. You are also required to conduct a follow-up check on people who have time-limited permission to work in the UK.”  This requirement was introduced under the 2006 Act to reduce the number of illegal workers in the UK and is the employer’s responsibility.

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There is a 3 step check process which employers must follow to ensure their employees’ right to work; these are to obtain originals of acceptable documents from the individual (for example a valid passport showing British citizenship), check the documents are genuine whilst in the presence of the prospective employee, and make a copy of the documents and keep these on the individual’s HR record. Within a bureau environment these checks would be the responsibility of the client as opposed to the team processing the payroll. HMRC provide a ‘Right to Work’ checklist which is available online for employers to use for the initial check and any follow-up checks. It is a criminal offence for an employer to employ someone illegally and if they are caught, they could face up to 5 years’ imprisonment and/ or unlimited financial penalties. Furthermore, Immigration Enforcement no longer need to prove that an employer knew that an employee had no right to work, as the Immigration Act 2016 (Part 1, chapter 2, section 35) states that “…it is a criminal offence if you know or have reasonable cause to believe that you are employing an illegal worker.”

Employers also have a duty to check the employment status of employees to ensure that the tax and National Insurance contributions are being processed correctly and to ensure employees are receiving the correct rights. Employers will also want to know whether an individual is classed as an employee, worker or self-employed as this can affect the responsibilities they have. There are various ways to test whether an individual is classified as an employee “Under the traditional control test a person was controlled by an employer if he or she was told what to do and how to do it.” (Stevens and Welch, 2013, p. 46). HMRC give a list of statements on their website (https://www.gov.uk/employment-status/employee ) which detail that “Someone who works for a business is probably an employee if most of the following are true.” The statements refer to scenarios such as they can’t send someone else to do their work or they are entitled to contractual SSP or SMP.

Types of UK Pension Schemes

Eligibility to Join and the Benefits Payable from Pension Schemes

Within the payroll bureau environment, the main type of pension to process are those under Automatic Enrolment. New regulations came into force on 1st October 2012 whereby all employers who have at least one member of staff are required to enrol eligible employees into a workplace pension, which they also contribute towards. The Pensions Regulator states “This applies to staff aged at least 22 but under state pension age (SPA), ordinarily working in the UK and earning more than £10,000 per year….” This was a bid by the government to ensure that people had the provision to save for the future as they had noticed many workers didn’t have a pension pot and were relying solely on the State pension. To assist with this, they set up a free pension scheme (NEST) which is easy to use and ensures that the regulations are adhered to. There are alternative pension schemes available for employers to use which are auto enrolment qualifying however, most have a set-up fee to use them, and some can be quite complex. Additionally, minimum contribution rates were set for employees and employers to pay into the pension schemes and these rates have been gradually increasing since auto enrolment was introduced.

Other schemes are still available for employees such as group personal pensions, stakeholder pensions and occupational schemes but these can rely heavily on the employers and whether they offer these to employees as they can be quite costly to businesses where payments are guaranteed and are dependent on length of service and earnings, such as with defined benefit schemes. Furthermore, there are personal pensions that are available to individuals however these are privately funded by members and therefore would not affect the way in which an employee’s pay is processed nor have any involvement for the employer.

Finally, it is also worth noting the new state pension scheme. This is an updated version of the old pension scheme to make it simpler for individuals to know how much they have saved for retirement from a younger age. The state pension is based on people’s National Insurance records and anyone with National Insurance records before April 2016 will need a minimum of 35 qualifying years’ contributions to be entitled to the new state pension when they reach retirement age. HMRC state “The new rules make sure that the amount of State Pension you get for your contributions to 6 April 2016 is no less under the new State Pension than you would have got under the old rules, provided you meet the 10 year minimum qualifying period.”

Conclusion

To conclude, the employer has a lot of employee responsibilities and whilst they may find some assistance within outsourcing their payroll to a bureau setting, there can also be issues with this. Whilst employers have ultimate control over what their own employees do, this is limited when a third party becomes involved. Similarly, this can also be said of the payments team within a bureau as they can only advise a client of what the correct and proper procedures are, they cannot enforce these should the client wish to administer things in a different way.

Such differences between the internal running of a business, and the way in which bureau staff operate can have a negative impact on the employees in question as noted earlier whereby errors can occur. It is therefore important in such circumstances that the payroll staff and the client work together as best as possible to ensure that payroll is processed smoothly and accurately.

Recommendations

The recommendations from the research are that there is certainly room for more automation within payroll to assist in reducing the number of errors, as this has such a huge internal impact on the business but also an external impact on the employees. A few suggestions on how to automate the payroll process more is to investigate importing data into the payroll software.  Whilst more businesses are taking this idea on board, there are still some out there that are manually inputting data. It has been found that such ways lead to a higher error rate due to the inevitable human intervention of manual data entry. Furthermore, it has been noted that some software providers are now looking at how updates of employees’ personal data can become automated, for example by perhaps using a HR functionality that can be linked to the payroll software to enable employees to enter their own data as opposed to the payments team doing this.

There appears to be room for improvement within bureaus when it comes to additional training in areas such as HR and pensions. Whilst there are experts out there who can assist with queries relating to these topics, it would be beneficial for the payments team within bureaus to have more of an understanding to be able to assist their clients more, and to have a wider knowledge of the areas.

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