With many companies having an international presence, payroll managers are often tasked with setting up or documenting pay practices to cover multiple locations. Ensuring that these pay practices contain sufficient information to enable external service providers or local teams to process the payrolls accurately requires some basic steps to be followed when it comes to drafting payroll practices.
Generic rules are usually a good starting point. Pay practices that differ from region to region can then be added to the generic rules. Pay practices should cover how joiners’ and leavers’ compensation will be handled, as well as whether there are special rules governing benefits in pay periods that are less than the standard pay period length. Let’s look at some of these rules.
Generic Rules
These are the rules that apply across all regions/countries in which payrolls are administered related to the pay day, base pay rate, calculation for joiners, leavers, and mid-month salary changes, and incomplete time data.
Pay Day—The pay day should be identified with reference to the letter of appointment and the local legislation. When pay day falls on a non-banking day, the document needs to give clear instructions on how this will be managed. When pay day falls on a bank holiday or a public/statutory holiday the normal process is for that pay day to move to the previous working day.
Base Pay Rate (BPR)—Base pay is the rate of compensation an employee receives in exchange for services. It does not include extra lump sum compensation such as bonus or overtime pay and would normally not include benefits. (There are countries that utilize a “cost to company” methodology, and these would generally need reworking to be incorporated into a standard global approach. Examples of countries in this category are South Africa and India).The base pay rate calculation would usually be consistent across different regions, but if there are different categories of employees or if there are specific in-country legislative requirements, there could be differences in the calculation of the base pay rate. (Where the calculation is different this should be clearly described in the pay practice document.)
The base pay rate is primarily needed for part period calculations. The rate could either be expressed in hours or in days depending on the unit of measurement (UOM). Base pay rate will normally be calculated with reference to the annual full-time equivalent (FTE) salary or the compensation rate (COMPRATE). FTE allows part-time workers' working hours to be standardized against those working full-time. COMPRATEs may be hourly, daily, weekly, monthly, or any other frequencies operating in the region. Some examples where the UOM is recorded in hours illustrates how the conversion is made to derive the base pay rate. For example:
Annual FTE salary/1,950 hours (where the standard working month is 21.66667 days at 7.5 hours per day)
COMPRATE (stated as a monthly figure)/162.5 hours (where the standard working month is 21.66667 days at 7.5 hours per day)
Calculation for Joiners, Leavers, and Mid-month Salary Changes—The document needs to provide instructions on whether benefits would apply from the initial start date of employment or whether there is a waiting period in place. It is not uncommon for pension funds and other payroll benefit providers to have specific rules in place stipulating that no part period contributions are permitted. An employee joining after the start of a calendar month would therefore not contribute to these benefits in their first month of employment. Likewise, an employee leaving mid-month would also not contribute toward the benefit. Some benefit providers, however, do accommodate part period contributions. The pro rating of contributions may not necessarily follow the same pro rating methodology used to calculate salary.
The normal calculation for starters and leavers would be the base pay rate multiplied by the number of days or hours worked. (Dependent on the UOM in which the base pay rate is recorded.)
Where an employee is entitled to a mid-month salary change, the normal approach is to calculate the difference in the compensation rate between the new and old compensation rate and apply that to the time period worked at the new rate—then add the result to the old compensation rate. Where the standard monthly time period worked is 162.5 hours and the compensation is stated as a monthly figure, the calculation would be recorded as:
New Compensation-Old Compensation/162.5 x number of hours at new rate + Old Compensation for the period
Incomplete Time Data
Where an organization has a time recording system, whether that is a Human Resource Management System (HRMS) or a specific time and attendance system, any pay practice document should record how the information will impact the payroll and whether the time data needs to be used to calculate the gross pay entitlement. Where time data received from the system is not complete in that the total hours/days provided is less than the standard time period (after taking into consideration any holiday, sick, or vacation time) and the employee is not a starter or leaver, the norm is to assume that the employee has worked for the incomplete time period. This would be retroactively corrected if necessary. The pay practice should highlight if this approach will not be followed and outline the approach that should be followed.
Pay Practices Unique to Country/Region
A number of pay practices relate to an organization, and it is important that each one is recorded in the pay practice documentation even if the pay practices differ from region to region. Examples of some pay practices that differ from one country to another are:
- Adoption leave
- Bereavement leave
- Commuting assistance
- Excess fares allowance
- Holidays
- Jury duty and witness service
- Maternity leave
- Overtime
- Parental leave
- Part-time employment
- Paternity leave
- Personal time off
- Sick leave
- Travel time
- Vacation leave
- Work shifts and schedules
- Temporary additional hours supplement
- Additional vacation and holiday pay
This is by no means an exhaustive listing but seeks to illustrate areas that would need to be covered in the pay practice documentation.
Overtime
The document should incorporate how overtime hours will be provided to payroll or the external service provider, or whether the time recording data needs to be analysed to determine whether to process any overtime at 1.5 or 2.0 times. In cases where the service provider or payroll teams are required to derive overtime hours worked, the time and attendance data would need to have sufficient details captured to facilitate this calculation and also would be required to be provided to these parties within an acceptable time period to ensure that all calculations can be performed within the payroll deadlines.
Where employees work shift patterns, a method of identifying workers on different shift patterns is required, and the pay practice would need to specify whether any of the shifts would be eligible for shift premiums. Many employers pay a shift premium to employees who regularly work between 8:00 p.m. and 6:00 a.m., for example. Employees working these shifts are commonly remunerated at 50% of BPR as a shift premium. This is not to be confused with overtime. Overtime is time worked in addition to the normal working hours and is calculated as a percentage of BPR for those additional hours.
Management-level employees are usually not eligible for overtime payments in terms of their employment contracts. (They may receive time off in lieu of overtime.) The European Union has issued a number of directives on overtime and the number of hours worked by employees. Employers and employees can agree to opt out under certain circumstances. The directives seek to limit the maximum average working week. The directives also seek to make provision for a specified minimum rest period in every 24 hours and a specified minimum rest period in every seven-day period, restrict the average hours worked at night in any 24-hour period, and provide a specified minimum annual leave period. Details of any opt-out arrangements should be reflected in the pay practice documentation.
Business Travel Time
In light of the increasing global mobility of employees, it is not uncommon to find a travel policy within larger organizations. The pay practice should cover when business travel is considered normal work time and when business travel would not be considered normal work time. The norm is that where an employee is required to travel on a normal day of rest (normally a Saturday, Sunday, or public holiday) they would be entitled to take a subsequent work day as compensatory time off. This is termed TOIL (time off in lieu).
The pay practice should have sufficient details to ensure that there would be no doubt as to how to process time recorded as travel time on the payroll.
Company Car and Car Allowances
Employers offering company cars/leased vehicles or car allowances usually have special rules in place around eligibility for these benefits. Country tax legislation covering company cars differs considerably in terms of the value placed on the benefit and the value of private mileage/kilometres that an employee can undertake before additional taxes need to be paid. Pay practice documentation should therefore set out whether the employer will provide any tax assistance for employees in countries where the private mileage/kilometre threshold is lower than other countries.
Employees receiving car allowances generally are not permitted to submit claims for reimbursements. This could vary from country to country, so again the pay practice would need to set out the rules to be adopted in that country.
Excess Fares Allowances, Relocation Allowances
Employers can require employees to change work locations within a country or within a region. Normally, if the new location is within a commutable distance/time from the employee’s current home location, then there would be no requirement for any supplementary allowances. Where the distance/time is in excess of the policy, then the employee is often compensated with an additional allowance to cover the extra cost. This allowance is often referred to as an excess fares allowance (EFA). If the new location is not within reasonable daily travel, the employee may be granted a relocation allowance or reimbursement of relocation expenses.
Temporary Additional Hours Supplements, On-Call Supplements
Occasionally employees may be required to work additional hours or temporary additional hours as a result of the nature of their specific job. Examples of this may be employees providing training where the training necessitates either an earlier start or where, for example, the employee has an event to host or organize that requires either an early start or late finish. In the horse racing industry where night races are held, it is not uncommon for employees to receive a special night time allowance on the occasions when night racing takes place. The temporary additional hours supplement may therefore have a broad range of naming conventions.
Employers will generally have very specific rules in place to ensure that a maximum number of hours can be compensated per month. Where additional allowances are paid, the policy should clearly state whether these allowances should be taken into consideration in the calculation of other benefits—for example, whether the allowances should be included in “pensionable” salary or whether they should be taken into consideration in determining bonus payments. (This also would apply equally to the other allowances covered above).
Various Leave Options
Leave can be regulated by legislation in different countries and can include adoption, bereavement, maternity, paternity, sick, holiday, and study leave, to name but a few different types. Employers may also have their own policies covering a range of different leave types. Pay practices should indicate what the rules are governing the granting of each leave type and what conditions need to be met to qualify for the leave. Employers can reward employees who have a long service history by increasing the leave accrual for certain leave types at specified anniversary dates. The point at which the leave accrual occurs and the rules around forfeiture need to be well documented as leave management is an area of payroll which often results in queries from employees. Therefore, ensuring that the allocations are correctly made initially will save time and resources for any payroll team.
Obtaining Clarity on Compensation
Pay practices should always ensure that both internal payroll departments and/or external service providers have no doubt regarding how employees should be compensated. Additional allowances should clearly state whether they should be included in the calculation of other benefits and whether they are to be utilised in determining bonus payments or should be included in leave/vacation pay calculations where this is not specified in local legislation. The scope of pay practices and what should be covered in pay practices is vast, and as with any aspect of payroll management they need to be implemented correctly to ensure compliance and provide a framework for measuring accuracy of the payroll.
Sharon C. Tayfield is a Senior Account Manager in the Global Outsourcing division of BDO LLP. She graduated with a Bachelor of Commerce majoring in Accounting, Taxation and Managerial Accounts and Finance. She followed this with a Higher Diploma in Education (Post Graduate). She went on to obtain a Diploma in Advanced Property Practice with Distinction in 1993 and then in 2001, successfully completed a Higher Diploma in Financial Markets & Instruments (Post Graduate) (Cum Laude). In 2014 she completed the CIPP Payroll Technician Certificate. She is a registered tax practitioner in South Africa and a member of CIPP (Certified Institute of Payroll Professionals) (UK) and GPA (Global Payroll Association).