February 17, 2016

Payroll Best Practices for Project-Based Companies

Payroll Best Practices for Project-Based Companies

By Kit Dickinson on February 17, 2016

Payroll Best Practices for Project-Based Companies

Payroll for professional services or project-based companies used to be much more straightforward than it is today. Since these companies consist primarily of salaried employees, the payroll process each pay cycle was on auto-pilot: pay the employee the same salary to the same department each pay period and move on.

Now the role of the payroll department and their payroll/Human Capital Management (HCM) systems is much more complex. With increased scrutiny from the government, clients, and employees, the entire payroll process must be precise. Project-based companies need to correctly allocate salaried employees’ hours and earnings across different projects, clients, funds, and pay periods.

If you want your payroll system to be robust and simple to operate, you'll need to plan strategically to handle a multitude of issues and regulations. When you’re evaluating payroll systems, make sure you consider the following issues.

Allocating Employee Salaries

Salaried employees in a project-based environment consistently work an inconsistent schedule. In one week they may work 65 hours on a project to meet a critical deadline. The next week, they may charge only 20 hours to a project, while the rest of the week is dedicated to non-billable tasks and vacation time. While the employee still gets the same salary regardless of how many hours are charged, the payroll system needs to provide the correct financials, billing, and labor reporting. This means accurately breaking down employee hours and salary earnings across billable and non-billable time.

Charging all of a salaried employee’s earnings to a single department or cost number only addresses the employee’s pay. To have precise visibility into overall project profitability and accurate client invoicing, you must set up your payroll system to maintain these critical project and non-project level details.

Bonuses and Other Non-Discretionary Payments

Many professional services companies include performance-based earnings as part of the overall salaried employee’s compensation. This could be an annual bonus or monthly commissions for achieving sales goals.

Often, these payments are managed in a spreadsheet or some other manual method because companies can’t find vendors who can automate their policies and integrate the results with their time, payroll, or other systems.

Paying the commission is the easy part for a payroll system. Be sure to ask your payroll/HCM provider if they can help you automate the calculations behind your company’s incentive or sales draw policies. If not, ask them to recommend a solution provider to help with the automation. This will save you time and risk associated with manually managing critical pay policies in a spreadsheet.

FLSA Compliance for Salaried Non-Exempt Employees

Many project-based companies have salaried employees that are also eligible for overtime. This is common in banking, law firms, engineering, government contractors, and other industries.

Most time-and-attendance systems do a good job recognizing when an employee is eligible for overtime and determining their correct pay during the current pay cycle. You can even enter one-time bonuses, commissions, or other payments into the system to be paid that period.

However, according to the government’s Fair Labor Standards Act (FLSA), these non-discretionary payments need to be applied against the period when they were earned. So the monthly commission check paid in November—but based on sales in October—needs to be applied to the October overtime earnings to reflect the commission amount.

Failure to pay prior period or retro overtime earnings adjustments have resulted in costly lawsuits from the government or employees for non-compliance. Be sure to ask your payroll/HCM provider how they can help you automate these important overtime adjustments so you can avoid expensive audits and legal issues.

The entire payroll process for project services companies has changed. Instead of paying everyone the same salary each pay period, payroll must now be a strategic and important part of your overall billing and financials management. It is key to your overall business profitability and compliance to make sure you’re on a payroll/HCM platform that delivers detailed project-level visibility and robust processing.

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