A company that grows by acquisition is likely to have a number of payroll systems – one for each company it has acquired. This situation may also arise for highly decentralized organizations that allow each location to set up its own payroll system. Though this approach allows each location to process payroll in accordance with its own rules and payment periods, while also allowing for local maintenance of employee records, there are several serious problems that can be solved by the consolidation of all these systems into a single, centralized payroll system.
One problem with multiple payroll systems is that employee payroll records cannot be shifted through a company when an employee is transferred to a new location. Instead, the employee is listed as having been terminated in the payroll system of the location he is leaving and is then listed as a new hire in the payroll system of the new location. By constantly re-entering an employee as a new hire, it is impossible to track the dates and amounts of pay raises; the same problem arises for the human resources staff, who cannot track eligibility dates for medical insurance or vesting periods for pension plans. In addition, every time employee data is re-entered into a different payroll system, there is a risk of data inaccuracies that may result from such embarrassments as wrong pay rates or mailing checks to the wrong address. Also, a company cannot easily group data for company-wide payroll reporting purposes. Finally, the company as a whole must pay more matching social security and Medicare expenses for employees if they switch between payroll systems during the year. For all these reasons, it is common practice to consolidate payroll systems into a single, centralized location that operates with a single payroll database.
Before embarking on such a consolidation, one must consider the costs of implementation. One is that a consolidation of many payroll systems can require an expensive new software package that must run on a larger computer, which entails extra capital and software maintenance costs (though the reverse may be the case: consolidating multiple large payroll systems may result in the elimination of multiple software maintenance fees, depending on the circumstances). In addition, there is probably a significant cost associated with converting the data from the disparate databases into the new consolidated one. Further, there may be extra time needed to test the tax rate for all company locations in order to avoid penalties for improper tax withholdings and submissions. Finally, the timing of the implementation is of some importance. Many companies prefer to make the conversion on the first day of the new year, so there is no need to enter detailed pay information into the system for the prior year in order to issue year-end payroll tax reports to the government. The cost of consolidating payroll systems is considerable and must be carefully analyzed before reaching the decision to convert.