Friday Rant: Are Payroll Providers Playing Games With Your Money?

Even though payroll services are only tangentially related to procurement, it can't hurt to become more knowledgeable about the available options and marketplace dynamics. As a small business, we've certainly observed a number of headaches over the years when dealing with multiple payroll providers, from false promises about what different platforms provide (e.g., ability to have employees from multiple states on the same system when in fact this was not allowed) to 30% fee increases without explanation and without warning, which caused us to say sayonara to one provider a few years back. And, like other businesses, we've had deposits delayed by 24 hours (or longer) without explanation, at least once in our history as a company (and now for reasons I think I understand, but read on, below). I recently caught up with a colleague who knows the payroll market quite well and has even hired folks coming from the sales-side of payroll providers. What he told me was shocking -- certain payroll companies (that will go unnamed) may be playing games with your money.

My colleague suggested that the games look like this: "Let's say company XYZ submits a payroll on July 10th. The payroll is immediately debited from the account on the 10th, but does not hit the accounts of employees (or the government) for what is typically 2-3 days. In that time, the funds are supposed to be embargoed and held by the provider, but what can happen is that the payroll company uses your funds to fund another organization's payroll and then takes the payroll by a third company, say, run later in the day on the 10th or on the 11th, to fund your payroll." Of course this all sounds a bit shady, but my colleague's insider contacts suggests that it's not an exceptional occurrence, especially amongst the second tier providers.

When it comes to personal and business funds, the commingling of dollars has brought down both companies and individuals in dealings with other parties in legal and tax contexts. Yet might payroll companies be commingling your company's payroll funds? It's certainly possible, and in the wake of the criminal behavior and commingling of funds at Axium (which brought down Chimes in the VMS/contingent world) in a similar context, it's all the more believable. In the Axium/Chimes situation, Staffing Industry Analysts notes that "the more than $100 million in tax penalties that the IRS hit them [the management] for [was] primarily for underpaying payroll taxes that were deducted from employee paychecks back to at least 2004."

If you're worried your payroll provider might be engaging in creative cash flows with your money before it hits your account (or the government's) there are some actions you can take. For one, larger payroll providers are less likely (based on our sources, who are unbiased in this, mind you) to engage in such activity. Consider making the switch to them if you don't know the management team (or don't feel comfortable with them) of a smaller provider. Second, it's worth asking in any sales process -- if you're considering a new payroll provider -- or with your account manager, for current relationships, if he has ever heard or seen this activity and to watch for pregnant pauses as much as his response. No doubt, if something is up, you might catch him off-guard. My colleague suggests that sales people from some of these providers are aware of this type of activity and that it's not a secret to those on the inside.

At the end of the day, one might ask why this even matters. Who cares what happens to the funds in the interim period before it hits our employees and the government accounts? The answer is very simple: if a payroll company goes bankrupt in a time when they have your funds before transferring them into the accounts, you could find yourself in a situation similar to how hundreds of staffing firms (and their workers) found themselves when Chimes did not make good on its commitments after serving in a similar intermediary role which required they work through a bankruptcy court to get a fraction of what was owed. And regardless, even if a firm is not in danger of going under, do you really want to work with any supplier which is so desperate for cash flow that it is resorting to commingling of client funds?

With payroll, I'm now convinced that bigger might be better (or at least safer).

Jason Busch