A payslip is only the beginning!

The employee in the center of pay

In my keynotes I often talk about “the employee in the center of pay”. What does that mean?

Not too long ago, people would work full-time for one employer. There was a one-to-one relationship between employer and employee, and the outcome of that was a check or a bank payment, documented by a payslip. The employer would take care of social security and tax payments in line with local legislation and maybe even provide some benefits. This is still the dominant approach in the payroll industry and how we think about the topic. Of course we’ve seen contract variations like Employee of Record (EoR) and Professional Employer Organization (PEO), but the outcome remains the same: a calculated payslip.

But for many workers, that one-to-one relationship is history: they have multiple employers, or they have one employer, work as a contractor, run a side business or have multiple gigs. In other words, they have several income streams. Some of these bring in a net payment through a payslip, while others result in an invoice with a gross payment. This puts the employee in the center of pay, where they manage these income streams, and are now responsible for legal payments, taxes and social security themselves. Income streams from other activities are usually less predictable. And that means that people have to be more financially literate. Unfortunately, that’s not a subject they teach you in school.

Spotlight on Pay Tech

The outcomes of the 2022 HR Tech funding report shows that investors became much more interested in the financial side of the employment relationship. I already reported that investments were lower compared to 2021. With the exception of one category: companies that create solutions to pay the (global) workforce.

And even though Earned Wage Access didn’t grow, all the other Pay categories did. From solutions to pay the global workforce, to technologies for new payroll engines and APIs, investors funded more of these companies than in 2021.

The search is on for a modern payroll engine, and this category doubled in size. Payroll engines should calculate changes the moment they come in: why would we save all calculations to just before payment day? It saves payroll admins a lot of time if that is a continuous process. It should also be easier to run one generic engine, and build country extensions on top of it. And finally, payroll data should be available, preferably through APIs. This category also attracted more funding.

The chart shows that compensation stands out: investments in this category tripled in value. These were mostly investments in companies that provide insights in how we pay the workforce: do we pay people equally for equal roles? What should we do to address inequalities? They also support you with advice on how to remedy these issues.

The increasing interest in compensation is supported by a number of geographies announcing pay transparency legislation: it becomes mandatory to publish a salary range in a job vacancy. Or companies must ensure that there is no obvious pay gap when looking at several workforce characteristics. And increasingly, companies feel a need to adhere to fairness standards without external pressure, out of a wish to be a responsible, transparent employer that treats people the same. I will write more about compensation in a next issue. Scroll to the bottom of this newsletter to find examples of recently funded companies developing pay solutions.

A payslip is the start

If you work in the HR and payroll domain, like I do, it’s not always easy to think beyond its borders. You are so focused on getting the payments right. For the longest time, I thought of a payslip as the end of a process. A process that starts every pay period, runs through data changes, calculations and ends with a timely and accurate payment to the worker, followed by a payslip. After completing the post-payroll activities, you close the period and a new one kicks off right away. I imagine many of you feel the same way.

But I’ve come to realize that that way of thinking could pose a problem. Because for the people we pay, that payslip is only the beginning. It allows them to pay for food, housing, transportation, education and so much more. It secures their family’s living conditions. But when it doesn’t, and the problems become serious enough, HR often becomes involved. You receive court orders for garnishments and you duly process them. When it happens too often, you might have a conversation with the employee, but other than that, there’s not much you can do. It’s an employee’s private business, and employers are hesitant to cross that line. But that is changing as well.

For those of us who work in the industry, it is important to understand this shift and think beyond the traditional payroll process. When you think of a payslip as not just the end of your process, but also the beginning of a worker’s financial journey, it becomes our responsibility to ensure that this journey is as frictionless and efficient as possible, allowing workers to be in better control of their financial well-being.

Smart payslip

What if we could use the latest technology to make the pay process more efficient and accurate, while also giving workers access to better information and resources? This is where the concept of the “smart payslip” comes in. A smart payslip is not just a document with numbers and deductions, but a digital environment that connects workers with their employment information, financial resources, and other benefits. It gives them access to their pay history, vacation days, pension contributions, and more. It allows them to easily connect this information to their “personal employment portfolio”, a secure wallet App, that also gathers the data from their other income streams. Suddenly they don’t have several income streams to manage separately, but a holistic overview of their finances in one go.

Imagine a world where workers can easily access their employment information and financial resources by connecting their employer’s payroll via an API to their income wallet. They can track their pay history, plan for retirement, and understand their benefits in real-time. You could allow them access to their pay information before the payroll runs, so they can check if it’s complete: are all hours worked included? Has all overtime been added? This would empower workers to make informed decisions about their finances, especially when there are large fluctuations month over month. For payroll teams it would mean less errors, more automation, and improved data management. This is where we are headed: a connected payroll that feeds data to employees when they need it, and where payroll admins and employees both play a role in making sure the payment (and payslip) is correct.

Financial health

For many years, the topic of employees’ personal finances and how they spend their income was considered taboo. Even if you were faced with the problem, e.g. through garnishments, it was generally considered none of the employer’s business. However, as the connection between financial stress and mental health has become more widely recognized, employers are starting to take an interest in their employees’ financial wellbeing. Studies have shown that financial stress can lead to a wide range of mental health issues such as anxiety and depression. We are only beginning to realize that financial stress can have a significant impact on the productivity, performance and overall wellbeing of our employees.

During the pandemic, employers introduced programs and initiatives to support their employees with mental health issues. We now understand that that is not enough: income management and financial wellbeing need to be included as well. This means offering financial education and resources, such as budgeting workshops and financial counseling services. Some employers provide access to employee benefits, such as pension plans, health savings accounts and employee assistance programs that can help employees with their financial planning and wellbeing.

One of the changes that is driving this shift is the rise of companies that offer technologies to help employees to manage their finances. The Open Banking standard and the resulting fintech offerings have made it easier for employees to access and utilize their financial data in a secure and compliant way. The one thing that is missing from this: direct access to the information in the payroll.

For employers, it’s important to approach this topic in a sensitive and respectful manner, without being perceived as overreaching. It is important to better understand the correlation between financial stress and mental health, and take proactive steps to support your employees with their income management and financial wellbeing. An employee that is occupied with their financial situation can not give their full attention to work, and their productivity will suffer. Where in the past it was unthinkable that the employer would cross this line, this has changed. Employees consider it a benefit when their employer makes financial wellbeing tools available to them, as long as the employer has no insight who uses these services and can’t look at data elements other than metadata, e.g. which services are used most often.

Isn’t this a fintech thing?

As the payroll and HR industry shifts towards the concept of continuous access to data, it’s not just the traditional players that are taking notice. Fintech companies have also recognized the potential of the payslip as the starting point for income management and financial services. By leveraging the data and information contained in payroll, fintechs can offer a wide range of financial products and services to workers, such as budgeting tools, savings plans, and even loans.

So you might wonder, why should we as employers become involved? Shouldn’t employees just rely on the tools offered by their financial service providers, who have more insights in their spending patterns?

One of the key ways that fintechs access and utilize this information is through APIs. An application programming interface is a way for different systems and platforms to communicate and share data. By using APIs, fintechs can securely access and utilize the data contained within the smart payslip, allowing them to offer a wide range of financial services to workers. I have written extensively about that in a previous article.

The reason that I bring it up again, is that when you are considering options, I’d recommend you look beyond the HR Tech industry to understand what fintech can offer, and if those solutions would be a fit with your audience. A word of caution: when you include fintechs, employees often “pay” with their data, so be careful when evaluating this option. However, it’s often the more mature option, offering excellent banking integration, so should be included in your review.

Budgeting apps and other financial wellbeing tools can be highly personalized and tailored to the individual needs of the employee. They can be accessed at any time and from any location, which is convenient for employees with busy schedules. Also, fintechs can often provide a wide range of services, from budgeting to saving to investment, and offer a holistic approach to financial management.

The financial support offered by employers can be integrated into the employee’s work environment. It can be more closely aligned with their overall career and financial goals. These tools can be useful to build a financial safety net and provide long-term financial security for employees. They often provide ideas how to improve productivity, which fintech solutions lack. Employers could offer incentives and rewards for employees who meet certain goals or milestones, which can be a powerful motivator for employees to improve their financial situation.

In conclusion, financial tools offered by fintech or by employers both have their own benefits and drawbacks. Fintechs can provide highly personalized and tailored services, while employer-offered tools can be more closely aligned with the employee’s overall career and financial goals. Employees might feel better sharing their data with external providers than with a solution provided by the employer. But a paid solution doesn’t sell their personal data, so privacy plays a role here too. It ultimately depends on the specific needs and preferences of your workforce, and it’s important to carefully consider what your employees would most appreciate.

Multiple income streams

It’s clear that the rise of gigs and side businesses with multiple income streams has introduced new challenges for workers, employers and pay(roll) professionals. You will need to understand the complexities of managing and paying employees who may not have a traditional one-to-one relationship with the company. This includes ensuring compliance with various regulations, tracking multiple income streams, and providing accurate and timely payments.

Your current payroll solution might not be capable of API-integration. Which doesn’t mean that all is lost: there are several “middle-ware” type solutions on the market with which you can bridge that gap and make data available to third party tools. Early insight into payslips – maybe even an employee approval? – can help ensure compliance and accuracy while also reducing the workload for HR and payroll professionals.

The shift towards multiple income streams is putting the employee in the center of pay, and that brings new challenges and responsibilities for employers and HR professionals. Going forward, this will be the norm, and not a single full time contract with one employer. By embracing new technologies and providing financial education and support, we can help people manage and make the most of their income streams, provide transparent and equitable pay, while also streamlining the payroll process for payroll admins. It’s a whole new way of thinking about payroll. Look at it as a win-win and start preparing today!

PS: Check out these companies reinventing the future of pay. I’ve selected a cross-section of solutions around the world, so they might not be available in your country. Not an endorsement, for educational purpose only:

Brightside – Employee Financial Wellbeing

Instapay – Earned Wage Access

Northstar – Employee Financial Wellbeing

Mistho – Payroll API

Payfit – Payroll

Social Handshake – Payslip giving

Tartan – HRMS & Payroll API

Wagestream – Frontline worker Financial Wellbeing