Managing Payroll for Project-Based Companies
Companies that are project-based face an additional set of complexities when it comes to managing payroll. Instead of allocating all the work to one department for billing purposes, work performed by employees is split up by project. This means that hours worked must be allocated to the appropriate project instead of lumping them all into one department. Even though the employee would still be paid the same amount, how those wages are funded changes depending on the project.
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, managing payroll each pay cycle was on auto-pilot: pay the employee the same salary each pay period and move on.
Now, the role of the payroll department and its payroll/Human Capital Management (HCM) system(s) is much more complex. With increased scrutiny from the government, clients, and employees, the entire payroll process must be precise. Project-based companies must correctly allocate salaried employees' hours and earnings across different projects, clients, funds, and pay periods.
When you're evaluating payroll systems, be sure to ask questions about the way it handles multi-project costing and compliance with government regulations.
Allocating employee salaries
Salaried employees in a project-based environment often work inconsistent schedules, and their work can span multiple jobs or clients. In one week, a particular project may require 65 hours, and the following week maybe it only needs 20 hours. 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 a salaried employee's wages to a single department or cost number only addresses the employee's pay. To have clear visibility into overall project profitability and accurate client invoicing, you must set up your payroll system to maintain 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. Examples are an annual bonus or monthly commissions for achieving sales goals. Often, these payments are managed in a spreadsheet or 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 commissions is usually easy for a payroll system. 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 help reduce the 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 and other industries.
Most time-and-attendance systems do an excellent job of recognizing when an employee is eligible for overtime and determining their correct pay during the current pay cycle. However, according to the government's Fair Labor Standards Act (FLSA), these non-discretionary payments need to be applied against the period when earned. This means that 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 correct commission amount. Failure to pay the prior period's or retroactive 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 necessary overtime adjustments to help avoid expensive audits and legal issues.
The managing payroll for project services companies has changed. Instead of paying everyone the same salary each pay period, payroll must now be a strategic and vital part of your overall billing and financials management. It is crucial to your overall business profitability and compliance to ensure you're on a payroll/HCM platform that delivers detailed project-level visibility and robust processing.
Whether it's paying your staff most efficiently, dealing with a mobile workforce, managing complex schedules or handling a range of other details, ADP can help.
A Simple Overview of the Fair Labor Standards Act
Your Guide to Year-end Payroll Reporting
Note: This article was originally published on the IDI Connections blog. In November 2021, ADP, Inc. acquired Integrated Design, Inc. (IDI) after 20+ years of partnership between the organizations. Read the press release here.