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To say that the payroll requirements of the public sector are 'different' would be an understatement. A better description would be 'complex', or perhaps 'very complex'. The implications for suppliers of payroll systems and services to public sector organisations are considerable.
A higher level of functionality is essential and, unless a supplier has existing public sector clients, it is almost impossible to attract new clients without costly development. Consequently, there are relative few suppliers to the public sector, although they include both system developers and service providers.
Before we consider the intricacies of spines, multiple posts and retrospective pay, it is important to understand what makes up the 'public sector'. The line between public and private sector is increasingly difficult to draw. By definition, public sector organisations are those that are publicly funded. They include central government; local government; further education and higher education colleges and universities; grant-maintained schools; police authorities; the fire services; the national health service; probation service; and the courts.
There are, however, other organisations that used to be publicly funded that retain many public sector characteristics, such as housing associations, TECs, and the public utilities. And, although never having been linked with the public sector, many businesses have sophisticated payment and benefits requirements that only systems aimed at the public sector can properly satisfy.
Due to competitive tendering and other initiatives, many public sector organisations, departments and agencies have moved away from the centralised payroll services traditionally provided by Chessington and local authorities. They have availed themselves of the various payroll options utilised by the private sector - some are running their own payrolls in-house, others use bureau processing services, still others have gone for a fully-managed service.
Although their requirements are still very structured, as we will see, this trend has also had the effect of introducing variation to their pay and benefits structures, requiring developers to build greater flexibility into their offerings. This is particularly noticeable in central government departments, some of which have inherited responsibility for other departments, each with their own specific differences.
However, in contrast to the private sector willingness to adapt working practices to the capabilities of their software, the public sector is still averse to change and expects suppliers to provide systems that operate to their precise requirements.
Spine points
The first of the three key complexities of public sector payroll is the use of formal salary progression arrangements. All public sector employees are represented by one of a number of negotiating bodies. The best known are probably the Whitley councils in the NHS and local authorities. Each job, or 'post', is allocated to a grade, and each grade has a salary scale with a minimum and maximum, and a number of fixed points in between, all set out on a 'spine'.
Each negotiating group has its own spine that starts at the lowest salary for the bottom grade and goes up to the highest salary for the top grade. The range of points for each grade are likely to overlap each other as they go up the spine.
Under normal circumstances, employees receive a salary increase, or 'increment', by moving to the next higher spine point. The increase may occur at a fixed date each year for all employees, or on their employment anniversary. The moves are generally automatic but, when they have achieved the maximum of the scale, employees receive only inflation increases, unless they are promoted or their job is regraded.
A payroll system must be capable of applying this rigid structure for salary progression but must also be flexible enough to handle local requirements. Such flexibility may also appeal to some larger private sector companies, where the concept of overlapping salary grades is common. However, the main difference is that, in the private sector, progression is more likely to be linked to performance rather than simply to length of service in the job or grade.
Multiple jobs
A common feature of employment in the public sector, especially in local government, education and the NHS, is the holding of more than one job, or post. The jobs may fall under different negotiating bodies, with different pay frequencies, different grades and salary scales, and different pension schemes. The potential complexity for payroll processing is enormous. The payroll system must be capable of
• allocating an employee to several posts,
• applying increments according to the grade and spine for each post,
• amalgamating the pay for jobs with different pay frequencies,
• calculating taxable pay correctly by deducting pension contributions to more than one scheme,
• aggregating earnings for NICs, and
• handling more than one table letter concurrently.
Pension deductions are a particular problem in this context. The jobs may provide membership of two or more pension schemes, with different contribution rates and benefits. Where an employee has two or more part-time jobs that fall within the same pension scheme and the combined hours exceed the full-time equivalent hours for membership of that scheme, only contributions equal to a full-timer may be taken. The contributions from one or more of the jobs must be less than they would otherwise be.
Even if the payroll system can handle all of these combinations of circumstances, there are then the problems of posting the payments and deductions to the correct ledgers, reconciling the payroll, allocating the pension contributions to the appropriate scheme, and working out the pension benefits that they accrue.
Retrospective pay
Union-negotiated pay increases may be delayed at times in the private sector but, in the public sector, it appears that the negotiating bodies have a reputation for being late. The result is that the pay received by employees since the date on which the increase should have taken effect must be recalculated, the difference paid, and the ledger postings for the relevant cost centres changed accordingly.
Late pay awards are not the only situations that cause a back pay problem. They can also occur, and for even longer periods, where the grading of a job is under review. If the grading changes, with a resulting increase in pay, the pay from the effective date of regrading must be calculated and the difference paid.
Whatever the cause, the recalculations have to be made, not just to basic pay, but to all other related payments, including overtime, bonuses and regional weightings. And then it can get complicated! During the period of retrospection, the employee could have had incremental increases and a job regrading, both of which could already have been subject to earlier retrospection.
Calculating retrospective payments manually is impractical and all payroll systems and services provided to the public sector must have this facility.
Returns and other differences
In addition to the common system requirements of the public sector, there are other features that are specific to different areas of the sector. For example, occupational sick pay and maternity pay are universally provided but the rules are not standard.
Most employees have access to a salary-related pension scheme but the contributions and benefits vary. In the education and local government sector, it is common to pay retainers to employees who do not work during term time. There are special pay arrangements so that employees who, because of the shorter daylight hours in winter, work fewer hours in winter than they do in summer but still receive the same pay.
Most public sector organisations have to complete regulatory reports and returns, many of which rely on payroll records to complete. In the education sector, for example, the Staff Individualised Record, required by the Further Education Funding Council, requires the payroll system to hold personal data that would normally only be found in personnel systems. The annual teachers' pension return is also complex and is provided as a standard report in public sector payroll systems.
Benefits of sophistication
The overall effect on suppliers of the special needs of the public sector has been that their systems have become highly sophisticated in terms of both functionality and flexibility. Not only has it been very difficult for developers to break into this market, but the developers variously describe the complexities and variations that their systems have to accommodate as 'a nightmare' and 'a minefield'.
Nevertheless, all of the features of public sector payroll have some read-across to the private sector and it can only be to the benefit of all payroll users that the increased functionality and flexibility are extended to those outside of the public sector.
The author would like to thank Centrefile, CMG, Meta4, Midland Software, PWA and Rutherford Webb for their help in preparing this article.
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