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Organizations face constant pressure to control labor costs without sacrificing operational efficiency, and payroll sits at the forefront of this ongoing expectation. Beneath the surface of routine payroll activities, hidden inefficiencies can limit profitability and strategic progress. Legacy policies, fragmented systems, and manual processes often contribute to labor leakage, but these factors remain challenging for leadership to identify and address.

By uncovering the sources of complexity and inefficiency, organizations can unlock cost savings, enhance transparency, and build a more resilient workforce. The transition from complexity to clarity begins with a commitment to smarter, more efficient management of labor resources.

The Hidden Cost of Complexity

Labor leakage in the average U.S. payroll is estimated to be as high as 3% of wages. Even at the low end, the impact is significant. For example, in a company with 25,000 frontline employees earning an average U.S. salary of $60,000, a 1% leakage equates to nearly $15 million a year.

Where does this leakage come from? Some of it can be in the following:

• Conflicting or overly complex policies, especially around overtime, premium pay, and eligibility
• Lack of automation in applying rules to hours worked
• Manual time capture methods; even when hours are captured electronically, there can still be leakage from rounding, manual selection of rates or premiums, buddy punching, supervisor overrides, and human error
• Fragmented systems and data, making it impossible for anyone to see the full picture or drive effective governance of the processes and resulting spend

These issues often persist due to limited policy management and oversight from leaders. In many organizations, misalignment between local policies and payroll systems is common. When policies are not properly integrated with payroll processes, employees may not be compensated correctly. This leads to payment gaps and significant time spent resolving queries, by both payroll teams and employees, which ultimately results in dissatisfaction and inefficiency.

The consequences of inconsistent policy extend beyond regulatory compliance and can negatively impact day-to-day operations. For instance, one payroll leader we worked with noted that even their own team would sometimes select the most generous pay codes for personal hours, taking advantage of ambiguities in corporate policies and causing budget overruns.

On top of these challenges, leaders are often unaware of the true extent of overtime within their teams. At one of our previous employers, we discovered an employee regularly working 16 hours a week of overtime spread across multiple days, all without the manager’s knowledge. This lack of oversight resulted in salary expenses reaching 200% above base pay, along with increased costs for benefits, taxes, and other salary-related expenses. Beyond financial costs, excessive overtime contributes to workload stress, safety issues, and diminished productivity.

Recognizing these hidden opportunities is the first step in creating lasting change and pushing significant savings back to the organization. Another example related to overtime occurred during a recent client meeting when an upset operations leader questioned why the corporate team was making their job more difficult by wanting to review their overtime expense.

While it wasn’t payroll’s role to dictate budget decisions or overall policy, the payroll team had been analyzing their rich dataset and discovered patterns in time entry that had caused teams to consistently exceed their budgets. The payroll team’s enthusiasm, however, was met with resistance, rather than appreciation, highlighting the challenges that often arise when trying to drive change across established practices. After extensive, and occasionally tense discussions, the meeting achieved a positive result with all sides agreeing to work together to address the opportunity.

Implementing a centralized overtime policy, coupled with regular monitoring and reporting to managers with the payroll data available, is an effective way to increase transparency and equip leaders with the tools they need to manage their workforce more efficiently.

Workforce Management Is Evolving … Slowly

Companies have been automating payroll processes since the 1950s. But over the last 30 years, progress has been made where organizations can now automate time capture, apply pay rules consistently, and generate real-time labor insights for decision-making. Despite this ongoing evolution, many companies still rely on manual processes, minimum viable product implementations, and outdated systems that do not communicate with each other. Additionally, there is often a vast number of roles, job titles, projects, and activities, making it nearly impossible to plan for every scenario.

Before automation can deliver real value, organizations must first simplify their existing landscape. This is often a challenge for payroll teams that typically do not control policies, work rules, budgets, or strategic business goals.

On top of organizational complexity, local regulations are becoming increasingly intricate, especially in industries like hospitality. For example, in Los Angeles, the Hotel Worker Protection Ordinance passed in June 2022 limits hotel housekeepers to cleaning a maximum of 3,500 square feet per day in hotels with 40 or more rooms. This regulation is part of a broader effort to ensure the safety and fair treatment of hospitality workers by establishing workload limits and increasing safety measures; however, it also creates a significant cross functional challenge for the payroll team to manage.

In scenarios like the ordinance passed in Los Angeles, payroll teams must be at the forefront of adapting to new regulations. Their unique perspective allows them to audit policies and identify redundancies or contradictions in the payroll data that may otherwise go unnoticed. To manage this growing complexity, payroll systems need to be robust and flexible.

Standardizing rules and driving enterprise-wide policies while still accommodating local nuances is a significant undertaking. Payroll strategies should always reflect the strategic direction of the organization, rather than simply maintaining legacy practices.

🙶 Labor is one of your most controllable costs

and most valuable assets. 🙸

Consistent Job Architecture Allows Consistent Application of Policies, Rules

Once processes are simplified, automation can handle rate calculations, eligibility checks, and time validations, improving accuracy, ensuring correct wages are paid, and even boosting employee satisfaction.

During a recent conversation with a human resources leader, they shared a story from a manufacturing plant in Latin America where employees were genuinely excited about the new electronic time clocks and automated system. For them, being paid correctly the first time eliminated the need to wait for corrections and ensured accuracy from the start, putting money in their pocket faster. In an environment where all plants in the area are paid roughly the same, this reliability has become a major differentiator for the employer.

You may have a proliferation of time and attendance systems and approaches. Your team should work backwards from the payroll process to map all data sources, which may reveal the need to consolidate and implement a modern tool.

These new workforce platforms can perform the following functions:

• Enforce policy rules automatically
• Integrate with payroll for consistency and auditability
• Provide analytics and visibility into labor trends across geographies
• Enable enterprise standards while allowing for local compliance

With advanced capabilities and artificial intelligence (AI), these tools have the power to enhance existing processes, compliance, and reporting.

The Executive’s Role: Strategy, Governance, Enablement

The intricacies involved in optimizing labor spend can initially seem intimidating. The good news is that you do not need to design the system yourself; your role is to lead the transformation, a skillset you have likely developed over time in leadership roles. Your executive sponsorship is critical to the success of your team.

As the leader, you need to do the following:

• Set the strategy—Define what labor optimization means and why it matters for the organization
• Govern the process—Ensure stakeholders are aligned, policies are harmonized and will be enforced, and review the entire framework cross functionally on a regular basis
• Ask the right questions—Where are our opportunities to stop leakage? Do our policies help or hinder efficiency? Do we have visibility into real-time hours data? Are we investing in the right systems?
• Remove barriers—Work with cross functional leadership; empower HR, payroll, and operations to simplify, drive consistency, and automate where they can

The Payoff: Efficiency, Transparency, Governance

Companies that take decisive action see tangible benefits: reduced labor leakage, enhanced employee satisfaction, and better compliance. Streamlining manual processes not only lowers administrative overhead but also increases organizational agility in responding to changing market demands.

While it’s tempting to focus solely on potential dollar savings, the true goal is to build a smarter, more resilient organization. Labor is one of your most controllable costs and most valuable assets.

As you consider your next steps, take time to assess your company’s opportunities for improvement. Reach out to your team to understand the current policy governance in place to mitigate labor leakage. Leverage their data and reports to identify areas of opportunity and foster collaboration across business units.

Support your payroll teams by sponsoring initiatives that drive centralized advocacy for policies, controls, and audits to manage behaviors and expectations. These actions can deliver significant bottom-line savings and help instill greater discipline and control throughout your organization.

Now is the time to act: empower your teams, leverage insights from payroll data, and lead your organization toward greater labor efficiency and resilience.

Joe Ranzau is a Partner at Grant Thornton. He is a global workforce transformation and payroll strategy leader with experience transforming HR and payroll service delivery across 70 countries for organizations ranging from 500 to 200,000 employees. Linda Obertin, CPP, Hilton Worldwide’s Senior Director, Human Resources – Global Lead Payroll, and a member of PayrollOrg’s Board of Directors, is a seasoned executive with more than three decades of global leadership experience, holding senior roles within Fortune 100 corporations and leading transformational initiatives across finance and HR functions.