What is a payroll adjustment?

Even for employees who earn a fixed salary, the payment amount detailed on the payslip may change from time to time. Whenever an employee is paid more (or less) than their usual earnings, a payroll adjustment is needed.

But what exactly is a payroll adjustment? When is it necessary to adjust an employee’s pay? And how to handle pay adjustments correctly to avoid any issues?

A payroll adjustment (also called pay adjustment) is a temporary or permanent increase or decrease of an employee’s pay. Information regarding pay adjustments are typically collected and administered by the HR team. The HR team is also responsible for passing the information on to the payroll team so that they can implement the salary changes before the next payroll run. 

It is vital for businesses to ensure that payroll changes are managed smoothly to avoid payroll errors that can lead to non-compliance and take a lot of time and effort to correct.

Payroll adjustments can become necessary for many different reasons. The most common scenarios where an employee’s pay needs to be adjusted include:

• Pay raise: When employees earn a pay raise, their salary data needs to be updated permanently to reflect the changes.

• One-off payments: Extra payments to employees are becoming more and more common. These payments can include expense reimbursements, special bonuses, or commissions.

• Sick leave: If an employee is absent from work due to illness or injury, it may be necessary to adjust his or her payroll. That’s because they will likely receive some part of their salary in the form of sick pay provided by the respective social security body.

• New hires: New joiners need to be added to the payroll system along with all the data that is needed to process payroll. 

• Final pay: When employees leave the company, the HR and payroll department need to calculate their final pay which comprises any outstanding payments to the employee, such as prorated wages, accrued leave, and more. 

• Employee relocation: When companies follow a location-based approach to paying employees, employee relocation might lead to a pay adjustment to match the new cost of living.

• Competitive salary: Salaries and wages need to be reviewed on a regular basis to make sure they are in line with market standards. Otherwise, the chances of attracting new talent decrease rapidly.

• Pay gaps: Pay gaps can be a sore spot for employees. Especially when it comes to gender pay gaps, businesses are often under pressure to equal out any existing pay discrepancies. 

• Reduction or increase of working hours: If an employee requests to work more or fewer hours, this must be reflected in their pay.

• Economic reasons: Businesses that are in a difficult economic situation often opt for decreasing their employees’ salaries and wages to prevent layoffs. 

• Payroll errors: A payroll adjustment is also needed when there has been a payroll error in the previous payroll cycle, resulting in an employee having been overpaid (or underpaid) for the pay period in question.

• Demotion: If an employee’s job title is changed to a lower position, this usually leads to a decrease in their pay, which then requires a pay adjustment.

There are a few things businesses should keep in mind when it comes to handling payroll adjustments. 

• Compliance: Payroll adjustments must comply with compensation laws and any other regulations regarding employee pay. For instance, decreasing an employee’s pay shouldn’t result in the employee’s compensation falling beneath minimum wage level.

• Documentation and recordkeeping: Payroll changes should be well-documented, so that it’s easy to understand in retrospective why the changes have been made. Any documentation should be kept along with other payroll records. 

• Notification of the employee: Pay adjustments should be communicated to employees to avoid any confusion in the moment when they receive their payslips.

• Cut-off date: It’s important that payroll changes are submitted and implemented before the cut-off date. Otherwise, they won’t be reflected in the current payroll run.

Depending on the number of employees who are affected, payroll changes can result in a lot of work for the HR and payroll team. Every business handles payroll adjustments differently. While some rely on old-school methods, such as post-it notes or paper payroll adjustment forms, others have already moved on to a more digitized approach using digital files or spreadsheets. 

What both approaches have in common, however, is that making payroll adjustments remains a purely manual task, which means that there is a high risk for error and that the level of efficiency is quite low. That’s where an automated payroll software comes into play. 

Modern payroll software leverages payroll automation to reduce the need for human intervention in payroll, including the management of payroll changes. By integrating their payroll and HR systems, businesses can automate the process of updating information regarding employee compensation and other information, which is needed for processing payroll correctly.