Does Your Small Business Have a Payroll Continuity Plan?

As a small employer, it’s important to have a business continuity strategy for responding to disasters — such as fires, tornadoes, storms, hurricanes, explosions, terrorist attacks, and pandemics. This larger business continuity strategy should include a payroll continuity plan for managing payroll during the crisis.

The federal, state, and/or local government may provide some payroll relief to small businesses and their employees during disasters. For example, depending on the impact of the disaster, the IRS may delay certain federal payroll tax reporting and remittance deadlines.

Generally though, you are legally required to pay your employees accurately (and on time) for wages owed, even during a disaster. Additionally, you must meet all other applicable federal and state payroll obligations. For these reasons, it’s essential to have a payroll continuity plan — even if you outsource some or all of your payroll responsibilities to a service provider.

Below are critical steps to drafting a payroll continuity plan.

Conduct a risk assessment

In the event of a disaster, determine what will happen in the following situations:

• Your payroll system is operational, but your in-house payroll team cannot work because of disaster-related sickness. How will you get payroll done? Do you have qualified replacement personnel on standby?
• You outsource some or all of your payroll duties, but your outsourcing partner is temporarily out of service. Do you have the basics on hand — such as a computer, printer, and paper checks — which will enable you to do payroll yourself? Note that, in most cases, the employer is ultimately responsible for meeting its payroll and tax obligations even when it outsources those functions to a third party.
• You cannot disburse paper checks via mail to employees. Do you offer alternative payment methods, such as direct deposit and/or payroll cards?
• You cannot send your direct deposit file to the bank because the Internet is down. Do you have a paper check system in place?
• Your onsite payroll staff is available to work, but the disaster has destroyed essential office equipment, such as furniture and computers. Do you have a list of stores you can rent or buy office supplies from, or technicians you can call for repairs or installations?
• You cannot retrieve your timekeeping and payroll files because your computers are down. Do you have a backup of those records offsite — such as on an external hard drive or a memory stick? Note that if you use cloud-based timekeeping (and payroll) technology, the data is stored over the Internet. To retrieve the files, all you need is an Internet connection and a web browser.

Remote work and payroll

• Your onsite payroll team is available but cannot physically come to work because of a mandatory stay-at-home order. Do you have access to cloud-based technology that allows your payroll team to manage payroll from anywhere?
• You fully transitioned to a work-from-home arrangement. How will your remote employees get payroll information? Do you have an online self-service portal they can access on demand? Do you have adequate payroll staff to remotely respond to phone and email inquiries from employees?

When conducting the risk assessment:

• Examine your entire payroll obligations
• Look for possible disaster-related challenges
• Nail down solutions to the obstacles
• Prioritize your disaster-related obligations and solutions based on what must be done right away versus what can be done later. This way, when disaster strikes, you will know what to focus on first.

In most cases, the employer is ultimately responsible for meeting its payroll and tax obligations even when it outsources those functions to a third party.

Identify potential manual processes

If you lose access to your computerized payroll system during a disaster, what aspects of your payroll can be done manually? Once you figure that out, decide how you will execute the manual processes.

For instance, you’ll likely need:

• Paper timesheets that nonexempt employees can complete by hand.
• Reliable estimates of your employees’ wages/salaries. Having hardcopies of payroll registers showing recent wages and deductions can help you manually calculate payroll more precisely.
• Paper checks that you can readily sign and distribute to employees.
• Tools to carry out manual payroll activities, such as pens, paper, calculator, checks, postage, envelopes, and hard copies of federal and state tax withholding tables.
• Blank copies of payroll forms that can be manually filed with the government, such as federal, state, and local employment tax reporting forms.
• Someone with fundamental knowledge of manual payroll processing. Small business owners should at least know the basics, in case they need to do the bare minimum on their own.

When you regain digital access, remember to transfer the manual transactions over to your computerized payroll system.

Prioritize staff safety

Your continuity plan should address payroll responses to disasters and emergencies — such as lockdown and evacuation procedures — and what to do when faced with dangerous, hostile, or suspicious-looking persons.

Your continuity plan should address payroll responses to disasters and emergencies — such as lockdown and evacuation procedures — and what to do when faced with dangerous, hostile, or suspicious-looking persons. While some of these security strategies can be applied to all employees, your payroll continuity plan should include specific safety measures for the payroll department.

Make sure your emergency contact information is up-to-date for all employees, including payroll personnel.

Test, distribute, and update the plan

Perform a mock payroll of the contingency procedures laid out in the continuity plan. For example, ensure you can access and run payroll from anywhere (e.g., from home) via web-based software. In addition, conduct a completely manual payroll simulation.

If you’re satisfied with the plan, formally document it and disseminate it to authorized individuals. In a small business, authorized persons typically include payroll staff members, whomever payroll directly reports to, and the business owner.

Review the plan at least once per year, and update it whenever applicable payroll laws or company policies change.

Creating payroll contingencies for your small business may seem like a lot of work, but the plan is vital to keeping your payroll function intact when disasters or emergencies hit. If you can afford it, consider hiring a payroll risk management expert to help you draft the plan.