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Payroll pains: The mistakes killing your restaurant’s bottom line

There are three main payrolls risks: errors, cheating and compliance.

September 28, 2015

By Anthony Lye, CEO at HotSchedules

Payroll is like a bit like rush hour traffic: it is a mind-numbing time leech that, while completely inescapable, can still drive you to brink of insanity. The difference is that when a driver crashes, the error is obvious; when payroll mistakes happen, you can’t see the dent in your revenue until later.

If you’re a restaurant manager, you already know that payroll is usually a painful, manual task. The sad reality is that old-school payroll processing sets you up for failure and untold stress. It’s on you and upper management to recognize the risks of manual payroll — and then do something about them.

There are three main payrolls risks: errors, cheating and compliance.

Errors

Paper is the root cause of honest errors. According to a survey conducted by Software Advice, 65 percent of 1-50 employee business still use paper forms for payroll while 60 percent of 51-1000 employee businesses continue to use paper punch cards. If you misread employees’ handwritten records and key in numbers incorrectly, your restaurant will eat the cost (employees usually notice if they’re underpaid). In one study, Nucleus Research found that the average error rate among a sample of companies was 1.2 percent of gross payroll.

Cheating

It’s easy for employees to cheat the system. No matter which study you consult, the numbers on "time theft" and timesheet gaming are scary. In the above-mentioned study, Software Advice found that 43 percent of hourly workers admitted to exaggerating the length of their shifts. A stunning 25 percent said they do this more than 76 to 100 percent of the time. In a separate study by Harris Interactive, 21 percent of employees admitted to "gaming the clock," and 5 percent confessed to "buddy punching" (having a coworker punch them in or out).

To be fair, the Software Advice authors concluded that "time theft is more about a lack of rigor in distinguishing between professional and personal time than it is about blatantly taking advantage of employers." Intentional or unintentional, payroll exaggerations still add up.

To understand the cost of cheating, let’s run some numbers. The actual time that employees steal can range from a few minutes to over an hour, but 41 percent of cheaters in the Software Advice study claimed to add 11-20 minutes per shift. Let’s say half of your employees steal one hour per week, your restaurant has 50 employees who earn $15 per hour. Each week, you’re cheated out of $375. Therefore, you lose roughly $18,750 per year. If you open four locations, without addressing this deception, you will shed $75,000 annually, not including the cost of honest errors. The payroll mishaps scale with your business.

Litigation

Even if you accept that errors and cheating are just a cost of doing business, know that your payroll errors can come back to haunt you in other ways. According to a report commissioned by ADP, more than 70 percent of employers are likely "not in full compliance with the FLSA [Fair Labor Standards Act]."

Not coincidentally, the ADP report finds that wage and hour litigation has risen in the United States. In fact, as many as 90 percent of "all state and federal class and collective actions filed in the U.S." are wage and hour claims. Unpaid work time and misclassification (overtime versus regular pay) were the most common claims, and among the top 10 wage and hour lawsuits, the average settlement was $34 million. Little payroll errors can come with big price tags.

If you’re serious about eliminating payroll mistakes, clock gaming and the risks of litigation, here are the steps I recommend:

• Automate payroll. This is a no-brainer. As long as someone has to transcribe punch cards to spreadsheets and manually reconcile adjustments, errors are inevitable. As a baseline, you need to digitize punch cards and let your POS report the true numbers.
• Enforce clock-in and clock-out. While some companies use biometrics to stop "buddy punching," in a restaurant, it’s easier to just set clock-in and clock-out times based on your schedule. Employees who aren’t supposed to be working shouldn’t be allowed to clock in or extend their hours without a manager’s approval.
• Aggregate and compare store by store data. If two locations have the same number of employees, yet drastically different payroll costs, something is amiss. Is the manager overstaffing? Are tip declarations significantly lower than at other locations? Make use of payroll data.

If the late nights with spreadsheets haven’t already pushed you over the edge, the cost of errors, cheating and litigation should convince to rethink payroll. Unlike rush hour traffic, payroll pains are within your power to change.

Anthony Lye is CEO at HotSchedules. He provides strategic direction and business guidane for the company, including the inegration of multiple technology solutions into one integrated platform.