in-house payroll

5 Hidden Risks of Improper In-House Payroll

August 25, 2022



Payroll is thought of as a time-consuming activity that belongs primarily to the Administration or HR departments. It can have several significant implications on a business, including cash flow, productivity, and overall staff morale.

However, even with its importance and significance, in-house payroll processing is usually not given enough attention to ensure a smooth overall process. There are many reasons and factors why payroll does not work as it should. If done incorrectly, payroll can pose a danger to PDPA security, reputational damage and even the loss of key company personnel.

To avoid these unwanted circumstances from happening, it is helpful to look at the risks of doing payroll incorrectly. Hopefully, by understanding what can go wrong, we are able to mitigate them and reduce the chances of them occurring. 

Read more: What You Should Know about Payroll Outsourcing

1. Failure to Comply with Local Regulations

Payroll legislation and regulations have a tendency to change from time to time. In Malaysia for example, a new amendment to employment law starting in January 2023 changed many things pertaining to employee benefits and discriminatory practices. Many companies are scrambling to adapt their payroll or HRIS system to the new regulation.

Aside from this, there is tax compliance that companies need to comply with, pension fund calculations and contributions, and other payroll deductions. Payroll issues can arise when the payroll administrator does not have adequate information to comply with local laws, exposing the company to non-compliance risk. 

2. Human Error & Lack of Expertise 

One risk of in-house payroll to look for is self-review or non-independent review process during payroll calculation, submission, and reporting. This risk compounds greater when the payroll tasks rely on manual entry or are done by inexperienced personnel. 

As much as 49% of employees will start a new job search if they encounter just two payroll failures. 

3. Weak Security & Employee Data Protection

In the effort to process payroll efficiently, HR will collect employees’ personal data that can be sensitive to unintended parties. Therefore, maintaining a strong Chinese wall of data security and protection is vital. However, it can be challenging for a small in-house HR department, especially for businesses with limited space and financial resources. Internal teams might not have the proper policies in place to ensure that data is updated consistently.

Improper data management and security can cause employee data to be accidentally disclosed, misplaced or missing. And the impact of inadequate security violates many data protection laws, such as the Personal Data Protection Act (PDPA) in most countries. The last thing any company needs is bad publicity for data breaches being investigated by the local authorities.

Read more: 5 Ways How HR & Payroll Outsourcing Helps Your Business 

4. HR Department Pain Points

Processing payroll is often easier said than done. Apart from the obvious costs of direct labour such as salary, training, devices, benefits and more, there are also invisible costs to retain and maintain HR employees’ morale in a company for taking responsibility for a task so often taken for granted by everyone.

Thus, payroll is not just about paying employee salaries on time every month, although that is still an important task to do. Payroll is also about finding the best strategy to balance company profits and compensating employees in the fairest way possible. Hence, it needs to be led by someone who knows what he or she is doing and must be passionate about HR matters. 

5. Overall Risk on Work Productivity 

Improper in-house payroll will affect work productivity. For one thing, it can demoralise the workforce as mentioned before, leading some to look for other employment opportunities elsewhere. Any delays or mistakes in payroll calculation may project a false perception that the company is in an unstable financial position. Of course, work productivity can also be affected during times of recession or a mass resignation for a host of other reasons too. 

During downtimes, businesses still need to pay their employees and have someone assigned for the payroll tasks. What will happen when even the payroll administrator or HR manager resigns? How soon can a new employee come in with proper training and onboarding? These are the risks businesses should have a plan to mitigate and prepare for the worst-case scenario. 


In-house payroll can be beautifully executed when a business is adequately equipped with the right talent and resources. For most cases though, the risks discussed today can pose a substantial threat to business continuity and efficiency. This is why payroll outsourcing could help counter these risks and provide peace of mind for HR managers. 

One of the major benefits of outsourcing is that it allows your HR division to reclaim valuable time and use it to concentrate on core responsibilities like developing Learning & Development programs, focusing on each departmental unique manpower needs and drafting succession planning contingencies. The above-mentioned high visibility duties will be more appreciated by the company and its employees than the often taken for granted, routine monthly payroll processing runs.

Outsourced payroll teams are able to help answer employee queries, prepare and file employee forms such as year-end returns, and even advise on compliance requirements. Talk to Ledgen Group’s payroll specialists about outsourcing your company’s payroll operation today and optimise your HR department capabilities. 

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