As the nature of employment is constantly changing with dynamic employee benefit expectations, organizational payroll is seeing constant transformation. At the same time, payroll data is no longer used only for paying employees, but is increasingly being employed for a variety of other purposes.
This diversification and added complexities of payroll has given rise to payroll APIs which are integral in bringing together the employment ecosystem for businesses to facilitate smooth transactions.
What are payroll APIs?
Like all other APIs or application programming interfaces, payroll APIs help companies integrate their different applications or platforms that they use to manage employee payment details together for a robust payroll system.
Essentially, it enables organizations to bring together details related to salary, benefits, payment schedule etc. and run this data seamlessly to ensure that all employees are compensated correctly and on time, facilitating greater satisfaction and motivation, while preventing any financial challenges for the company.
Payroll concepts and information
To build or use any payroll API or HRIS integration, it is important that you understand the key payroll concepts and the information you will need to collect for effective execution. Since payroll APIs are domain specific, lack of knowledge of these concepts will make the process of integration complicated and slow. Thus, here is a quick list of concepts to get started.
1. Frequency and repetition
The first concept you should start with focuses on understanding the frequency and repetition of payments. There are multiple layers to understand here.
First, understand the frequency. In technical terms, it is called pay period. This refers to the number of times a payment is made within a specific period. For instance, it could be monthly, twice in a month, four times a month, etc. Essentially, it is how many times a payment is made within a particular period.
Second, is the repetition, also known as payroll runs. Within an organization, some employees are paid on a regular basis, while others might receive a one-time payment for specific projects. A payroll run defines whether or not the payment is recurring. Your payroll run will also constitute a status to help understand whether or not the payment has been made. In case the payment is being calculated, the status will likely be unprocessed. However, once it is complete, the status will change to paid or whatever nomenclature you use.
2. Pay scale and in-hand pay
As a part of the payroll concepts, it is extremely important for you to understand terms like pay scale, in-hand pay, compensation, pay rate, deduction, reimbursements, etc. We’ll take them one at a time.
Pay scale/ Pay rate
A pay scale or pay rate determines the amount of salary that is due to an employee based on their level of experience, job role, title, tenure with the organization, etc.
A pay scale or a pay rate can be in the form of an hourly or weekly or even a monthly figure, say INR xx per week or INR yy per hour. It may differ for people with similar experience at the same level, based on their tenure with the company, skills and competencies, etc.
Based on the pay scale or pay rate, a company can calculate the compensation due to any employee. Generally, the math for compensation isn’t linear. Compensation is also referred to as the gross pay which includes the pay rate multiplied by the time period that the employee has worked for along with other benefits like bonuses and commissions that might be due to the employee, based on their terms of employment.
For instance, some organizations provide a one-time joining bonus, while others have sales incentives for their employees. All of these form a part of the compensation or gross pay.
In addition to the benefits mentioned above, an employee might be eligible for others including a health cover, leave-travel allowance, mental wellness allowance etc. These all together add up to benefits that an employee receives over and above the pay rate.
Within the compensation or the gross pay are parts of deductions, which are not directly paid to the employees. These deductions differ across countries and regions and even based on the size of the company.
For instance, in India, companies have to deduct PF from the employee’s gross pay which is given to them at the time of retirement. However, if an organization is smaller than 20 people, this compliance doesn’t come into existence. At the same time, based on the pay scale and pay rate, there are tax deductions which are due.
The in-hand pay is essentially the amount an employee receives after addition of all due payment and subtraction of the aforementioned deductions. This is the payment that the employee receives in his/ her bank account.
Another concept within the payroll is reimbursements. There might be some expenses that an employee undertakes based on the requirements of the job, which are not a part of the gross pay. For instance, an employee takes out a client for dinner or is traveling for company work. In such cases, the expenses borne by the employee are compensated to the employee. Reimbursements are generally direct and don’t incur any tax deductions.
3. Cost to employer
The above concepts together add up to the cost to the employer. This refers to how much an employee essentially costs to a company, including all the direct and indirect payments made to them. The calculation starts with the pay scale or pay rate to which other aspects like contribution to benefits and em
Payroll data models/ data schemas
Now that you have an understanding of the major payroll concepts, you also need to be aware about the key data or information that you will need to comprehend to work on payroll APIs.
Essentially, there are two types of data models that are most used in payroll APIs. One focuses on the employees and the other on the overall organization or company.
From an employee standpoint, any payroll API will need to have the following details:
The part of the world where the employee resides. You need to capture not only the present but also the permanent address of the employee.
Employee profile refers to a basic biography of the concerned person which includes their educational backgrounds, qualifications, experience, areas of expertise, etc. These will help you understand which pay scale they will fit into and define the compensation in a better way. It is equally important to get their personal details like date of birth, medical history, etc.
An employee ID will help you give a unique identifier to each employee and ensure all payments are made correctly. There might be instances where two or more employees share the same name or other details. An employee ID will help differentiate the two and process their payrolls correctly.
Information on dependents like elderly parents, spouses and children will help you get a better picture of the employee’s family. This is important from a social security and medicare perspective that is often extended to dependents of employees.
When it comes to company details, working with a payroll API, you need to have a fair understanding of the organizational structure. The idea is to understand the hierarchy within the organization, the different teams as well as to get manager details for each employee.
A simple use case includes reimbursements. Generally, reimbursements require an approval from the direct reporting manager. Having this information can make your payroll API work effectively.
Top payroll API use cases
Invariably, a payroll API can help you integrate different information related to an employee’s payroll and ensure a smooth payment process. However, it is interesting to note that many SaaS companies are now utilizing this payroll data collected from payroll APIs with HRIS integration to power their operations. Some of the top payroll API use cases include:
1. Insurance and lending
Often, information about payroll and income for individuals is siloed and insurance and lending companies have to navigate through dozens of documents to determine whether or not the individual is eligible for any kind of insurance or loans. Fortunately, with payroll APIs, this becomes easy by enabling several benefits.
- First, payroll API can help lenders or insurance agents with streamlined information on whether or not the person has the ability to pay the installments or loans.
- Second, any kind of lending also requires a background verification which payroll APIs with HRIS integration can easily provide. Thus, with payroll APIs, SaaS based insurance and lending companies can easily process verification and loan underwriting.
Accounting and tax management companies have for long struggled with manual paperwork to file company taxes which comply with the national and regional norms. With payroll API, SaaS based accounting firms find it extremely easy to access all employee related tax information at one place. They can see the benefits offered to different employees, overall compensation, reimbursements and all other payroll related technicalities which were earlier siloed.
Armed with this data, courtesy payroll APIs, accounting firms find their work has been highly streamlined as they no longer have to manually document all information and then work to verify its accuracy and compliance.
3. Employee benefit companies
There are several SaaS companies today that are helping businesses set up their benefits plans and services for high levels of employee satisfaction. These employee benefits companies can take help of data from payroll APIs to help businesses customize their benefits packages to best suit employee expectations and trends.
For instance, you might want to have different benefits for full-time versus contractual employees. With payroll API data, employee benefit companies can help businesses make financially prudent decisions for employee benefits.
4. Performance management systems
The recent years have seen a rise in the adoption of performance management systems which can help businesses adopt practices for better employee performance. Armed with HRIS and payroll API data from different companies, these companies can identify motivators in payroll for better performance and even help identify rate of absenteeism and causes of poor performance.
Such SaaS based companies use payroll APIs to understand which pay scale employees take more time off, what their benefits look like and how this gap can be bridge to facilitate better performance. Invariably, here, payroll data can help streamline performance management from a benefits, incentives and compensation standpoint.As well as, it makes HRIS data makes it a one click process to gather all relevant employee information.
5. Consumer fintech companies
Consumer fintech companies, like those in direct deposit switching, are increasingly leveraging payroll APIs to facilitate their operations. Payroll API integrations allow consumers to directly route their deposits through their payroll with direct deposit switching. The account receiving the deposit is directly linked to the employee’s payroll account, making it easy for consumer fintech companies to increase their transactions, without manual intervention which increases friction and reduces overall value.
5. Commercial insurance
Finally, there are SaaS companies that deal with commercial insurance for companies for different purposes. Be it health or any other, payroll API data can help them get a realistic picture of the company’s people posture and their payroll information which can help these commercial insurance companies suggest the best plans for them as well as ensure that the employees are able to make the payments. They can achieve all of this without having to manually process data for all employees across the organization.
Payroll fragmentation challenges
Research shows that the payroll market is poised to grow at a CAGR of 9.2% between 2022 and 2031, reaching $55.69 billion by 2031.
While the growth is promising, the payroll market is extremely fragmented. Undoubtedly, there are a few players like ADP RUN, Workday, etc. which have a significant market share. However, the top 10 players in the space constitute only about 55%-60% share, which clearly illustrates the presence of multiple other smaller companies. In fact, as you go down from the top 2-3 to the top 10, the market share for individual applications dwindles down to 1% each.
Here is a quick snapshot of the payroll market segmentation to help understand its fragmented nature and the need for a unified solution to make sense of payroll APIs.
Before moving on to how payroll fragmentation can be addressed with a unified solution, it is important to understand why this fragmentation exists. The top reasons include:
Changing and diverse employee demographics
First, different businesses have different demographics and industries that they cater to. Irrespective of the features, each business is looking for a payroll solution that provides them with the best pricing based on their number of employees and employment terms. While some might have a large number of full time salaried employees, others might have a large number of contractual workers, while the third kind might have a balanced mix of both. These diverse demographic requirements have given birth to different payroll applications, fragmenting the market.
Dynamic market conditions
Next, it is important to understand that market conditions and employment terms are constantly in flux.
- On one hand, the compensation and benefits expectations are continually changing.
- On the other hand, with the rise of remote and hybrid work, employment models are undergoing transformation.
Therefore, as businesses need new and fresh approaches to deal with their payroll requirements, a consequent rise of fragmentation can be observed.
New and tech enabled solutions
Finally, organizations are increasingly adopting white labeled or embedded payroll solutions which enable them to either brand the solutions with their name or embed the API into their existing product. This is enabling market players in other verticals to also enter the payroll market, which further adds to the fragmentation.
- On one hand, there are completely new SaaS players entering the market to address new business needs and changing market conditions.
- On the other hand, existing players from other verticals are adding to their capabilities to address payroll requirements.
Unified API for payroll integration
With so many payroll applications in the market for HRMS integration, it can be extremely daunting for businesses to make sense of all payroll related data. At the same time, it is difficult to manage data exchange between different payroll applications you might be using. Therefore, a unified payroll API can help make the process easy.
First, the data needs to be normalized. This means that your unified payroll API will normalize and funnel data from all payroll providers about each employee into a consistent, predictable and easy to understand data format or syntax, which can be used.
Second, a unified API will help you manage all employee payroll data in the form of unified logs with an API key to ensure that you can easily retrieve the data as and when needed.
Make informed decisions
Finally, a unified payroll API can help ensure that you are able to make sense of the payroll data and make informed decisions during financial planning and analysis on factors like pay equity, financial prudence, etc.
Payroll API data with Knit
As a unified payroll API, Knit can help you easily get access to the following payroll data from different payroll applications that you might be using to facilitate seamless payment processing and payroll planning for the next financial year.
Seamlessly retrieve all employee data like first name, last name, unique ID, date of birth, work email, start date, termination data in case of former employees, marital data and employment type.
Employee Organizational Structure
Hierarchical data for the employee, including information on the employee’s title and designation, department, manager details, subordinates or those who report to the employee, etc.
Details about the family members of the employees including children, spouse and parents. The information includes name, relation, date of birth and other specific data points which can be useful when you are negotiating insurance and other benefits with third party companies.
Information on where the employee currently resides, specific address as well as the permanent address for the employee.
All kinds of details about the compensation for the employee, including gross pay, net pay, benefits and other earnings like commissions, bonuses, employee contributions to benefits, employer contributions, taxes and other deductions, reimbursements, etc.
Wrapping up: TL:DR
Overall, if you observe it is very clear that increasingly, the payroll market is becoming more and more fragmented. Invariably, it is becoming extremely difficult for businesses using multiple payroll applications to normalize all data to facilitate understanding and exchange. To make sense of payroll APIs, you need to first acquaint yourself with the key payroll concepts like pay period, payroll run, compensation, in-hand pay, gross pay, reimbursements, benefits and deductions, etc.
Once you understand these, you will agree that a payroll API can make the payment process seamless by helping in employee onboarding and payroll integration, management of reimbursements, administration of benefits and easy deductions, tax and net pay management, accounting and financial planning, among others.
Increasingly, data from payroll APIs is also enabling other SaaS companies to power their operations, especially in the finance and fintech space. If you look closely, lending, insurance, portfolio management, etc. have become very streamlined, automated with a reduced reliance on manual process. At the same time, HR management has also become simplified, especially across performance management. Payroll data can help performance management companies help businesses identify the right incentive structure to motivate high performance.
However, with increasing fragmentation, a unified payroll API can help businesses easily extract salary information, data on benefits and deductions and records about how and when the employees have been paid along with tax related information from a single source. Thus, if you are adopting payroll API, look out for data normalization and data management for maximum business effectiveness.