The Use of Smart Contracts in Payroll & HR

Amid all the new technologies and innovations available to payroll and HR teams, blockchain and smart contracts are perhaps flying under the radar a little. This may be because they aren’t always the easiest things to understand, and also because they’re often associated with cryptocurrency more than anything else.

But the reality is that smart contracts have the potential to be hugely beneficial to how payroll and HR operate in the future. This blog explores how they work, why they’re important, and the scale of what’s possible.

What are smart contracts?

Smart contracts are automated contracts hosted on a blockchain. They are set up to automatically execute when certain conditions have been fulfilled, removing any need for manual intervention to process anything: once they’re set up, they take care of themselves.

From a financial perspective, that means that payments can automatically be made to a bank account once certain tasks have been carried out. As an example, a contract could be set up that would execute the payment for 20 hours of work, as soon as an employee has completed those 20 hours. There is no need to incorporate this into a regular monthly payroll run: the smart contract executes an instruction for the payment to be made into the employee’s bank account.

Why are smart contracts important?

Smart contracts are important for two reasons. The first is that they represent a revolution in terms of payroll and HR efficiency through blockchain technology: no longer do payments have to be constrained to regular payroll runs with specific cut-off dates. Payments can instead be made on a rolling basis as smart contracts are executed, cutting the burden of deadlines on payroll systems and teams, and giving employees and contractors quicker and more flexible ways of getting paid.

The second reason is that smart contracts highlight the potential of data for payroll and HR. In many ways, smart contracts flip the relationship between processes and data: instead of data being used to enable the process (i.e. payroll runs), it’s processes being used to activate the data (i.e. the fulfilling of smart contract conditions).

How do smart contracts benefit payroll and HR?

Once you start to explore smart contracts for payroll and HR in more detail, it becomes clear that the benefits of adopting them can quickly spread far and wide throughout an organization:

• Automation: the high level of automation involved in smart contracts means much of the administrative work that payroll and HR teams have to do can be removed. Instead of having to manually process payments, and check to make sure that they’re made accurately, they can simply set up the smart contract and let the technology take care of everything else.

• Efficiency: the traditional means of making payments is through bank transfers and direct deposits, which come with associated lead times and costs. This can be removed entirely when using smart contracts, which can automatically pay recipients into the bank account specified within the contract. This cuts out the cost and time implications of using a third party for transfers.

• Certainty: just because a contract has been set out on paper doesn’t stop people trying to break them, bend them or back out of them. That simply isn’t possible with smart contracts, where all terms and conditions are set out in blockchain code that can’t be altered. Without any scope for adjusting the conditions, and with clear parameters set out for dispute resolution, there is no longer any room for ambiguity.

• Joiners, movers and leavers: new hires, those moving internally and those leaving an organization often create lots of admin to ensure their information (including payroll data) is correct. Using smart contracts makes these processes much easier. Employees can upload their data into a smart contract, to which they can then grant employers access. This can help employers onboard or make necessary changes quickly and easily, and dealing with leavers simply means losing access to employee data.

• International payments: making payments across international borders can be extremely time-consuming and expensive, at both ends of the process. Smart contracts break down all these barriers, removing burdens like wire fees, exchange rates, and other charges imposed by third parties and intermediaries. This in particular can make a major difference to how payroll and HR operate at a global level.