How to build a blockchain-based payroll system. Article 7 of 10

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This is article 7 of 10 forming the seventh part of a series of articles dedicated to my attempt at helping Payroll & HR professionals understand the potential impact that both Blockchain and Cryptocurrencies could have on the future of Payroll & HR.

To view the earlier article in the series – click here:

  1. Article 1: How will Blockchain, Cryptocurrency and DLT technologies affect the future of Payroll & HR
  2. Article 2: Will companies start to payroll its employees in cryptocurrency?
  3. Article 3: How will blockchain affect HR Recruitment Processes?
  4. Article 4: What are smart contracts and how will they affect payroll and HR?
  5. Article 5: What benefits could blockchain bring to the payroll industry
  6. Article 6: Are Blockchain Payroll Companies the Payroll Future?

Also, check out The Payroll Podcast with Anita Lettink, SVP of Global Alliances at NGA HR which discusses ‘Blockchain and the Future of Payroll & HR’ in considerable detail if you wish to fast-track your learning. You can subscribe to the Payroll Podcast here: Apple Podcasts

How to build a blockchain-based payroll system

One company produced an interesting blog about creating a blockchain payroll system back in January 2017, before the explosion in the price of Bitcoin accelerated the level of interest from the media, government regulators, and from business service companies. It was this article that inspired these series of articles too, so it is worth a read.

Teemu Turunen of Finnish mobile software company Futurice tasked his team to experiment with using the Ethereum blockchain to recreate the company’s payroll system [https://futurice.com/blog/payroll-system-in-blockchain].

Turunen allows his team of programmers to experiment with open-source software problems in their own time.

When they do this, they report back to the company the number of hours they’ve spent and receive a paid bonus for these hours on top of their normal monthly paycheck.

Calculating these hours, and the relevant payment that should go to each member of staff, is tricky and time-consuming, because not every programmer takes advantage and so there is no “one-size-fits-all” payment that can be made to every employee.

“Some people report contributions every month, some once a year, some never,” says Turunen

“The popularity has been on the rise though and we haven’t had any automation in handling these reports. It’s been slowly becoming a time-consuming chore to collect all the data at the end of the month and report them to payroll.”

Instead of reporting their bonus hours to a central person, who then passes them on to the payroll department, the idea was for each employee to enter their bonus hours onto an Ethereum-based blockchain, where the payroll calculation would be done automatically.

Here’s how it would have worked.

  1. The employee logs on to an internal company webpage where she enters the time in hours and minutes of her free time she has spent on bonus work. She also adds a title of a publicly-accessible URL which helps the company identify the contribution. Along with the time spent, and the URL, is a short description of the contribution made, for example:

“Investigating how to speed up development between teams when we use open source code”.

  1. The above information, along with a unique ID for the employee, gets stored in the Ethereum blockchain.
  2. The same information is also sent to a company instant messaging channel.
  3. At the end of every month, an application is run on the blockchain to automatically calculate the bonus for every employee who has reported doing extra hours in their free time.
  4. This information is auto-forwarded to the Payroll Department and the monthly salary is paid with the bonus intact, if relevant.

 

In creating this experiment, Futurice ask an important question that is not often answered:

  • Why do we specifically need to use a blockchain to make this automatic calculation?
  • Why can this calculation not be made by an equation held in a centralised database?

At the most basic level this could look like an Excel spreadsheet. This spreadsheet is kept in-house and only the Payroll Department has administrator access to confirm that the correct calculation has been made.

  • The Ethereum blockchain is public, but is this level of privacy acceptable?
  • Would you want every one of your employees to be able to see what bonus payments have been made to every other of your employees?

The other fundamental challenge with public blockchains is scalability. As the size of a public blockchain grows (that is, as more information is entered into it), the speed at which transactions can be verified slows down. The storage, bandwidth and computing power required to maintain it also increases.

This is because every ‘node’ that verifies that the information is correct must run through every transaction that came before, as well as all the new ones, to make sure the master copy of the blockchain looks correct.

When we look critically at companies who are trying to sell you the idea of a blockchain-based payroll system, we find the same kinds of issues.

It all comes down to these two linked questions.

  1. Do you as a business owner need to understand every function of a payroll database system? Probably not.
  2. Do you as a business owner need to have an understanding of why using blockchain-based payroll will save you money, over any other compatible programme or system currently available? Probably yes.

Futurice’s conclusion?

“There’s no reason why this couldn’t have been done without using blockchain.

“Deciding on what to use blockchain for is a difficult question, and also a question most companies investing in blockchain implementation are currently asking themselves.

“One thing that is quite certain though is blockchain is mainly suitable for creating data storage systems that work using predefined rules but are not controlled by any single entity.

“In cases where giving away control is not acceptable, it is also possible to create private blockchains with no third-party involvement whatsoever.

This, however….

“would reduce the blockchain to a simple fault-tolerant distributed database…which is quite unlikely the most suitable technology for the job.”

Which basically suggests that we don’t need blockchain at all!

What do you think?

Please share and comment – I will try to interact with as many as possible!

Future articles in the series will include:

  • When should businesses start planning for blockchain?
  • Risks and costs
  • Conclusion – is blockchain and crypto the future?

Thanks 🙂

As always, whether you love payroll or love HR, love what you do, work smart and work hard – just be careful not to overdo it.

Visit our website to access more blogs, whitepapers, The Payroll Podcast and more content about all things “Payroll and HR”.

If you are looking for expert talent in the fields of Payroll, HR or Reward, then please contact me and I would be delighted to discuss how we can help.

Nick Day | Managing Director

JGA Recruitment | JGA Payroll & HR Recruitment

Email: nick@jgarecruitment.com | Tel: 01727 800 377

Sources:

  1. https://futurice.com/blog/payroll-system-in-blockchain

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