The Most Common Payroll Compliance Mistakes in HR
Payroll practices are governed by both federal and state regulations and non-compliance can lead to serious penalties. As regulations vary by state, it is vital that HR managers are aware of the regulations that apply to their workforce. In the absence of regulations, managers should ensure that they have implemented their own standardized policies and procedures relating to payroll practices. Below are some of the most common mistakes made in payroll practices which HR managers should be familiar with.
One of the most common mistakes made by companies is the misclassification of workers as employees or contractors, a mistake which can have serious tax penalties. There are many instances in which companies have purposefully classified workers as independent contractors in order to avoid paying workers compensation, social security, state unemployment insurance, employee benefits, vacation, holiday and sick pay. Understanding the level of control a worker has over their workload is one way in which HR departments can determine how workers should be classified. If workers are responsible for setting their own time and hours, determining how their work will be carried out and use their own tools and equipment, it is likely that they are an independent contractor.
Frequency and Method of pay
Frequency and method of payment will vary by state and in some cases it may vary by industry. The federal law does not provide regulations on the frequency of payment but some states do regulate weekly or twice a month payments. Special rules may also apply to government employees. Some states do not require employers to provide their workers with pay stubs such as Alabama, whereas states such as Connecticut requires that all employers provide their workers with pay stubs on each payment day. For pay days which fall on public holidays, some states have regulations and mandate that payments be made the business day before the holiday. For states with no regulations, companies may choose to set their own guidelines, choosing to pay their workers either the day before or after the holiday period. In terms of method of payment, some states do stipulate that employers cannot mandate their workers to receive payment by direct deposit unless a worker specifically chooses to use direct deposit. In states which do not have these regulations, federal law does permit employers to pay via direct deposit with written authorization from their worker.
In instances where a non-exempt employee forgets to submit, complete or have their timesheet signed by their managers, employers must continue to pay the worker under Fair Labor Standards Act and request that the employee submit their timesheet as soon as possible.
For employees who leave the company before their regular paycheck date, federal law requires that payment is continued to be paid at the next scheduled date, however this regulation is state specific. Some states have implemented rules requesting shorter timeframes, such as payment being made within 72 hours after resignation, as is the case in California.
Unused Vacation time
Unless a company has implemented a specific policy to address what happens to payment of unused vacation time at the time of resignation or termination, companies are typically required to pay back any unused vacation time. This may vary based on whether an employee was terminated or resigned.
Areas which commonly cause difficulties for HR manager are errors in filling out W-2 forms and 1099-MISC forms, missing deadlines for tax deposit and filing, miscalculating state unemployment tax, poor data gathering and record keeping. Fortunately, many software solutions such as SaaS Based Applications allow for the automation of many of these processes. These tools provide modules which notify HR managers of important tax deadlines, as well as modules that accurately track number of hours worked, accrued vacation time, overtime calculations and pay-check administration.
The use of an HRIS can greatly reduce the common mistakes made in payroll management and prevent costly penalties associated with non-compliance of state and federal regulations.