3 Common Payroll Errors and How to Avoid Them
As every employer knows, employee payroll is regulated by a complex set of state and federal laws and regulations. Rules can vary widely from state to state and penalties for non-compliance can be harsh.
As a payroll supervisor at Back Office Remedies, I’ve seen a lot of payroll errors made by our client companies. Today, I will explain the most common mistakes and provide tips on how to avoid them. Please note, for purposes of illustration, we will use California for reference.
3 Common Payroll Pitfalls
1. Not paying Overtime
A lot of employers misclassify “non-exempt” employees as “exempt” employees, which results in non-compliance with wage laws and imposes a penalty on employers.
2. Failure to Correctly Pay Final Checks Upon Termination
Requirements for issuing final checks vary depending on whether the termination is voluntary or involuntary. Employers who fail to correctly pay final checks might be assessed continuing wages as a penalty from the date the wages were due up to a maximum of 30 days.
3. Errors in Calculating and Paying Vacation Pay.
While there is no law that requires an employer to have a vacation policy, the law does require employers to provide and pay for vacation that is offered to employees.
1. Not paying overtime
Incorrect employee classification
A common problem is classifying workers as independent contractors to avoid paying taxes, when in fact a careful application of the rules would show that workers are more likely to be treated by the authorities as being employees. However, even if workers are classified as employees, employers often improperly treat them as “exempt” (employees who are not protected by FLSA, which means they do not have to be paid the required minimum wage or overtime pay) rather than “non-exempt” to avoid paying overtime pay.
Exempt vs Nonexempt Classification - Basic rules
We already discussed Independent contractors or Employee classifications issues in our previous blog titled, “Independent Contractor or Employee?”. So, we will skip this topic today but we do need to review a general idea of Exempt or nonexempt classification.
Exempt or nonexempt classification is determined by the actual job duties and salary levels, not the job title or job description. Employees are exempt if they meet both “duties” and “salary” tests.
FLSA provides an exemption from both minimum wage and overtime pay for employees performing following types of job duties.
- Learned and creative professional
- Outside sales
For the detailed job duties and criteria, please refer to your state's laws and rules.
- Regularly receive the same amount on payday, regardless of the hours worked
- Cannot be docked for hours not worked in a day
Case study: $360,000 for Live-in Caregivers in Wage Theft Cass
The California Labor Commission recently recovered $360,139 from a residential care facility owner for multiple wage violations relating to just two workers, concerning underpaid wages, overtime, meal periods and accrued interest. In this case, employees were required to work 24-hour shifts for a flat “daily-rate”. The Commission determined this arrangement failed to comply with numerous wages laws. Effectively the employees were not receiving the proper minimum wage; no overtime; no meal breaks and no uninterrupted sleep periods for their overnight work. Consequently, the Commission awarded the workers $180,106 in underpaid regular wages and overtime wages; $13,177 in other wages; $86,009 in damages and $34,832 in interest. To make matters worse, the employer refused to voluntarily pay the award and the Commission was forced to levy the employer’s bank account. As a result, the employer was forced to pay an additional $46,015 in accrued post-judgment interest because of the delay in paying the award.
Under Labor Code Section 1194, the right for a California worker to receive the statutory minimum wage and overtime pay cannot be waived and any agreement between the employer and employee that effectively results in such an outcome is invalid. Thus, even if an employee were to agree to such an arrangement, it is not binding and the employee can file a wage claim against the employer.
2. Failure to Correctly Pay Final Checks Upon Termination
Employers also run into problems when it comes to final pay upon termination of employment and the rules vary depending on whether the termination is voluntary or involuntary. Under California law, the following applies to final pay.
For discharged employees:
- Employees who are discharged must be paid all wages due at the time of termination. (Labor Code § 201) “All wages” include any earned, but unused vacation pay. (Labor Code §227.3)
- There is no requirement under California law that an employer pay accrued sick leave upon termination.
- An employer must pay a discharged employee at the place of discharge. (Labor Code § 208)
No written agreement for a defined employment period and prior notice:
- An employee who does not have a written agreement for a definite period of employment and who quits without giving prior notice must be paid his or her wages within 72 hours.
- An employee who quits without 72 hours notice may request that his or her final wage payment be mailed to a designated address. The date of mailing will be considered the date of payment. (Labor Code § 202)
- If the employee gives at least 72 hours notice of his or her intention to quit, those wages must be paid at the time of quitting.
- An employee who quits must be paid at the office or agency of the employer in the county where the employee worked.
Penalty for willfully failing to pay wages
An employer who willfully fails to pay any wages due an employee who is discharged or quits within the time frames provided under Labor Code § 201 or Labor Code § 202, may be assessed continuing wages as a penalty from the date the wages were due up to a maximum of 30 days. (Labor Code § 203)
The penalty is calculated by multiplying the daily wage rate of the employee by 30 days. (Mamika v. Barca (1998) 68 Cal.App.4th 487) Penalties under Labor Code § 203 may be avoided if the employer can show that a good-faith dispute existed concerning whether any wages were due. A “good-faith” dispute means that the employer’s defense, based on law or fact, if successful, would preclude any recovery on part of the employee. (Title 8 California Code of Regulations § 13520)
Even if there is a dispute, the employer must pay, without requiring a release, whatever wages are due and not in dispute. If the employer fails to pay what is undisputed, the “good faith” defense will be defeated whatever the outcome of the disputed wages. (Labor Code § 206)
3.Errors in Calculating and Paying Vacation Pay.
Employers often compound final pay violations by failing to properly calculate and pay accrued vacation pay.
In California, vacation pay is regulated as follows:
There is no legal requirement in California that an employer provides its employees with either paid or unpaid vacation time. However, if an employer does have an established policy, practice, or agreement to provide paid vacation, then certain restrictions are placed on the employer as to how it fulfills its obligation to provide vacation pay.
Earned vacation time = Wages
Under California law, earned vacation time is considered wages, and vacation time is earned, or vests, as labor is performed. For example, if an employee is entitled to two weeks (10 work days) of vacation per year, after six months of work he or she will have earned five days of vacation.
- Vacation pay accrues (adds up) as it is earned, and cannot be forfeited, even upon termination of employment, regardless of the reason for the termination. (Suastez v. Plastic Dress Up (1982) 31 C3d 774)
- An employer can place a reasonable cap on vacation benefits that prevents an employee from earning vacation over a certain amount of hours. (Boothby v. Atlas Mechanical (1992) 6 Cal.App.4th 1595)
- Upon termination of employment, all earned and unused vacation must be paid to the employee at his or her final rate of pay unless otherwise stipulated by a collective bargaining agreement.
It is important to note that accrued vacation time must be paid at the employee’s final rate of pay. Furthermore, any attempt by the employer to reduce an employee’s final pay rate to avoid paying the proper amount of vacation pay will also be a violation. As you would expect, violations come with penalties.
California Labor Code Section 203 states in relevant part:
“If an employer willfully fails to pay, without abatement or reduction, in accordance with Sections 201, 201.3, 201.5, 201.9, 202, and 205.5, any wages of an employee who is discharged or who quits, the wages of the employee shall continue as a penalty from the due date thereof at the same rate until paid or until an action therefor is commenced; but the wages shall not continue for more than 30 days…”
So if an employer is found to be in violation of section 203, the company could owe not just the past due compensation but a penalty of up to an additional 30 days of wages.
Payroll laws and regulations are only getting more complex. The importance of staying up to date and in compliance cannot be exaggerated if you want to avoid the time and expense of payroll audits, penalties and interest. If you do not have the resources for a dedicated HR and payroll specialist at this stage of your business, make the decision to engage an experienced payroll service such as Back Office Remedies to help you implement a best practices approach for your business.
Updated on November 10, 2017 17:44