Industry Insights SMB Matters HR Essentials
As a business owner you may be wearing multiple hats, navigating various federal, state and local laws while managing various other aspects of your business including running payroll successfully.
Payroll mistakes can be costly and can result in damaging employee morale and your company’s reputation. Here are top ten common payroll mistakes that you should avoid:
Covered employers must record actual hours worked each day and total hours worked each workweek for nonexempt employees. Companies that utilize the services of a PEO or HRO must submit those hours to their payroll provider in order for the provider to calculate the regular rate of pay (RROP), process accurate wages for all hours worked and provide compliant wage statements.
The RROP is an hourly pay rate generally determined by dividing the total earnings for the workweek by the total number of hours worked. RROP is used for the computation of overtime earnings, emergency leave payments under the Families First Coronavirus Response Act (FFCRA) and state and local emergency leave acts as well as state and local specific payments for sick and safe leave and missed meal or rest periods, among other rate calculations. When the employer fails to capture and preserve hours worked, they may inadvertently enhance the employee’s ability to file a claim when disputes arise. Note that such information should be kept for a minimum of two years, with some jurisdictions requiring longer document retention periods.
Most states have rules related to the length of pay periods. Employers must compare their employee’s FLSA status against the state’s wage and hour requirements to determine the applicable pay period length, i.e., weekly, biweekly, etc.
Most states have rules for when to pay wages earned within a particular pay period to employees, such as twice per month, but no more than sixteen days apart, the 15th and last days of the calendar month or by the 26th day of the current calendar month. Employers must compare their employees FLSA status, payment method, i.e., hourly or salaried, and, depending on the work state, the occupation of their employee, against the state’s pay day requirements to determine the applicable pay day(s) for the given pay period.
Covered employers generally are required to pay one and one-half times the regular rate of pay for all hours worked by nonexempt employees in excess of 40 hours in a given workweek. Some states require overtime payments for hours worked in excess of a certain number of hours worked in a given workday, which is a stricter way of calculating overtime hours for the given pay period. Employers should review overtime payment rules based on the state in which they hire nonexempt workers to ensure compliance with applicable overtime pay requirements.
Certain states require the employer to provide nonexempt employees with uninterrupted, full meal and rest periods per workday or shift (typically represented by four consecutive hours of work). When the employer fails to do so, a penalty payment must be made to the employee. The penalties can add hefty costs to the employer, as they are based on the employee’s contractual rate of pay. Allowing uninterrupted time for the employee to recharge and refuel is a way for you to help promote the health, safety and happiness of your workforce.
Covered employers are required to pay the applicable minimum wage or salary to employees. Employers must pay the higher of federal, state and local minimum wage rates or salary thresholds to employees. There are numerous state and local jurisdictions in which the minimum wage rate, paid to nonexempt employees, and the salary basis test, applicable to white-collar exempt employees, exceed federal rates. It is important for employers to take into consideration the employee’s FLSA status, work jurisdiction, type of employee, as well as in certain locations the company head count, among other information, when they evaluate the applicable wage rate that must be minimally paid.
When companies fail to properly classify workers as employees, they run the risk of not paying all wages due to the employee, such as premium payments for overtime, double-time and specific types of income that are dependent on the calculation of the RROP, as well as face potential penalties for failure to provide wage statements and meal and rest breaks. Employers are also exposed to record-keeping deficiencies as they are required to record actual hours worked for nonexempt employees. Paid employee leave must also be provided, i.e., paid time off, holiday, sick day etc., potentially with retroactive hours or pay. Lastly, wage statements are of concern because every employee must receive an accurate wage statement for each pay period.
Employers should take caution to classify payments to employees accurately as discretionary and exclusive of the RROP vs. nondiscretionary and inclusive of the RROP, as those payments may affect the calculation of overtime wages. As stated in item #1 above, not only are overtime payment calculations affected by the RROP, but so are emergency leave payments under the FFCRA, state and local emergency leave payments as well as state specific payments for missed meals and sick time, among other rate calculations. Discretionary payments are paid solely at the discretion of the employer and need not be included in the RROP. Nondiscretionary payments must be included in the calculation of the RROP for the workweek(s) in which the amount was earned. The calculation is made by adding the payment to the employee’s other nondiscretionary earnings for the workweek and dividing by the number of hours actually worked.
The timing and amount of final wages owed depends on state law and often hinges on the type of termination, i.e. voluntary and involuntary, as well as how much notice the employee provided to the employer prior to an employee’s voluntary termination. Employers who fail to pay all wages due, included any accrued, but unused paid time off owed, upon termination may be subject to penalties and damages. Those penalties and damages may be in the form of a civil fine, damages from a claim filed by the employee, a waiting time penalty payment to the employee, imprisonment or a combination of the aforementioned.
Employers are required to keep accurate records of the number of hours worked by nonexempt employees and the applicable pay rates. This is important as each rate will be used in the calculation of the RROP. Some refer to this as the weighted average rate of pay or the blended rate of pay. Whatever term is used, it is impossible to calculate the RROP without proper record and submission of the contractual rate applied to each hour worked.
For more information on avoiding costly payroll mistakes, contact our team of payroll experts.
This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.
This post may contain hyperlinks to websites operated by parties other than TriNet. Such hyperlinks are provided for reference only. TriNet does not control such web sites and is not responsible for their content. Inclusion of such hyperlinks on TriNet.com does not necessarily imply any endorsement of the material on such websites or association with their operators.