Payroll Pitfalls: Navigating the Most Frequent Mishaps
Managing payroll as a business involves navigating various complexities, including keeping track of changing state laws related to taxes and employment regulations and dealing with different payroll software systems. If these challenges are not effectively managed, they can accumulate over time and potentially jeopardize your business.
Payroll errors can lead to employee dissatisfaction, financial penalties, and damage to your business's reputation. It's important to recognize these common pitfalls and take proactive measures to tackle them. Doing so enhances your business efficiency and ensures smoother payroll operations as your business grows.
Navigating the Minefield: Identifying and Preventing Common Payroll Errors
In July 2022, it was reported that workers at the supermarket chain Asda were facing financial hardships due to recurring payroll errors. These mistakes left some employees underpaid by £500, with 11,000 errors affecting 5,500 workers.1
This incident highlights the significant impact of payroll mistakes on businesses and their employees. Underpayment or delayed wages can cause financial strain and dissatisfaction among workers. For businesses, rectifying these errors may result in additional expenses, including potential fines from regulatory bodies.
Understanding effective payroll management practices is crucial. We've compiled a list of common payroll errors and practical advice on addressing them effectively.
Errors in Data Entry
Mistakes made manually when inputting important employee details, such as hours worked, incorrect social security numbers, or tax deductions, can have considerable implications. For instance, inaccuracies in logging work hours might lead to employees being paid too little or too much, directly affecting their financial well-being.
Similarly, inaccuracies in tax deductions can result in compliance issues with tax authorities. Here are steps to prevent this error:
- Emphasize automation: Transitioning from manual data entry to automated systems is a key strategy to reduce mistakes. Payroll software can automate various data input tasks, reducing reliance on manual processes.
- Regularly review your system: Conducting routine audits of payroll data is important for promptly detecting and correcting errors. Audits are a proactive step to catch discrepancies before they become significant issues.
- Training: Offer thorough training to the payroll team regarding accurate data entry procedures. Establish clear guidelines and protocols for inputting employee information, highlighting the importance of accuracy and meticulousness.
Misclassifying Employees
Employee misclassification occurs when businesses incorrectly label their workers as “independent contractors” instead of employees or vice versa. A recent NELP study estimates 10 to 30 percent of employers misclassify their employees.2 This implies that several million workers nationwide could be subject to misclassification.
Misclassification or labeling contracted employees as "independent contractors" denies workers fundamental rights and protections, including:
- Minimum wage
- Overtime rates
- Social Security contributions
- Collective bargaining rights
- Workers' compensation
- Unemployment benefits
- Protection against wage discrimination
A notable example is Uber's misclassification of drivers as independent contractors rather than employees. In 2020, Uber faced allegations of denying drivers employment rights and compliance with minimum wage standards due to this misclassification, sparking a legal dispute.
To prevent misclassification, businesses must clearly understand the criteria distinguishing employees from independent contractors, such as the level of control the employer has over the worker's tasks, the worker's independence, and the nature of the working relationship.
Regularly reviewing these criteria and reassessing worker status, especially when job duties or work arrangements change, is crucial to maintaining compliance and avoiding legal issues and tax complications.
Read More: Ethical Considerations in Staffing: Promoting Fairness and Equal Opportunities
Delayed or Inaccurate Tax Submissions
Failure to meet tax filing deadlines or submit inaccurate information to tax authorities can lead to penalties. Tax authorities impose stringent deadlines for submitting payroll-related documents, such as W-2 forms and quarterly or annual tax filings.
Missing these deadlines typically incurs financial penalties, with the severity increasing based on the duration of the delay. This could result in significant monetary consequences for the business.
Here are actions to avoid this error:
- Maintain a detailed tax calendar. A thorough tax calendar allows for recording all relevant tax deadlines and periodically reviewing them to ensure compliance.
- Seek expert guidance to ensure that filings are completed accurately and on time. Professional assistance can also provide invaluable insights into complex tax regulations and offer advice on optimizing tax strategies and maximizing deductions to help minimize tax liabilities for the business.
Incomplete or Missing Documentation
Incomplete or missing records pose significant challenges for employers. The Fair Labor Standards Act (FLSA) requires employers to maintain records for at least three years, including timecards, work schedules, and wage adjustments. These records must also be available for inspection by representatives from the Department of Labor.
Inadequate record-keeping makes it hard to resolve discrepancies or undergo audits. For example, in 2021, Amazon faced accusations of withholding tips from delivery drivers, leading to a $62 million settlement likely due to issues documenting and accurately distributing employee compensation.
To address this:
- Maintain organized records: This requires documenting all elements of payroll processing, including individual employee details, hours worked, tax withholdings, and benefit contributions. Implementing standardized record-keeping procedures creates consistency and clarity in documentation.
- Digital storage: Moving from traditional manual record-keeping to digital storage solutions brings significant change. Digital platforms improve the accessibility and security of records and streamline retrieval during audits or internal reviews. Cloud-based storage solutions provide accessibility from any location, ensuring records are easily accessible when required.
Miscalculating Pay
Payroll mistakes can affect salaried and hourly employees, leading to issues such as overcompensation, underpayment, missed initial paychecks for new hires, incorrect benefit deductions, and improper payments during leaves.
Factors contributing to miscalculations include inaccurate work hours recording, misinterpretation of overtime rules, and irregular schedules. For instance, in 2017, Tesla faced allegations of failing to compensate employees for overtime work, resulting in a $5 million settlement due to violations of California labor regulations.
To prevent miscalculations, consider implementing the following measures:
- Provide training to employees on accurately logging their work hours, including overtime.
- Establish clear policies and guidelines regarding overtime work and compensation.
- Implement time-tracking systems or software to record employee hours accurately.
- Encourage open communication between supervisors and employees about payroll deductions, benefits, time off work, and hours logged.
However, underpaying employees might be more prevalent than anticipated: in 2019, the Department of Labor (DOL) recovered $322 million in owed wages to workers.3 Therefore, it's crucial to thoroughly check for underpayments and rectify mistakes promptly to maintain positive relationships and prevent potential claims and harm to your reputation.
Failure to Adhere to Labor Regulations
Violating labor laws on minimum wage, overtime, or employee rights can result in severe legal consequences for your organization, including penalties, fines, lawsuits, and damage to their reputation. Staying informed about labor laws and regulations is essential.
Understanding minimum wage requirements, accurately calculating overtime pay, and ensuring employees' rights regarding breaks and work hours are crucial. Take Chipotle. In 2022, they were found to have breached California labor regulations by failing to offer employees sufficient meals and rest breaks, leading to a $15 million settlement.
Businesses should invest in ongoing payroll personnel training to ensure compliance with labor laws. This training should cover updates to labor laws, proper wage and overtime calculation methods, and best practices for record-keeping. Continuous education can reduce errors and enhance overall compliance.
Additionally, seeking legal guidance is essential for businesses to navigate the complexities of labor laws effectively. Employment law attorneys can advise and assist in interpreting labor regulations, addressing compliance issues, and reducing legal risks. They can also offer guidance on handling potential disputes or claims related to labor law violations.
READY TO STREAMLINE YOUR PAYROLL PROCESS AND AVOID THESE PITFALLS?
Gain the flexibility to onboard the skilled talent you require for your projects without the burden of administrative duties. Allied OneSource offers hassle-free payrolling services designed to alleviate your organization from independent contractor liabilities and additional administrative burdens.
With our help, you can avoid these pitfalls and enjoy peace of mind knowing that your payroll is in capable hands. Reach out to us today to discover how we can help streamline your payroll process and support your business growth.
References
1 Wood, Zoe . “Asda Employees “Skipping Meals” due to Monthly Payroll Errors.” The Guardian, 15 July 2022, www.theguardian.com/business/2022/jul/15/asda-employees-skipping-meals-monthly-payroll-errors.
2 “Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries.” National Employment Law Project, www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-workers-federal-state-treasuries-update-october-2020/.
3 “U.S. Department of Labor Delivers Record $322 Million in Recovered Wages for Workers in Fiscal Year 2019.” DOL, www.dol.gov/newsroom/releases/whd/whd20191028.
