Even the most careful employers can make payroll errors that could cost them big bucks, as outlined in a recent presentation at the 2022 American Payroll Association Congress.
Between the Fair Labor Standards Act (FLSA) and state-specific wage and hour laws, it gets tricky to stay in compliance with all the regs out there. In fact, 70% of companies aren’t in compliance with the FLSA in some way, according to the Dept. of Labor (DOL). And there’s likely many issues with state laws, too.
Payroll errors lead to lawsuits
The possibility that employers could end up embroiled in an expensive lawsuit due to payroll errors is high. From 2009 to 2019, wage and hour related class-action lawsuits vastly outnumbered any other type of workplace legal cases.
And “we didn’t know it was happening” isn’t always a valid defense. The DOL could charge an employer with a “willful” violation of the FLSA if the agency felt it should have known about the violation, yet did nothing to correct it.
During the presentation, Daniel Messeloff, Esq, a partner at Tucker Ellis, LLP, highlighted the top five reasons why employers end up entangled in wage and hour lawsuits.
Here are the most common reasons for Payroll-related lawsuits – and how you can prevent issues with your Payroll team.
1. Not paying nonexempt employees for all time worked
While it may seem like a no-brainer that you need to pay employees for the hours they work, the waters have gotten murkier on what’s considered time worked in recent years – especially with the rise of teleworking and technology that allows employees access to emails and company systems at all hours.
Bottom line: If someone’s performing work tasks, they need to be paid for that time. Nonexempt employees may be working during nights and weekends outside of their scheduled hours, which can easily lead to overtime violations if that time isn’t tracked correctly.
To avoid issues with paying for all hours worked, make sure supervisors are trained to spot signs of any off-the-clock work (e.g., emails received at off-hours) and talk with the employee to see whether they’re working any extra hours that aren’t being accounted for in their pay.
2. Miscalculating overtime
Your Payroll team knows the basics of calculating the regular rate of pay for overtime purposes. However, it can sometimes be tricky to determine what types of compensation should be included in the regular rate. And that can be a significant cause of payroll errors.
Here’s a good guideline to follow from Messelhoff: Any payment an employee receives that’s based on or measured by the person’s hours worked, production or efficiency should be included in the regular rate of pay. This includes commissions, shift differentials, certain bonuses and other incentive payments.
Payroll should ask themselves: Would an employee’s knowledge of this payment persuade the person to work additional hours? If so, then it should be included in their calculations.
3. Deducting for meal breaks
The FLSA doesn’t specifically require meal breaks for employees. But multiple state employment laws do mandate meal breaks, and nine states require both rest breaks and lunch breaks.
Employees haven’t always gotten the memo. Only about one in five workers leave their desks for lunch. Many employers automatically deduct time from pay for meal breaks – which becomes an FLSA violation if they’re spending that time working.
With that in mind, it’s important to make sure your people are taking their breaks as legally required. If a nonexempt employee spends their lunch break working at their desk, they’ll need to be paid for that time. Supervisors need to hammer home the importance of taking meal breaks and not working through lunch.
It’s also key for Payroll to avoid automatically making meal break deductions whenever possible. It may take more time now, but it could avoid big violations due to payroll errors later.
4. Misclassifying employees as exempt
Close to 8.6 million American employees are misclassified as exempt, which means worker classification is an issue for many companies.
The current salary threshold for exempt employees is $684 per week (or $35,568 a year). Various exemptions exist under the FLSA. Common ones used by employers include the executive exemption for supervisors and the administrative exemption for employees performing office work.
Often, employers assume that positions with “manager” in the title are automatically exempt. That’s not always the case. Duties matter, and each exemption comes with specific tasks the employee must regularly complete to be eligible.
Job descriptions tend to shift and change over time, so workers may end up doing tasks as managers that can actually make them eligible for overtime pay. Regularly asking “what does this employee actually do?” and evaluating their current duties will help you avoid inadvertent FLSA violations. Keeping job descriptions updated and accurate is also important.
5. Failing to keep accurate time records
Recordkeeping is tedious and can trip up even the most seasoned Payroll pros. Time records for nonexempt employees need to contain specific elements, per the FLSA, including:
- When the employee’s workweek begins
- Daily hours worked for each employee
- Total hours each employee worked during the workweek
- The basis on which employees are paid (e.g., hourly, weekly)
- Total earnings (which includes all additions or deductions), and
- The date of each paycheck and the dates covered by the pay period.
Manual processes, including paper recordkeeping and data entry, make tracking all this necessary data even more difficult, so automation is key. Software solutions can help you avoid payroll errors. These programs can automatically double-check that all info is saved, accurate and easily accessible to employees – as is required by many state wage laws.
