Seven Common Mistakes Companies Make in Payroll

As a payroll company that deals with hundreds of employers and thousands of employees, Checkright  has seen some common “mistakes” our clients have made over the years. These mistakes lead to audit penalties, unhappy employees, and expose employers to a lot of risk. Check out these seven common problems to see how your best practices measure up.

  1. Salaried employees don’t have to be paid overtime. This mistaken policy is one of the most common errors we see. The employee’s status as exempt or non-exempt from overtime determines whether or not the employee has to be paid overtime wage, NOT whether they are paid a salary or by the hour. Some examples of employee categories exempt from overtime include: outside salespeople; computer technicians; executives; administrators; professional employees; and employees that make over $100,000. All of these exemptions have their own rules and tests, so be sure to consult the Department of Labor webpage or an employment lawyer before making the determination that an employee should not receive OT.
  2. Counting hours in base 10 instead of 60 minute increments. We have seen employers that report 8 hours and 56 minutes worked as 8.56 hours. In fact .56 hours equals about 34 minutes worked, not 56. This error sounds obvious, but we have seen it many times, including one of our employers who had to be pay a lot of back wage in an audit when this was unearthed.
  3. An employee who is terminated or quits is due their final pay immediately. In fact, Virginia statute only requires that the employer pay this individual when they would have normally received their check. This misperception usually is initiated by the terminated employee who demands immediate pay.
  4. Overtime is a weekly calculation, not per pay period. The most common pay periods are every two weeks, or twice a month. Many employers calculate and pay overtime for hours over 80 hours worked, instead of viewing each week separately. For example, if an employee works 50 hours one week and 28 hours the next, often employers will turn in 78 hours worked, with no overtime, for the two week period. The correct reporting would be 68 hours regular and 10 overtime hours. Overtime occurs when a non-exempt employee works more than 40 hours in any week.
  5. Employers and workers thinking they can decide if that worker should receive a 1099. We often hear that an employer talked to a worker and they decided together that worker would receive 1099 pay rather than W2 pay. In actuality, regulations determine whether the worker is a contractor–it has nothing to do with the desire of the two parties. If a worker fits these criteria: the worker controls his own coming and goings; the worker controls how he does the particular job or task; if the worker is available for others to hire for the same job; and if the worker uses his own tools to perform the job; then that worker may qualify as an independent contractor.
  6. Employers not having their health insurance plan administered. Employers that have a company insurance plan must have that plan administered to allow the employees to take their payroll deductions tax free. Administering the plan includes creating the annual plan document and complying with notice requirements to employees, among other things. If it is uncovered at audit that the plan is not administered properly, the IRS can disallow the pretax deductions for all the employees. In this case, which we have seen with one of our clients, all the employees had to re-file their taxes to include extra income.
  7. Companies not maintaining employee paperwork and files for employment documents. Employees must fill out I-9’s, Direct Deposit Authorizations (if applicable), W-4’s, and corresponding State withholding forms. All of these forms must be retained past the term of the employee’s employment. The length after separation varies somewhat depending on the form, but a good, working rule is to retain these forms for four years after the employee last worked for the company.

Unfortunate need for disclaimer in litigious society: These guidelines are general in nature and should not be used as specific rules or guidelines, as circumstances vary from company to company. You should always consult with an employment lawyer, HR professional, CPA, or Certified Payroll Professional when making decisions and policies for your company and its employees.