Pay Statement Compliance and Payroll Management: Navigating a Changing Landscape
Over time, paying employees has become more complex. It's no longer enough to withhold taxes and benefits from an employee's gross pay. Today, it's critical that employers "show their work" and carefully display every dollar their workers are being paid and what is being withheld. Failure to do so could be costly to employers, who could find themselves on the wrong end of an enforcement action or lawsuit.
Keep reading to learn why businesses must remain compliant regarding their employees' pay statements and about the resources available to help them do so.
Pay statement compliance: the risks are real
Employers face a number of potential compliance risks as they navigate pay statement disclosure requirements on a state-by-state basis. These risks include government audits, litigation, penalties, and potential reputational harm. If employees see what they perceive to be disparities between their expected compensation and what's reported on their pay statements, employers could find themselves in a conflict with their employees.
For example, as of June 2024, a company that distributes non-compliant pay statements to its California employees could pay $50 per employee for the first violation and $100 for each subsequent violation, subject to an aggregate penalty of up to $4,000 per employee. If the claim is brought under California's Private Attorneys General Act (or PAGA), there could be additional significant penalties calculated on a per-employee basis. For larger companies, that is a hefty price to pay for an avoidable error.
What pay statements must include
Pay statements are important for record keeping and for clearly communicating with your employees about their compensation. They can also help employers address questions from their employees and regulators about wages and taxes. In addition, a complete and accurate pay statement is crucial for compliance.
Most states require some or all of the following elements on employee pay statements:
- Contact information and relevant dates: Display of employer's legal name, address and phone number, pay period beginning and ending dates, and employee details, such as name and an employee identification number.
- Pay rates and hours: This is critical information for nonexempt employees who are eligible for overtime. Statements should detail regular, overtime, double-time rates, and corresponding hours worked. Pay statements should also include all other types of compensation, such as shift differentials, bonuses, commissions, piece rate earnings and any other wages being paid to the employee.
- Gross earnings: Total earnings before any taxes or other deductions.
- Employee taxes: Deductions for federal income tax, FICA taxes (Medicare and Social Security), and state/local taxes as applicable.
- Benefit deductions: Employee contributions to employer-sponsored benefit programs, such as health insurance and retirement plans.
- Garnishments: Pay statements should reflect any amounts withheld for court-ordered reasons like child support, defaulted loans, or tax levies.
- Paid time off (PTO): Many state and local jurisdictions that mandate time off, such as paid sick leave or paid leave for any purpose, require employers to include on pay statements any time accrued, time available, time taken and amounts paid.
- Net pay: The amount paid to an employee after all deductions.
- Any additional state or jurisdiction-specific required information based on where the employee is performing services (e.g., where the employee is working and being paid).
Takeaways for employers
For employers evaluating their compliance risks and pay statement compliance, here are a few key things to consider:
- Pay statements must have all information required by state or local jurisdictions.
- Lack of compliance can open a business to lawsuits and regulatory enforcement.
- It's crucial to work with your payroll provider to confirm you are submitting all required information and that it appears on your employees' pay statements.
- Penalties and fines can have a significant impact on your organization.
Partnering with an experienced payroll service provider can help you navigate pay statement requirements to meet your compliance obligations.
Let ADP help your business with pay statement requirements
Generating compliant employee pay statements consistently can be challenging, but it's not impossible. Especially when you work with ADP SmartCompliance for Payment Solutions. Whether you pay your team through direct deposit, paper checks or pay cards, ADP will provide you with the tools to help generate an accurate pay statement.
Discover the benefits of wage statement compliance with ADP Payment Solutions:
- Pay statement requirements in all 50 states
- Digital or paper statements taking into account employee consent requirements
Learn more by launching this on-demand webcast anytime, Mastering pay statement compliance across the US: A comprehensive guide for the 49 states (that aren't California)
Note: This article provides practical insights and is not an exhaustive resource. It offers information on the subject matter with the understanding that ADP does not provide legal or tax advice.
