An organization's payroll solution can be crucial to its success. Employees expect to be paid on time, and problems with wages and hours can be escalated to the Department of Labor (DOL) Wage and Hour Division (WHD) or the local wage and hour department with a quick phone call. That, in turn, can open up an investigation that's costly in terms of time, legal and accounting fees and reputation.

In short, payroll is the one thing you have to get perfect every time, and not having a solution in place to deal with payroll errors can directly affect employees, which can in turn affect your business.

The Little Problems Creating Payroll Errors

Most of the time, a problem in payroll is an honest error — the employee receives a raise or there's a change in local tax rates, and it wasn't reflected right away. Or, the employee or supervisor made a mistake in time sheet reporting. Although these errors may be small, they require time and energy to correct. In these situations, the employer should explain the error to the employee and make adjustments as soon as reasonably practicable and in accordance with any wage and hour or payroll requirements. Of course, a quick fix can only happen if someone is authorized to take care of it as quickly as possible.

Can these errors be prevented? Especially if the payroll solution contributing to these errors is not friendly to users, a redesign could be enough to reduce data entry errors. However, even the best system may result in the occasional error, which is why organizations should have systems in place to address errors as soon as possible.

An employee will be annoyed to find that a payroll error contributed to an overpayment, but the annoyance will be compounded if the notification and adjustment is delayed. Even worse, an underpayment that's not corrected in a timely fashion could result in an employee call to the WHD. According to the ADP report, Payroll Processing: Proper Calculation of Employee Pay Helps Minimize Wage and Hour Compliance and Litigation Risks, handling employee pay properly is key to helping prevent compliance problems and subsequent litigation risks.

The Bigger Issues: Worker Classification

Payroll is regulated by the WHD, and it puts workers into specific categories:

  • Employees vs. contractors
  • Exempt vs. nonexempt (as defined by the FLSA)

Common payroll errors include misclassifying employees as independent contractors and not paying overtime to workers who are inaccurately classified as exempt. These problems are less related to issues with payroll solution and more due to errors in management judgment. The chances of these can be reduced with training and internal plans that reflect realistic costs of labor, as well as understanding federal, state and local wage and hour rules. Small business owners can set the tone and remind the organization of the costs of misclassifying workers.

No One Works for Free

Ultimately, everyone works for pay. Employees may certainly appreciate the contributions they make, the value they add to customers and colleagues and the camaraderie of the workplace, but they expect to be paid in full and on time. Hence, payroll solutions are closer to the heart of the organization than it may seem at times. A key part of that is having a system in place to address both the small errors of paperwork and the larger errors of classification as efficiently as possible.

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Tags: Wage and Hour Rules Payroll Wage and Hour