Payroll compliance can be extraordinarily complex and quite costly if not done right. Unless payroll processes are in place to consistently apply pay policies, accurately calculate Fair Labor Standards Act (FLSA) overtime, and streamline administration of FMLA and other leave policies, you can leave your business vulnerable to litigation. Ensure you are protecting your business by staying up-to-date on compliance changes.
Important 2023 Payroll Compliance Updates
2022 will usher in some changes that will have an effect on payroll policies and procedures:
- The Social security taxable base wage is increased to $147,000
- Standard deductions for IRS federal income taxes in 2023 have increased to $27,700 for married couples filing jointly; $13,850 for single filings or married filing separately; $20,800 for a head of household
- Limits for qualified fringe benefits for tax year 2023 are $300 for parking; $300 for commuter highway vehicle and transit pass (combined); $15,950 for adoption assistance.
- Qualified retirement contribution limits have also been updated. Elective deferral limits for 401(k), 403(b) and 457 plans increase to $22,500; annual IRA contribution limit has increased to $6,500; the annual compensation limit increases to $330,000 for 401(k), 403(b), SEP and profit-sharing plans; the limit for defined benefit plans increases to $265,000; contribution limits for SIMPLE plans increase to $15,500 with a catch-up limit of $3,500.
- The latest HSA contribution limits are $3,850 (self-only), $7,750 (family) and the catch-up contribution limit (age 55 or older) stays at $1,000.
- FSA limits increase to $3,050. The carryover limit for cafeteria plans increases to $610. Dependent Care FSA will stay the same at $2,500 for those married filing separately and $5,000 for those who are single or married filing jointly.
Changes to State Laws in 2023
Many states have also made important updates that will affect payroll:
- Oregon’s Paid Family and Medical Leave Program contributions begin January 1, 2023.
- Colorado’s Paid Family and Medical Leave Insurance Program contributions begin January 1, 2023.
- Contributions to the New York Paid Family Leave program have been reduced to 0.455% of an employee’s gross wages up to a maximum annual contribution of $399.43.
- The Washington Cares Fund program went into effect January 1, 2022. It imposes a mandatory, employee-paid payroll tax up to 58¢ per $100 of earnings. Contributions start July 1, 2023, and benefits will be available beginning July 1, 2026.
- Washington’s Paid Family and Medical Leave premium rate will be raised to 0.8% on wages up to the Social Security cap of $160,200
- In Massachusetts, contributions to the state’s Paid Family and Medical Leave program will be reduced to 0.63% of eligible wages—0.56% for medical leave and 0.12% for family leave. The maximum benefit for 2023 increases to $1,129.82.
- In New Jersey, the equivalent program requires a contribution of 0.06% of wages up to a limit of $94.08.
- Oregon Paid Family Leave Program begins January 1, 2023, and employees can start applying for benefits starting September 3, 2023. Employees will pay no more than 0.6% of their gross wages.
15 states have increases to their minimum wage effective January 1, 2023, and 3 have increases schedule for June, July, and September. For a detailed look at the latest minimum wage regulations where you are, check out Paycor’s guide to Minimum Wage by State.
Here’s the good news. Paycor clients don’t need to take any action for new rates and caps to be calculated. Federal, state and local withholding changes are programmed into Paycor’s system effective 1/1/2023, and updates are made throughout the year.
The Cost of Non-Compliance
The federal government continues to enforce workplace rights through lawsuits. In fiscal year 2021, the Equal Employment Opportunity Commission (EEOC) made an astonishing 61,331 charges of workplace discrimination and secured a total of $350.7 million in compensation.
Wage and hour settlements continue to be the primary compliance exposure for businesses, so HR professionals and executives should focus their efforts on prevention.
Spending money now to help ensure compliance is better than spending even more money down the road in the event of a lawsuit. These are some typical wage and hour mistakes HR professionals should try to avoid making.
Exemption Classification Errors
Classification issues can be a big problem for employers in dealing with the complexities of the FLSA. Often, employers improperly classify workers as exempt and fail to pay the overtime wages they’re due, which can result in penalties and legal trouble.
In 2021, for example, FIS Holdings Inc. settled with the U.S. Department of Labor for $3.85 million stemming from the DOL’s investigation of unpaid overtime compensation for 1,000 pipeline workers in 40 states.
The most common roles that are excluded from receiving overtime pay are “white-collar exemptions” for executive, administrative and professional employees. To qualify, the employee must be paid a salary (not hourly), earn minimum annual pay of $35,568, and regularly perform certain duties. For example, an executive is required to supervise two or more employees. For all hours worked past 40 in a work week, non-exempt employees must be paid 1.5 times their regular pay rate.
Misclassifying Freelancers and Employees
Another major compliance challenge confronting employers is the misclassification of workers as independent contractors or interns. In our gig economy, employers are beginning to rely more frequently on contractors and freelancers to reduce payroll costs and tax liabilities. When it comes to when, where and how much they work, gig workers have more freedom and autonomy than employees. But gig workers aren’t entitled to employment benefits such as health insurance or overtime pay.
If you misclassify some employees as independent contractors, and they don’t receive those benefits, your company could be in hot water when it comes to compliance.
On October 13, 2022, the DOL published a Notice of Proposed Rulemaking (NPRM) that recommends the Department revise its guidance on determining the distinction between employees and independent contractors. The notice proposes to repeal the Independent Contractor Status Under the Fair Labor Standards Act (2021 IC Rule) rule published on January 7, 2021, and replace it with an analysis to determine status that is more consistent with the FLSA as interpreted by judicial precedent. The DOL believes the proposed rule would “reduce the risk of employees being misclassified as an independent contractor, while providing added certainty for businesses that engage (or wish to engage) with individuals who are in business for themselves.” More information about the rule can be found here.
With so much confusion about who’s classified as what, it’s easy to see how slip-ups can happen. It’s important to periodically audit your employee database to make sure everyone is appropriately classified.
Disregarding Pay Equality
The Equal Pay Act (EPA) dictates that men and women in the same workplace receive equal pay for equal work. The jobs don’t have to be 100% alike, but they do have to be substantially similar. Job content, not title, is the determining factor to test for job equality. The EPA covers all forms of compensation, not just salary: overtime, bonuses, benefits packages, stock options, vacation pay, and reimbursement for travel expenses. If a wage inequality between men and women is discovered, you cannot reduce the wages of either party to equalize pay.
Workers’ Compensation Insurance
Every state, as well as the federal government, has a Workers’ Compensation program to provide compensation to employees who are injured on the job. As each state has different rules to abide by, it’s important to keep up-to-date on any changes, especially if you have offices in multiple locations. The most common examples of employer violations include failure to:
- File or accurately complete forms
- Pay benefits to injured or ill employees in a timely fashion
- Pay the correct amount of benefits
Since Workers’ Compensation is state-specific, any fines levied will vary.
The Role of HR
Companies can mitigate the chances of lawsuits filed due to being out of compliance with the above laws by:
- Having an accurate, automated time tracking system
- Maintaining accurate employee pay records
- Training managers on the differences between non-exempt and exempt employees
- Conducting periodic audits to help ensure employees have been correctly classified
- Assessing the type of work freelancers are doing to determine proper classification
Most lawsuits come about because companies have records that are incomplete or difficult to understand. If you don’t practice good record keeping, class-action wage and hour lawsuits can easily be lost, damaging your company’s bottom line and reputation. Having solid payroll practices in place along with an online payroll software will go a long way toward helping ensure compliance.
It definitely can be, and you certainly don’t want to put your business at risk of litigation or fines due to compliance errors. Paycor can help. With accurate timekeeping, payroll and tax updates, proactive compliance warnings to ensure proper tax setup, consistent recordkeeping and detailed reports, our HCM technology helps you confidently manage compliance. We’ve got more than 29,000 customers and more than 30 years’ experience helping business leaders like you. Contact us today to see how we can help.
Paycor is not a legal, tax, benefit, accounting or investment advisor. All communication from Paycor should be confirmed by your company’s legal, tax, benefit, accounting or investment advisor before making any decisions