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Workforce Management

Payroll Compliance in 2022: What You Need to Know

One Minute Takeaway

  • The federal government continues to enforce workplace rights through lawsuits, which is why it pays to monitor compliance.
  • Many states have made updates that will affect payroll related to minimum wage rates, paid family leave and payroll taxes.
  • Most lawsuits arise because companies have incomplete records.

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 2022 Payroll Compliance Updates

2022 will usher in some changes that will have an impact on payroll policies and procedures:

  • The Social security taxable base wage is increased to $147,000
  • When filling a W-2, the maximum amount of dependent care assistance benefits excludable from income may be increased from $5,000 to $10,500 (or $2,500 to $5,250 for married filing separately)
  • Standard deductions for IRS federal income taxes in 2022 are $25,900 for married couples filing together; $12,950 for single filings or married filing separately; $19,400 for a head of household
  • Limits for qualified fringe benefits for tax year 2022 are $280 for parking; $280 for commuter highway vehicle and transit pass (combined); $14,890 for adoption assistance
  • Qualified retirement contribution limits have also been updated. Elective deferral limits for 401(k), 403(b) and 457 plans increase to $20,500; the annual compensation limit increases to $305,000 for 401k, 403(b), SEP and profit-sharing plans; the limit for defined benefit plans increases to $245,000; contribution limits for SIMPLE plans increase to $14,000 with a catch-up limit of $3,000
  • The latest HSA contribution limits are $3,650 (self-only), $7,300 (family) and the catch-up contribution limit (age 55 or older) is $1000
  • FSA limits increase to $2,850. The carryover limit for cafeteria plans increases to $570

Changes to State Laws in 2022

Many states have also made important updates that will affect payroll:

  • The Washington Cares Fund program is effective January 1, 2022. It imposes a mandatory payroll tax for all compensation at a rate of .0058 of an employee’s wages. Individuals who have private long-term care insurance can opt-out if they can verify their insurance is comparable
  • Washington’s Paid Family and Medical Leave premium rate will be raised to 0.6% on wages up to the Social Security cap of $147,000
  • In Massachusetts, contributions to the state’s Paid Family and Medical Leave program will be 0.68% of eligible wages—0.56% for medical leave and 0.12% for family leave
  • Contributions to the New York Paid Family Leave program are 0.511% of an employee’s gross wages up to a maximum annual contribution of $423.71
  • In New Jersey, the equivalent program requires a contribution of 0.14% of wages up to a limit of $212.66
  • Oregon has delayed the implementation of its Paid Family Leave Program to January 1, 2023

Over 20 states have announced increases to their minimum wage effective January 1, 2022. For a detailed look at the latest minimum wage regulations where you are, check out Paycor’s guide to Minimum Wage by State.

Nine states have also raised their unemployment wage bases: IA, MT, NV, NJ, NY, OK, OR, UT, WA.

There have been no major changes to state withholding laws. However, be aware that due to the pandemic there are special exemptions for state withholding in the case of temporary changes in work location.

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 1/1/2022, 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 2020, the Equal Employment Opportunity Commission (EEOC) made an astonishing 67,448 charges of workplace discrimination and secured a total of $439.2 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.

avoid-lawsuits-with-compliance

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.

Last year, for example, a class action suit from department managers working for supermarket chain Price Chopper reached a $6.5 million settlement in compensation for unpaid overtime wages.

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, and somewhat recent, 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.

In November, the state of New Jersey fined Uber $649 million for misclassifying their drivers as independent contract workers instead of employees. After conducting an audit, the state alleges the company failed to pay $530 million in back payroll taxes from 2014 to 2018. Due to the nonpayment, the state is also seeking an additional $119 million in interest. Uber is disputing the state’s findings.

In September, California governor Gavin Newsom signed a bill to expand the definition of which workers can be classified employees. The bill is scheduled to take effect in January. Similar legislation is being enacted in New York, Oregon and Washington. And in New York City, Uber and Lyft drivers are now required to be paid a minimum wage even though they’re still not classified as employees.

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 greatly decrease 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.

Sound overwhelming? It definitely can be, and you certainly don’t want to put your business at risk of litigation or fines due to compliance errors. We’ve got nearly 30 years of helping medium and small businesses with their compliance challenges. Let us help you too. Contact us today to see what we can do.

Sound Overwhelming?

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, consistent recordkeeping and detailed reports, our HCM technology helps you confidently manage compliance. We’ve got more than 29,000 customers and 30 years’ experience helping business owners like you. Contact us today to see how we can help you.

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