Payroll compliance can be both complex and costly if you miss important details. Unless you put consistent payroll processes in place, you leave your business vulnerable to lawsuits. With that in mind, make sure you’re properly applying pay policies, calculating Fair Labor Standards Act (FLSA) overtime, and following FMLA and other leave policies. You can also protect your business by staying up to date on compliance changes.
Important 2024 Payroll Compliance Updates
2024 will usher in changes that to quite a few federal payroll policies:
- The Social Security taxable base wage is increasing to $168,600.
- Standard deductions for IRS federal income taxes in 2024 have increased to $29,200 for married couples filing jointly; $14,600 for single filings or married filing separately; $21,900 for a head of household.
- Limits for qualified fringe benefits for tax year 2024 are $315 for parking; $315 for commuter highway vehicle and transit pass (combined); $16,810 for adoption assistance.
- Qualified retirement contribution limits have also been updated. Elective deferral limits for 401(k), 403(b) and 457 plans increase to $23,000; annual IRA contribution limit has increased to $7,000; the annual compensation limit increases to $345,000 for 401(k), 403(b), SEP and profit-sharing plans; the limit for defined benefit plans increases to $275,000; contribution limits for SIMPLE plans increase to $16,000 with a catch-up limit of $3,500.
- The latest HSA contribution limits are $4,150 (self-only), $8,300 (family) and the catch-up contribution limit (age 55 or older) stays at $1,000.
- FSA limits increase to $3,200. The carryover limit for cafeteria plans increases to $640. 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 2024
Many states have also made important updates that will affect payroll:
- Colorado’s Paid Family and Medical Leave initiative grants employees up to 12 weeks of leave starting on January 1, 2024.
- Contributions to the New York Paid Family Leave program are decreasing to 0.373% of an employee’s gross wages up to a maximum annual contribution of $333.25.
- Maryland’s PFML program goes into effect this year. Contributions begin on October 1, 2024, at a rate of 0.90% of covered wages up to the Social Security cap. Benefit payments will be available on January 1, 2026.
- Vermont’s Paid Family and Medical Leave Insurance program started on July 1, 2023. Starting on July 1, 2024, the program will grow to include private and non-state public employers with 2+ employees.
- Illinois’ Paid Leave for All Workers Act entitles all employees to earn and use at least 40 hours of paid leave annually. Contributions begin on January 1, 2024. Benefits become available on March 1, 2024.
- Washington’s Paid Family and Medical Leave total premium rate will decrease to 0.74% of wages up to the Social Security cap of $168,800. Employers pay 28.57% of the total premium, and employees pay the remaining 71.43%.
- In Massachusetts, contributions to the state’s Paid Family and Medical Leave program will be increase to 0.88% of eligible wages—0.70% for medical leave and 0.18% for family leave. The maximum benefit for 2023 increases to $1,149.90.
- In New Jersey, the equivalent program requires a contribution of 0.09% of wages up to a limit of $145.26.
20 states have increases to their minimum wage effective January 1, 2024, and 3 more will have increases in 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. Instead, we program federal, state, and local withholding changes into Paycor’s system for you, effective January 1. The system updates throughout the year to stay on top of changing regulations.
The Cost of Non-Compliance
The federal government continues to enforce workplace rights through lawsuits. In fiscal year 2022, the Equal Employment Opportunity Commission (EEOC) made an astonishing 65,000 charges of workplace discrimination and secured a total of $513 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.
Exemption Classification Errors
Classification issues can be a big problem for business when dealing with the FLSA. For example, it’s common for employers to improperly classify workers as exempt, and then fail to pay overtime wages. This can lead to penalties and even legal issues.
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
Here’s another major compliance challenge: correctly classifying employees. Many employers inaccurately classify some employees as independent contractors or interns. In the current gig economy, more and more businesses hire freelancers to reduce payroll costs and tax liabilities. On paper, gig workers have more freedom than employees. Employers can’t legally dictate when, where, or how much they work. 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.” You can read more about the proposed rule 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 in the right category.
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 for employees who are injured on the job. It’s important to note that laws vary from state to state, and updates occur on different timelines. It’s important to track these changes closely, especially if you have offices in more than one state. Businesses face several common compliance challenges:
- Not filing or accurately completing forms
- Failure to pay benefits to injured or ill employees in a timely fashion
- Inaccurate benefit amounts
Since Workers’ Compensation is state-specific, penalties may vary. Typically, any of these issues will result in a fine.
The Role of HR
Companies can mitigate the chances of lawsuits 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 make sure all workers are classified correctly
Most lawsuits stem from inaccurate record-keeping. If your data is incomplete or hard to understand, your company is more vulnerable to class-action wage and hour lawsuits. These cases damage both your bottom line and your reputation. Having solid payroll practices in place along with an online payroll software will go a long way toward compliance.
Sound Overwhelming?
It can be. You certainly don’t want to put your business at risk of litigation 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