Payroll compliance can be extraordinarily complex and quite costly if not done right. Unless 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. If your company is audited or subjected to a lawsuit, are you sure you have the proper controls and processes in place to quickly provide accurate records and audit trails?
Reducing overpayment, absenteeism and litigation are all areas of potential savings for every business. Automating the time and labor function can be the key to managing labor costs, but it also provides operational benefits. Decisions can be based on accurate and timely data across the organization enabling you to move beyond basic timekeeping methods to start managing your dollars with intent.
Important 2020 Changes
2020 will usher in some changes that will have an impact on payroll policies and procedures:
- The Department of Labor (DOL) raised the Fair Labor Standards Act (FLSA) “white collar” exemptions from $455/week to $684/week.
- The DOL raised the total annual compensation requirement for highly compensated employees from $100,000 to $107,432 per year.
- The DOL now allows employers to use bonuses and incentive pay (including commissions) to satisfy up to 10% of the standard salary level.
- Form W-4 for employee withholding will be substantially different in 2020. New hires and current employees who want to change their withholding are required to use the new form. You can continue to use the old form for employees who don’t need to make changes. The American Payroll Association has created a handy chart outlining the differences between the new form and previous versions.
- The IRS has increased limits on the exclusion for elective deferrals for 401(k), 403(b) and 457(b) retirement plans from $19,000 to $19,500.
- The dollar limit for voluntary employee salary contributions to healthcare FSAs has increased from $2,700 to $2,750. Monthly contribution limits for employee transportation FSAs have increased from $265 to $270.
- The EEOC is seeking approval under the Paperwork Reduction Act to continue administering Component 1 of the EEO-1 survey. The commission said it is not planning to continue using the EEO-1 Report to collect Component 2 pay data information.
- The Social Security Administration increased the Social Security wage base by $4,800 from $132,900 to $137,700.
The Cost of Non-Compliance
Federal government enforcement lawsuits increased to a three-year high in 2018. The Equal Employment Opportunity Commission (EEOC) filed 199 lawsuits against employers last year, up from 184 in 2017. However, the value of the top settlements really tanked, dropping from $485.25 million in 2017 to a mere $126.7 million in 2018.
2018 gave us the first look at what effect the “Me Too” movement had on workplace litigation. 74% of the EEOC’s Title VII lawsuits focused on sex-based discrimination, up from 65% in 2017. Also on the rise were the EEOC’s lawsuits focused on sexual harassment claims, which increased to 41 lawsuits, up from 33 in 2017.
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.
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 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.
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.
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