5 Costly Payroll Mistakes

August 10, 2017

With federal and state laws changing on a near-daily basis, payroll has become increasingly complicated. Failure to comply with current laws can be a costly mistake for local businesses. With hundreds of clients in southern New England, we see the same errors being made every day.

Here are the five most common ones:

  1. Misclassifying Employees: Deciding whether or not to pay someone as an employee or an independent contractor isn’t up to an employer, nor can an employee waive their rights as an employee and opt to be paid as a contractor. There are very clear guidelines, with laws established at both federal and state levels. In Massachusetts, workers are presumed to be employees. The burden falls to the employer to prove that a worker is truly an independent contractor and the standards in achieving this classification are very high. With the Commonwealth of Massachusetts devoting significant resources to auditing firms in regard to this issue, erring on the side of caution is always the safest route.
  2. Overtime Errors: When it comes to overtime wages, there is no gray area: Employees who work more than 40 hours in one week must be paid at 1.5x times their regular rate. With employees who are paid bi-weekly, they must be paid overtime if they work more than 40 hours in a defined week. For example: An employee who works 20 hours in week one and 44 hours in week two of the pay period would be entitled to 60 regular hours and four hours of overtime pay. Federal and state laws very specifically define employees who are exempt. Special rules do apply to tipped employees working in the food service industry.
  3. Wage Payment: This is one of the most common mistakes made by employers. Hourly employees cannot be paid on a semi-monthly or monthly basis. They must be paid at least once every two weeks. Wages must also be paid within six or seven days of the end of the pay period, depending on the total number of days worked. Any employee who is terminated must be paid all wages due, including vacation time and commissions earned, on the day of release. Additionally, all employees must have access to an earnings statement (paystub) that states their name, the employer’s name, the date of pay, the number of hours worked and any deductions made from their pay.
  4. Payroll Deductions: With the exception of state and federal taxes, an employer cannot deduct money from an employee’s paycheck without their authorization. The only other exceptions are government-mandated payments such child support and IRS levies. All other deductions must be authorized by the employee and be for their benefit. An employer cannot deduct money from an employee’s wages for disputed amounts. These must be resolved within the legal system, outside of the payment of wages.
  5. Vacation Pay: One of the most common and significant sources of disputes between employers and employees is vacation pay. All vacation time earned must be paid out upon termination. Any paid time off policies should be clearly outlined in the employee handbook and vacation time should always be accrued per hour worked.