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.
The Cost of Non-Compliance
The cost of workplace class-action settlements rose steeply in 2017. The top ten settlements totaled $2.72 billion — a pretty startling surge from $1.75 billion in 2016. Discrimination, employee benefits, and wage and hour claims were among the top actions.
The growth of wage and hour settlements — which increased over the past two years to $1.2 billion — is the primary exposure for businesses in 2018. HR professionals and executives should focus their efforts on prevention.
Equal Employment Opportunity Commission (EEOC) filings more than doubled, rising to 184 lawsuits in 2017 from 86 the previous year, while settlements spiked nearly ten-fold, from $52.3 million in 2016 to an incredible $485.25 million in 2017.
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 $23,660, 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 this new 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 typically have more freedom and autonomy than employees. Gig workers aren’t entitled to employment benefits such as minimum wage or overtime pay. If some of your employees are misclassified as independent contractors, and don’t receive those benefits, your company could be in hot water when it comes to compliance. 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 experience injuries or illnesses 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. Having solid payroll practices in place will go a long way toward helping ensure compliance.