LegalReader.com  ·  Legal News, Analysis, & Commentary

News & Politics

Avoid These Common Payroll Compliance Mistakes


— March 27, 2019

Managing payroll can be a complicated task. No matter how difficult though, misunderstanding or ignoring payroll compliance laws can be very costly to both employees and employers.


Imagine finding out you worked hundreds of hours more than you were paid for, and the feelings of betrayal that come with that oversight. In reality, this happens more often than you’d expect, and is usually the result of misunderstanding or blatantly ignoring payroll compliance laws. Either way, there are major consequences for everyone involved.

These consequences include individuals who worked a certain amount of regular or overtime hours not being compensated for the time and effort they put in, as well as a potential lawsuit for the company involved. Companies that miscalculated or purposely misrepresented payroll could have to pay a large amount at once without being prepared for it, not to mention potential court costs if it escalates. Either way, somebody is paying, literally or figuratively.

For example, almost 800 employees at a California car wash finally received their past due checks after a $4.2 million settlement against the owner was reached. Those employees went for a long time without the money they deserved, and the company had to pay out a huge settlement. This is just one of many examples of payroll compliance mistakes. Most often, simply understanding the law will help prevent these mishaps.

Miscalculation of Overtime Pay for Exempt vs. Non-Exempt Employees

According to the Fair Labor Standards Act of 1938, employees who work more than 40 hours per week and who are eligible for overtime will receive 1.5 times their hourly rate for the additional hours. The “employees who are eligible” part is what gets confusing, though. Whether or not a person receives overtime pay for a certain amount of hours is based on federal law and takes into account three specifics:

  1. How much you earn: There’s a weekly, average financial earnings cap, and if you make over that amount per year, you’re not entitled to overtime.
  2. What your daily responsibilities are at work: Managerial duties – and therefore managers – are not eligible for overtime.
  3. The typical job skills required for your position: If primary duties require independent judgement (for example, a CEO’s duties) overtime is not granted.

Not all of these exemptions have to be met. For example, a manager who makes less than the earnings cap still won’t be eligible for overtime based on their managerial duties. On the other hand, blue collar workers are entitled to overtime pay regardless of how high their regular wage is. While these guidelines are helpful to start learning about overtime law, they’re just the beginning steps – you’ll want to thoroughly research compliance as it relates to your specific employees.

Large group of people working on computers at desks in rows; image by Alex Kotliarskyi, via Unsplash.com.
Large group of people working on computers at desks in rows; image by Alex Kotliarskyi, via Unsplash.com.

Misunderstandings About Overtime Pay for Salaried vs. Hourly Employees

While many salaried employees do not receive overtime, the law isn’t as straightforward as, “You receive a salary, therefore you don’t get overtime.” Depending on the circumstance, salaried employees may be eligible for overtime. In addition to the exemptions we’ve gone over, salaried employees have to be treated like salaried employees in order to be exempt from overtime. 

Being treated like a salaried employee means receiving a certain amount of money on a set schedule and not having pay docked if they arrive late or need to take off for something like a doctor’s visit. If they are treated as an hourly employee instead of a salaried employee, they may be eligible for overtime, even if they’re technically listed as salaried. 

Using an Unlawful Currency to Pay Employees

Businesses have to pay their employees in a lawful way, such as through direct deposit or physical check. While the law may vary from state to state about which modes of payment are acceptable, payroll cards are often outlawed. 

An example of unlawful payment occurred with several McDonald’s restaurants in Pennsylvania. Instead of paying employees in a traditional way, McDonald’s issued J.P. Morgan Chase payroll cards that charged transaction fees for actions like withdrawing money from an ATM, paying a bill online and even checking the card’s balance. Employees sued and won a settlement.

Payment for Restaurant Workers Regarding Hourly Wage and Tips

Restaurant workers have a slightly different setup when it comes to hourly payment. Servers are considered tipped employees, which means that a majority of their income is from tips, not the hourly wage. Other types of restaurant workers, like dishwashers and hostesses, are not tipped employees.

While there are slight differences based on employee age and length of employment, in general, tipped employees are required to receive the federal minimum wage or the state minimum wage if it’s higher. If they’ve made it clear to the employee, some employers can claim a tip credit up to a certain amount, which means they could pay the employee less than the minimum wage.

Overtime pay is another consideration for restaurant workers. Even if workers are paid bi-weekly, overtime is calculated weekly. If the server worked 20 hours during week one of the paycheck and 50 hours during week two, they’d still receive 10 hours of overtime.

Requiring Workers to Be On-Site Without Paying Them

In the California car wash case referenced above, the workers were required to come to work early without clocking in until the official start of their shift. They were also forced to clock out during slow periods but remain on-site until business picked up. Because of these two main factors, the workers ended up with several hours of unpaid work.

This type of wage violation is prevalent in a number of industries, including construction, hospitality, and caregiving. If you’re a non-exempt employee and you’re working, whether at the physical location or at home by answering emails or calls, you have to be paid for your time.

Solving This Problem

In many cases, especially something as complex as payment for tipped workers, both the employee and the employer have to fully understand payroll compliance regulations. Employers who want to remain on the lawful side of payroll compliance should know every aspect of payroll law for the different types of employees at the business. Since payroll and time tracking can be complicated as you add more and more staff, consider adopting tech tools to help streamline operations.

Employees should know their rights and recognize when they’re being violated, as well as what they’re entitled to. If an employee didn’t receive overtime that they were entitled to, they may be eligible for damages equal to the amount of overtime that should have been received. If it’s proven that the employer understood overtime law and still did not pay overtime, the employee could receive more. Because of this risk, it’s imperative that companies not only understand every facet of the law, but follow it closely to ensure everyone involved is protected.

Join the conversation!