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Resource Center / Payroll

What To Do If You Discover a Payroll Error

As an employer, you do your best to ensure that employees are being paid correctly. What happens when something goes wrong? Take a look at these tips.

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Oct 24, 20227 minutes

Employers are legally obligated to pay their employees in accordance with the guidelines outlined in the federal Fair Labor Standards Act (FLSA) and additional state and local wage laws that apply to their workforce. Even with the best intentions and attention to detail, there may be certain payments that get missed for one reason or another.

That’s because no matter how much we automate, there's a human component to most payroll cycles, whether that’s in the form of entering a new salary or hourly rate, entering time and reviewing timecards, or calculating a bonus. Most of these errors or oversights aren't malicious, but pay is a sensitive topic for many, and these situations require empathy, time, and swift attention.

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Most employees will raise their pay concerns internally before seeking external remedies. When they do, employers should act swiftly to investigate and make any corrections in a timely and compassionate manner. Otherwise you may risk an administrative charge or lawsuit that could result in penalties such as backpay, liquidated damages, fines, attorney’s fees, and other liability.

While you can't entirely eliminate the risk of a payroll error, you can take proactive steps to audit your company’s practices before any payment concerns arise, and that could save you a lot of hassle. Here are a few tips to get you started.

Reducing Your Risk of Payroll Errors

When it comes to errors relating to your non-exempt workforce, you can reduce your risk of wage mistakes by using reliable time tracking software to keep accurate time records. This software should also create an electronic record of the hours logged.

Be sure to train both employees and managers on how to use the software as well as all internal procedures for recording, approving, and correcting time entries. It's important to train non-exempt employees to record all time spent working, even (and especially) time worked outside of normal working hours, such as during otherwise unpaid meal breaks. This will go a long way toward ensuring all time is properly compensated, including overtime. Managers should also be trained to reinforce these practices, and against encouraging or incentivizing employees to underreport their time.

Regardless of exemption status, all employees must be paid in a timely manner at the appropriate rate. To do this, you must be clear on what “timely” means in your jurisdiction, as the requirements may vary depending on the work location and type of payment. For example, beyond regular salary pay schedules, many states provide clear and enforceable requirements regarding the timing of final pay that differ from the next regularly scheduled pay date. California law for instance requires that employees be paid all owed wages at the time of termination unless the employee resigns with less than 72 hours' notice.

Resolving Employee Concerns

When your employee raises an internal concern regarding payroll, you should promptly investigate the employee’s concerns to determine if there was an error. If there was, you should take corrective action as soon as possible. On the other hand, you may realize that the employee is mistaken — with all of the payroll taxes and contributions happening on the federal, state, and local levels, it may simply be a misunderstanding. Be sure to respond with due diligence and without making assumptions.

If the employee is still unhappy with the response, they may proceed to file a lawsuit or an administrative wage claim with the US Department of Labor (DOL) or with a state or local wage and hour division.

So, what should you do? Here are the basic steps to take.

  • When the employee raises a concern regarding their pay, promptly document the report, including the date, and inform the employee about the steps you will take to investigate and address their concerns.

  • Investigate the concern as soon as possible. See if the claim has merit. If it does, then you should resolve it immediately. If it doesn’t, create a communication plan that is empathetic yet firmly stated in order to provide clarity and resolution. If you are unsure how to investigate the merits of the report or the relevant legal landscape, consult an employment attorney.

  • If you find that there's a mistake and you have underpaid the employee, make a payment for the shortfall as soon as possible. Rather than reverse a former paycheck, we recommend scheduling a new, separate payment with a recorded note that indicates the reasoning.

  • Document the process in an internal document, including notes about the actions you've taken and any payroll adjustments.

  • An employment attorney can also advise you on best practices regarding documenting your investigation, including the results of the investigation and any corrective actions taken.

It's also important to keep in mind that payroll can be a vulnerable subject for employees. They may even feel that the mistakes you made are a personal slight against them. It is important to remain tactful and calm, be accountable for any delay in payment, and focus on the resolution. Even if the employee was ultimately wrong or misinformed, this is your opportunity to reframe the conversation and make your employee feel taken care of.

Best Practices Regarding Wage & Hour Requirements

Avoid any perception of retaliation if a concern is raised

As an employer, you may not take any adverse action against an employee in connection with exercising their rights with respect to wages. Retaliation could include any action that has a negative impact on the employee, including firing or demoting title or responsibilities. Employees are protected by federal law and many states’ laws from this type of retaliation. Should an internal concern about wages escalate into an administrative action or lawsuit, even if the wage claim is dismissed, a retaliation claim could still hold up and cost the company.

Familiarize yourself with wage laws and concepts

Be aware of the wage and hour laws that apply to your business. Most laws put the burden on the employer to ensure records of hours worked are maintained and accurate payment is made.

  • Exempt vs. non-exempt. One of the most common wage disputes is worker misclassification. This happens when non-exempt employees are treated like exempt employees and are denied entitlements such as overtime. Employees are generally non-exempt until proven otherwise, and the FLSA and state laws provide exemption rules that no internal agreements can supersede. It's essential to make sure that your payment policies and employee classifications are compliant with these laws.

  • Time tracking requirements. While the FLSA states that employers can determine any kind of time keeping method they prefer, there are specific record requirements. Find a software that can integrate with payroll and reduce your risk here.

  • Wage timing laws. Many states have specific guidelines for pay frequency, and these might be different from termination or commission pay requirements.

  • Additional pay considerations. Your non-exempt employees may be subject to additional wages that you're not aware of, including pay relating to travel time and rest breaks. These laws exist on the federal and state level.

Include wage policies in your employee handbook

Be sure that you keep an up-to-date employee handbook that states all of the policies of the company as clearly as possible, including pay policies. When employees begin work they must review this information and sign a statement confirming that they understand it. It’s important to work with an employment attorney to make sure that your company policies comply with state and federal laws.

Justworks can help

For Justworks customers, Justworks Hours integrates seamlessly with payroll to automate this process with minimal effort. Our reliable time tracking software helps you keep accurate time records and provides documentation of the hours logged. Additionally, your Justworks account manager or support representative is readily available to provide general information and best practices on appropriate payroll timelines for your employees pay cycle.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.