Payroll Survival Guide: Avoiding the Most Common Year-End Time & Attendance Mistakes
Some mistakes are embarrassing, but some can land your organization into a multi-million dollar nightmare. Before closing the books on this year’s payroll, make sure you analyze some of the most common mistakes with teeth that bite.
The most common payroll-related time-and-attendance mistakes include non-compliance with regulations, incorrect time recording, improper classification of exempt/non-exempt employees, and lack of auditing capabilities for current processes.
Missing or incorrectly applied changes to labor regulations
Companies must manage federal regulations like the Family Medical Leave Act (FMLA) and Fair Labor Standards Act (FLSA), and state regulations that govern how employees are paid. These regulations can create a lot of complexity in an otherwise simple process of paying employees.
The Department of Labor (DOL) continuously searches for companies that are not correctly managing their federal compliance. For example, Wells Fargo & Company recently agreed to pay $12.8 million to current and former employees that were affected by alleged violations of the Fair Labor Standards Act.
The last major change to the FLSA occurred in 2004, but many companies are still not accurately managing its requirements today. According to 2005 DOL statistics, 48 percent of the companies investigated had overtime pay violations. How can this be so? Complexity!
One example of complexity in the process can be seen in the calculation of FLSA overtime pay rates. Many practitioners incorrectly assume the overtime pay rate is 1.5 times the regular rate, when in fact it is a weighted average rate of all the time an employee may have worked plus their shift differential pay (see the table below).
Incorrect
40 hours x $10 = $400.00
10 hours x $10 x 1.5 = $150.00
20 hours x $1.00 = $20.00
TOTAL: $570.00
Correct
50 hours x $10 = $500.00
20 hours x $1.00 = $20.00
SUBTOTAL: $520.00
(This is the total straight pay + differentials)
(“Reg Rate” = $520/50 hours = $10.40/hour)
10 hours x $10.40 x 0.5 = $52.00
TOTAL: $572.00
Companies must examine their time collection process from zero to gross in order to find the gaps that may be causing errors. For example, any re-keying of time data should raise a flag, because this step of the process might introduce errors into the system. Other problem areas include non-automated time recording methods, manual calculations or application of business rules, and manual approval processes.
Advanced time and attendance systems are able to manage the automation of complex rules and calculations, and it is through this precise timekeeping that organizations can successfully manage compliance. This means that the complexity is managed with each punch-in or absence request, not sometime later in the period when it may be too late to do anything about a potential problem.
Time and attendance incorrectly recorded
The phrase “to err is human” could suffice as the tag line for manual time and attendance processes. People make mistakes whether they want to or not, but only automation can reduce or eliminate those mistakes. Correcting mistakes later is no substitute for an automated process. While missing time punches can be added after the fact, for example, they may not be recording the ‘true’ time an employee clocked in or out.
Even when a time and attendance process is automated, errors can be introduced if the system lacks business rules that validate the entry. Newer attendance tracking systems validate data against rules, but older home-grown systems may lack those rules, and upgrading and maintaining those systems can be expensive.
According to the American Payroll Association’s 2005 Best Practices Study, which was released in April 2006, “The trend in timekeeping solutions is heading away from an in-house solution to a solution provided by a time and attendance provider.” This trend indicates that organizations are beginning to realize that the resources required for keeping up the pace with compliance change and best practices management far outweigh the cost of purchasing a pre-built system.
There is no better time than the months approaching the end of the year to search your current time and attendance processes looking for gaps and problem areas that may introduce errors into your year-end close. Verify that your current system automates your time and attendance process from end to end.
Incorrectly classifying exempt and non-exempt employees
Not all employees are covered by the FLSA. Some employees may be exempt from the rules that govern minimum wage or overtime pay rates. This is a legal landmine that employers should be very careful to avoid.
Companies like UPS, Coca Cola, and Pacific Bell have all paid multi-million dollar settlements because of employee misclassification. The DOL short test for exempt status requires the following:
| FLSA “Short Test” |
Salary Requirement:
- Minimum $455/week
- Salary Basis: when an employee receives the same pre-determined amount, without regard to quantity or quality of work performed
Duties (these are the primary white collar exemptions):
- Executive
- Manages unit of business
- Regularly directing the work of 2 or more employees
- Authority to hire/fire (or recommend)
- Administrative
- Office or non-manual work directly related to business operations
- Exercises independent judgment and discretion on matters of significance
- Professional
- Relies on learned skill to perform duties (i.e. Engineer)
- Creative professional (i.e. Designer)
- Outside Sales
- Computer related
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The following is a scenario in which an employee’s exempt status is compromised. It serves to illustrate how an organization may inadvertently remove exempt status from an entire class of employees.
| Problem Scenario |
An exempt employee becomes disorderly at the office after working a portion of the day and is then told to leave the office without pay for the remainder of the day.
The Salary Basis test requires that exempt employees receive the same pre-determined amount, without regard to quantity or quality of work performed, so the employee (and possibly the class of employee that he/she is part of) may be deemed non-exempt and eligible for overtime worked during their tenures. |
As the year-end approaches, employers should review exempt and non-exempt status of their workers and adopt a process where more than one manager approves the status set for the employee.
No auditing of the year’s pay information
An audit is a systematic examination against defined criteria or regulations in order to determine whether interactions and related results conform to that plan or law. It’s not just a good idea, in many organizations it may be required. An audit shows the observer that the organization has a formal process in place and offers proof that the process was followed.
It is very difficult to audit a manual process. When a process is automated, the risk of missing a step is greatly reduced or eliminated. Some regulations like Sarbanes-Oxley require that the process be auditable so that an observer can verify that the process was followed precisely.
The FLSA, for example, requires a 3-year audit trail of the following payroll information:
- Hour and day when the work week begins
- Total hours worked by each individual for each work day and work week
- Total daily or weekly straight-time earnings
- The regular hourly pay rate for any week in which overtime is worked
- Total overtime pay for the work week
- Deductions or additions to wages
- Total wages paid for each period
- Date of payment and pay period covered
Use the year-end as an excuse to audit your processes for compliance with regulations, contracts, or business rules. If this cannot be easily accomplished, you may have a process that puts your organization at risk.
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