4 Ways Companies Can Avoid Payroll Mistakes

Inaccurate paychecks are bad for businesses

These days, payroll mistakes should be entirely avoidable: automation has infiltrated practically every aspect of society. And yet over 25% of small businesses still use pen and paper to manually track finances. This results in frequent administrative errors, with a quarter of workers reporting being incorrectly paid at least once. 
 

Inaccurate paychecks are bad for business, whether companies are overpaying or underpaying. Either they are cutting into their profit margin or short-changing their workforce, leaving themselves open to lawsuits. Obviously, neither is ideal. 

Furthermore, companies risk creating a disaffected workforce that is unmotivated to work. One survey found that 49% of workers will begin a new job search after two paycheck errors. Clearly, if a company can not pay its employees correctly and promptly, someone else will. 

Since there is already a substantial labor shortage, with more jobs vacant than people willing to fill them, it is crucial for companies to issue accurate paychecks to ensure employee retention. So, how can you avoid improperly compensating your workforce? 

First, companies need to familiarize themselves with local wage requirements. Otherwise, simple and innocuous errors may end up costing companies millions of dollars in lawsuits. To avoid such substantial penalties, ensure you are complying with all legal statutes regarding minimum wage, overtime, and gig employees. 

In the U.S., economists have estimated that workers lose $15 billion annually to minimum wage violations. While the majority of wage violations go unnoticed, employers found guilty of violating either the minimum wage or overtime pay requirements are subject to civil penalties of up to $1,000 for each infraction. For a small business, a few simple mistakes could be devastating.

Such mistakes often happen when attempting to institute a single wage for each position company-wide. But just because your headquarters is in Michigan, does not mean you can pay your workers in the New York office the same wage. This is because the legal minimum wage in Michigan is $9.87/hour, while New York’s is $13.20/hour. 

Another common legal mistake involves incorrectly classifying employees as independent contractors, or vice versa; the gig economy has greatly muddied the waters regarding benefits and wages. Companies often incorrectly categorize full-time employees as independent contractors, which means those companies are illegally skimping on required benefits like health insurance and overtime pay.

Intentional violations aside, most payroll mistakes are innocuous. Humans are bound to accidentally select the wrong number, click the wrong button, or forget to write something down. Unfortunately, one incorrect digit in a long serial number or a single lost timesheet can lead to payroll mistakes across the board. 

Such innocent errors are also one of the leading causes of mistakes in overtime pay; legally, employees must be compensated time and a half for every hour worked that exceeds 40 hours in a week. However, manual calculations may lump all their hours worked together, without regard for the different pay rates. 

Therefore, it is best to eliminate any and all manual computations, including physical timesheets and manually entering data into Excel spreadsheets. Non-automated timekeeping inevitably leads to misreporting and oversights, risking your company’s legal standing and financial security. 

One way to eliminate payroll mistakes is by automating the entire process—from tracking hours worked to calculating the resulting pay. 

Time and attendance software will both expedite payroll and promote accuracy. For instance, you can track the number of hours that employees work using biometric clocks. With these devices, employees scan their fingerprints to clock in and out. The scanners are connected to software that automatically records hours worked in a company’s internal system. 

With time and attendance software, employees can also clock in and out of work via mobile applications on their phones, which makes the real-time data visible to both employers and employees, mitigating any potential wage disputes. Furthermore, these applications can also be integrated with geofencing technology, which shows the real-time locations of employees to ensure they are actually on the job. 

Despite an employer’s best efforts to take a variety of precautions, miscalculations can still happen. Therefore, it is just as important to have a back-up plan to issue corrections on short notice.  

Payroll corrections allow companies to issue adjustments to already distributed paychecks, whether subtracting or adding compensation. These often come in the form of direct communication with the employee, with both parties coming to an agreement to either add value to the next paycheck or withhold a period of wages to compensate. 

Some states have procedures in place for rectifying such errors. For instance, Oregon allows employers to resolve mistakes by the following pay period if the wages are less than five percent of the total pay owed. 

Having a system in place for compensating employees for underpaid wages immediately should help a company avoid any legal repercussions regardless of state statutes, keeping both employers and employees satisfied and fostering a productive workforce environment. 

Adam Day is President & CEO at Timerack.