How to avoid common payroll mistakes that could cost your company money and create undue liability Featured

8:00pm EDT October 26, 2010

Payroll may seem like a simple area to manage. Your employees work, and you pay them for that work; but there are several payroll areas that create liability for an employer, says Christina Woodward, director of HR and payroll services at ManagEase.

“Unless you have payroll expertise within your organization, you could be making costly errors,” says Woodward. “Many businesses have an accounting person or an office manager handling payroll, and the wage and hour component tends to be missed. There is also a heavy tax component that is often overlooked. Payroll is an important area for employers to pay close attention to, as it is the company’s largest overhead and liability.”

Smart Business spoke with Woodward about how to avoid costly payroll mistakes.

Why is payroll such a difficult area for employers to get right?

Oftentimes, employers do not realize the expertise required to produce an accurate payroll. There are a lot of potential pitfalls an employer may be subject to, especially in larger-dollar payrolls.

Another component creating difficulty relates to the complexity of current payroll software, making it more difficult for users.

Payroll can be very costly, especially as errors cross over quarters, or years, requiring amendments with different agencies.

How can misclassifying employees as exempt cause unpaid overtime liability?

There’s a high risk, cost-wise, when misclassifying employees as exempt when they should be nonexempt, which can create overtime liability and meal/lunch break liability.

Employees may be exempt from overtime eligibility if they meet certain criteria, for example, if they are a member of executive management or hold a professional degree. Deciding if an employee meets the requirements to be exempt can be tricky and requires wage and hour expertise. An employer’s best option is to involve human resources to properly classify employees in order to avoid undue liability.

Misclassifying employees can be costly for a company, involving fines, back pay and even class action suits.

How can meal breaks cause problems for employers?

In California, non-exempt employees must take a minimum 30-minute meal break within five hours of working. There is a one-hour meal break penalty for every instance an employee does not fulfill this requirement. Meal breaks should be well documented using a timecard or electronic timekeeping system in order to support an employer in case of a claim by an employee. As you can see, payroll errors can add up quickly and even result in class action suits against employers.

What pitfalls do employers face with garnishments?

When a garnishment order arrives, an employee may say, ‘I don’t really owe that or that is a mistake.’ But an employer has a legal responsibility to withhold that garnishment beginning on the date that garnishment indicates. Without the proper payroll software in place to assist with calculating garnishments, the task can become very complex. Not withholding garnishments correctly carries huge fines up to and including jail time.

How can paying bonuses to non-exempt employees trip up an employer?

Many employers do not realize that paying additional non-discretionary amounts to non-exempt employees impacts their regular rate of pay, in turn impacting their overtime premium rate. Examples include: production bonuses, commissions, etc. This is one example of why it is crucial to have the right payroll expertise within your company to recognize these types of issues.

How can employers benefit from the HIRE Act W-11 credit?

The HIRE Act credit is effective Feb. 3, 2010, for employers that hire new positions or hire a replacement for someone who was not laid off. The credit is applicable to hires who did not work more than 40 hours in the 60-day window prior to their start date.

The employer is able to take up to a 6.2 percent credit on the employer portion of the Social Security tax on eligible employees who complete a Form W-11. There is also a business tax credit of $1,000 for employees who remain for 52 weeks.

Payroll is an integral part of an organization, requiring expertise, further education and dedication to accuracy. Without a competent payroll administrator, payroll compliance and complexities could become costly.

Christina Woodward is director of HR and payroll services at ManagEase. Reach her at or (714) 378-0880.