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3 Simple Payroll Mistakes Your Small Business Can’t Afford

In most cases, it’s ok to make mistakes. Take a picture with your thumb in the shot, buy the wrong brand of coffee creamer — the world will go on. Unfortunately, payroll mistakes are not like off-brand coffee creamer. One big payroll mistake could cost an employee several overdraft fees or the shame of having their card declined unexpectedly. As a business owner, it could cost you your reputation, a small fortune in fines, or your business.

That’s why small business owners must recognize the pitfalls of employee payroll and know how to avoid them. Here are three easy mistakes you’ll want to watch out for next time you run payroll.

1. You skip out on payroll approvals

It sounds small, but for hourly employees, all parties involved should verify each time card. 74% of payroll managers said they don’t give employees a chance to review time cards, in a recent survey of time tracking habits. Those are employees who, until they get paid, can’t be sure all their hours were recorded correctly.

Asking employees to approve their time cards before running payroll is good for everyone. For one, it decreases the chance that an employer will underpay a worker. That means fewer personal financial mistakes like overdrafting or not having enough funds to pay a bill. Plus, having a part in the payroll process can help build trust and feelings of ownership among workers. If an error does creep through, the employee is less likely to be upset because they had an equal part to play.

Additionally, employee payroll approvals can save businesses from committing wage theft — a violation of the Fair Labor Standards Act (FLSA). Wage theft, even committed by mistake, comes at a heavy cost.

The New York State Department of Labor recovered $6 million in lost wages from AGL Industries in 2018. Authorities found the company guilty of underpaying 500 employees when they withheld overtime compensation knowingly.

Cases of that magnitude are infrequent, but getting fined by the Department of Labor for wage-related violations is not. It might be a case of “better safe than sorry” to ask employees to approve their own time cards. After all, if anyone is invested in getting paid fully, it’s your employees.

2. You round employee time the wrong way

Timesheet rounding gets a bad rap. Perhaps because 34% of business owners said they round hours down to reduce employee pay deliberately or prevent early clock-ins. But that’s a shame because 55% of employers said they round to simplify payroll, billing, and invoicing.

Pop quiz: Is it illegal to round employee time for payroll?

  1. Yes
  2. No
  3. It depends on how you do it

If you answered C, you’ve got it right. Timesheet rounding isn’t illegal in all cases, but it is a complicated issue. The crux of it is determining how you round, and when. If you do it or plan to start, there are two options for rounding time legally.

Option 1: Round down when employees clock in and round up when employees clock out. 

Contrary to reducing employee payroll, rounding this way can benefit employees. When an employee clocks in at 8:04, their time will show 8:00. And when they leave at 4:56, their time will show 5:00.

This style of timesheet rounding still simplifies payroll with nice round numbers instead of extra minutes and seconds. But if you’re using employee time for invoicing or just want a more balanced rounding system, there’s another way.

Option 2: Round employee time in the same direction, both ways.

Say you round up when an employee clocks in. You must then round up when the employee clocks out. If someone clocks in at 8:04 and your round their time to 8:05, you must round their clock-out time of 4:56 to 5:00. The idea is that by rounding in the same direction both times, any minutes gained or lost even out. The Department of Labor (DOL) cares that you pay employees accurately for the number of hours they worked. Start and stop times are less important.

One thing to consider when rounding employee time is the increment to which you are rounding. Rounding to the nearest five minutes, using the options described previously, is fairly innocuous. Round to the nearest 10 or 15 minutes and the DOL begins to take more notice. The FLSA, and some states like California, have particular rules about rounding time to the nearest quarter-hour.

DOL fact sheet No. 53 says, “The FLSA allows an employer to round employee time to the nearest quarter-hour. However, an employer may violate the FLSA minimum wage and overtime pay requirements if the employer always rounds down. Employee time from 1 to 7 minutes may be rounded down, and thus not counted as hours worked, but employee time from 8 to 14 minutes must be rounded up and counted as a quarter-hour of work time.”

3. You misclassify your workers

Despite what you might think, it’s easy to confuse employees with contractors. It’s also an easy crime to be charged with, should the DOL find out you’ve misclassified employees.

Business owners have all sorts of ways to justify misclassifying workers:

  • It’s a common industry practice.
  • Their employees work from home and have flexible hours.
  • An employee says they’re ok being a contractor.

None of these are good reasons, at least on their own, for an employee to be classified as a contractor. Yet blurring the line between employee and contractor is one of the most common errors business owners make. Even companies like FedEx and Uber have had their share of lawsuits over employee misclassification — and lost millions of dollars as a result.

There are many reasons why a business owner might prefer to hire a contractor over an employee. Chief among them is that contractors are often cheaper. They’re not paid overtime, they don’t receive employee benefits, and there’s no added cost to the business for Medicare or Social Security. But there are specific parameters around what makes a contractor a contractor.

If you have contractors on your team, ask yourself, Do they meet these qualifications?

  1. You do not reimburse them for expenses.
  2. You do not tell them where to work, when to work, or how to work.
  3. You do not provide their work equipment, such as their computer or phone.
  4. You do not administer any benefits to them, such as health insurance or paid time off.
  5. Their employment has an end in sight, either at a project’s completion or on a pre-set date.

Contractors aren’t the only workers you can misclassify or who lose out on wages as a result. It’s just as easy to assume all salaried employees are exempt from federal laws that grant overtime pay.

Payroll mistakes aren’t cheap

If you think the DOL isn’t paying attention, you’re wrong. Businesses of all sizes are charged with committing wage theft each year, and often, those acts are preventable. The easiest mistakes to make — misclassifying workers, wrongly rounding employee time cards, and running payroll without approval — can also be the most costly.

Before your business gets burned, make sure you’re doing all you can to stay compliant. Better to catch mistakes early, own up to those mistakes, and rectify them now than wait for legal action. And if you really want to save yourself from expensive payroll blunders, consider getting ahead before you fall behind.

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