There would be no such thing as a payroll mistake in a perfect world. Obviously, the world we live in is far from perfect. Payroll mistakes do happen. The question is, what next? How a company handles incorrectly paying employees could determine whether there are legal ramifications or not. Companies and their payroll departments have to tread lightly.
The two most common payroll mistakes – other than employee misclassification – are overpaying and underpaying. There is nothing inherently illegal about overpaying employees, but underpaying could get a company in trouble if it was determined that underpayment was purposeful or the result of negligence.
Once again, we are back to the question of what happens once a mistake has been discovered. The first step is to stop and carefully assess the situation, explains Dallas-based BenefitMall. It is foolish to try to quickly jump into a solution before fully understanding the problem.
When You’ve Paid Too Much
Discovering that your company has paid an employee too much can create a conflict of sorts. You want the excess amount back, but you do not want to come off as being a cold and uncaring employer unwilling to bite the bullet ‘just this once’. Obviously, concerns are less if the amount overpaid is significant.
At any rate, federal and state laws allow employers to recover overpaid amounts. The way the process works differs from one state to the next. The one thing all state laws have in common is the requirement to notify affected employees before attempting to recover overpaid amounts. This is where accurate payroll records are critical.
BenefitMall recommends providing copies of those records when informing affected workers. Those records offer the proof you need to legally recover excess pay. What happens next is a matter of state law. Some states allow employers to recover excess pay by deducting it from future paychecks. Other states require employer and employee to work out an agreement as to how recovery will be made.
When You’ve Paid Too Little
Underpaying employees opens up your company to litigation if it’s not caught and addressed quickly. Once again, payroll records are critical here. Should an underpayment mistake ever wind up in litigation, payroll records are your company’s defense against charges of negligence or purposeful underpayment.
Also note that both federal and state laws give employees every right to demand back pay. You are obligated to pay it one way or the other. Some states assess late fees as a way of prompting employers to pay what is owed as quickly as possible. The longer it takes to pay, the more money actually goes to the employee.
As with paying too much, the process for correcting underpayment begins by notifying affected employees. Employers should encourage affected workers to sign off on the notification indicating they understand what happened and they are agreeing to whatever form of remuneration is required by law.
One last thing to note here: if it is found that your company intentionally underpaid employees, those employees have up to three years to take action. This suggests that one purposely underpaid employee could take action that leads to further discovery of additional employees affected by intentional underpayment.
Always Keep Meticulous Records
A common thread in both over- and underpayment cases is found in the records employers keep. BenefitMall explains that the best thing companies can do to protect themselves is to keep meticulous records for as long as is legally required. Document everything from hours worked to total compensation. The more detailed the records, the less likely a company is to get in trouble for making honest mistakes.