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6 Payroll Mistakes That Leave You Vulnerable

6 Payroll Mistakes That Leave You Vulnerable

Payroll is extremely important to your employees. When a company makes a payroll error or misses a pay date, employees may look for other work, worried that their employer is in financial trouble.

But that’s not the only area of concern for your company. There are several ways payroll mistakes could leave your company vulnerable to government fines and employee lawsuits. Here are six of the most common. 

1. Misclassifying Employees

Employee classification refers to whether your employees are eligible for overtime pay. Exempt employees are those who are not eligible for overtime pay. Non-exempt employees can earn overtime. While most times, exempt employees earn a salary and non-exempt employees are paid hourly, this isn’t a hard and fast rule. 

Proper employee classification requires a detailed analysis of each employee’s job title, job duties, and pay. If you do not go through this exercise, you may end up misclassifying an employee. This can have dire consequences for your business. For example, suppose you classify an employee as exempt when they were really non-exempt. In that case, you may be required to pay back overtime pay, taxes for both your company and the employee, as well as fines and penalties levied by government agencies.  

2. Miscalculating Pay

Calculating payroll by hand is not recommended. It is ripe for mistakes that could lead to costly errors. Besides that, employees who receive inaccurate pay can become disengaged. They also have a legal right to sue your company. 

Some overtime rules can be complicated too. Knowing exactly when an employee should be paid overtime or holiday pay can result in underpaying an employee.  

If you have tipped employees, that can further complicate matters. Tipped employees do not have to be paid a base wage that meets the minimum wage. However, if their tips do not take them to at least the hourly minimum wage, then your company has to make up the difference. 

3. Missing Payroll Deadlines

Your payroll process might be complex and time-consuming, however, your employees count on you getting it right every time.

Missing tax deadlines comes with penalties and interest. Make sure you know how much you need to pay in taxes and when your company’s taxes are due so you can avoid these costly issues.

4. Incomplete Records

Business record keeping is crucial. Payroll records are no different. The Fair Labor Standards Act (FLSA) requires employers to keep payroll records for at least three years. These records must include employee names, hours worked, wages paid, hourly rate, pay dates, and itemized deductions.  

This information can help protect you, even though it may seem tedious. You may encounter a former employee who later states that you underpaid them or failed to pay them overtime. If you have records, you can show with certainty that you paid them correctly. But if you don’t have these records, you have no evidence to counter your former employee’s allegations. 

5. Forgetting Bank Holidays

It’s essential that you always keep payroll due dates in mind. If your payroll is due five days before your payday, and you pay on Fridays, you may encounter Monday holidays. Why is this important? Because your bank will need to process your payroll one day earlier. In this example, you would need to complete your payroll before the Monday bank holiday. 

Keeping a calendar of bank holidays can save you stress and anxiety. If you realize at the last minute that you’re up against a bank holiday, it’s much easier to make payroll mistakes and cause yourself more work. 

6. Non-Compliance with New Payroll Laws

Employment laws change with some regularity. Staying up to date with these changes is a full-time job itself. You don’t have the time necessary to keep up with relevant labor law changes and implement new processes to ensure your business is compliant. 

But if you don’t do these things, you risk costly fines and penalties. That’s why you must know and understand how new payroll laws affect your company and work to ensure that your payroll process follows any new regulations. 

HR Outsourcing as a Solution 

One of the best ways your company can avoid these payroll mistakes is to partner with an HR outsourcing company. Outsourced payroll experts can help you prevent these errors and advise you on upcoming payroll and employment law changes so you can focus on your core business needs.  

However, using a payroll processing company alone could be a mistake. Payroll outsourcing companies do not take on any liability if payroll mistakes are made. That continues to fall squarely on your company’s shoulders.  

When looking for payroll experts who can also help your company in numerous other ways, looking for a Professional Employer Organization (PEO) might be the solution you need. A PEO takes on the liability of ensuring your payroll is accurate and timely. What’s more, a PEO can provide your company with comprehensive HR services and support.  

In fact, the ROI of HR outsourcing vastly outweighs what you would get with a payroll only provider. Learn more by downloading our free eBook “What is a PEO? 

What is a PEO?


Small Business, HR Outsourcing