Pay Statement Compliance and Payroll Management: Navigating a Changing Landscape

Over time, paying employees has become more complex. It's no longer enough to withhold federal and state taxes, health insurance premiums, and retirement fund contributions from an employee's gross pay. Today, it's critical that employers "show their work" and carefully display every dollar their workers are being paid and what is being withheld. Failure to do so could be costly to employers, who could find themselves on the wrong end of a class action lawsuit.

Keep reading to understand why businesses must remain compliant regarding their workers' pay statements and to learn about the resources available to help them do so.

Pay Statement Compliance: The Risks Are Real

Employers face a number of potential compliance risks as they navigate pay statement disclosure requirements on a state-by-state basis. These risks include government audits, litigation, penalties, and potential reputational harm. If employees see what they perceive to be disparities between their expected compensation and what's reported on their wage statements, employers could find themselves in a conflict with their workers.

For example, in California, a company that distributes non-compliant pay statements could pay $50 per employee for the first violation, subject to an aggregate penalty of up to $4,000 per employee plus costs and attorney's fees. For larger companies, that is a hefty price to pay for an avoidable error.

What Pay Statements Must Include

Aside from clear communication and record-keeping for both employees and regulators regarding pay, compensation, and tax rates, the pay statement is a crucial wage payment compliance component.

Pay statements simplify payroll complexities, provide employees clarity on their paychecks, and help employers resolve disputes and tax discrepancies. Moreover, pay stubs contribute to payroll compliance, varying by state regulations. Typically, pay statements may include:

• Contacts and Dates: Display of employer's name, address, phone number, pay period dates, and employee details. Some states may require an employee identification number.
• Pay Rates and Hours: Critical information for employees eligible for overtime, detailing regular overtime, double-time rates, and corresponding hours worked.
• Gross Earnings: Total earnings before any tax or deductions.
• Employee Taxes: Deductions for federal income tax, FICA taxes (Medicare and Social Security), and state/local taxes if applicable.
• Benefit Deductions: Employee contributions to employer-sponsored benefit programs.
• Employer Taxes and Contributions: Employer responsibilities for various taxes, including federal and state unemployment taxes, FICA taxes, and potential benefits contributions.
• Garnishments: Withholding a portion of earnings for court-ordered reasons like child support, defaulted loans, or tax levies.
• Paid Time Off (PTO): Accrued hours, taken and balance for vacation, sick, or personal days.
• Net Pay: The amount paid to an employee after all deductions.
• State-Specific Requirements: Any particular state or jurisdiction-specific required fields based on where the employee is being paid (such as state-mandated family leave employer and employee contributions)

Takeaways for Employers

For employers evaluating their compliance risks and pay statement compliance, here are a few key things to consider:

• Wage statements must have all relevant information pertinent to state rules/regulations.
• Lack of compliance can open a business to lawsuits, including class actions, in some jurisdictions.
• Your payroll system may not possess the required fields; it's crucial to set up a consultation with your payroll system provider to determine a business's possible risk exposure.
• Penalties and fines can add up.

Navigating pay statement compliance requirements to ensure clarity, compliance, and a positive employer-employee relationship doesn't have to be daunting. Partnering with an experienced HR organization (HRO) service provider offers peace of mind and ensures accurate and timely payment of employees and taxes.

This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice, and is not guaranteed to be complete, correct, or up-to-date.