How common are payroll infractions, really? What’s the most common violation, and why does it happen? We wanted to get the perspective of someone who deals with the ramifications of FLSA noncompliance on a daily basis, so we sat down with employment litigation attorney Matt Elliott and asked him for his take on payroll infractions.
Note: This is part two of a two-part interview. Read what Matt had to say in part one.
A Lawyer's Payroll Advice to Employers
IDI: So what is the most common infraction that you find?
Matt Elliott: There’s a few that we see come up again and again. Improper deductions from paychecks is a common one. Depending on what state you’re in, it is impermissible to deduct various things from paychecks. And yet we see employers do that all the time, because it’s a fairness thing from their perspective. They think that the employee broke something or borrowed something, or committed to take something out of their paycheck for some reason. Well, even if all those things are true, it can still be illegal, depending on what state you’re in.
Failure to calculate overtime properly is another very common one. For instance, many companies offer bonuses to their hourly workers, and normally those are supposed to be incorporated into the regular rate of pay for overtime purposes. We see a lot of companies that don’t do that. We see a lot of companies that otherwise fail to calculate overtime properly.
And, of course, you have misclassification issues, where people are classified as salaried employees, but they’re required to be hourly employees, and so they’re required to be paid overtime, and they’re not.
What do you think is the biggest reason employers are in noncompliance?
Well, there’s a few reasons. One, the laws always change, right? And the regulations that interpret those laws also change. And sometimes, they change 180 degrees, depending on what administration is in power. So it’s very difficult for companies to keep track of all those changes while still doing their normal company work.
I think companies that try to do it the old-fashioned way—which is just having it all in the head of the HR Director, or having it all down on paper somewhere, or just relying on policies and practices that have been in place for years and years—that’s very dangerous, because there’s just no way to turn on a dime when the regulation or the law changes. And there’s too much for one person or department to keep track of. It needs to be more systematized.
What percentage of employers have automation—systematic time, payroll, or HR systems?
Well, I think the medium to larger businesses probably have some level of automation—whether it’s through a third-party provider or internally.
Now, the question of course, is: Is that automation just basic payroll automation, or is it sophisticated automation that’s tailored to these issues under the wage laws? And I would say that a much lower percentage has this sophisticated level of automation that’s really sensitive to all of the issues under the wage laws. And for smaller businesses, I would say that it’s virtually non-existent.
You mentioned laws changing, and sometimes quite dramatically. As you know, there’s been a lot of press over these new overtime regulations that are coming, and employers need to be ready to go on December 1. Regarding that change, what do you see coming on the horizon?
I would guess there’s going to be an initial flood of litigation in 2017, in connection with all of the smaller and medium-size businesses who are only vaguely aware of this and don’t realize they need to do something now to get the employees who are currently classified as salaried properly classified as non-exempt, and set up to earn overtime if they’re working over 40 hours a week, and so forth.
Do you think there’s still a lot of ignorance about the overtime changes?
Well, I think in a sense, it’s like Obamacare for many people—people know that it’s out there, they’ve heard about it, they’re afraid of it and dissatisfied with it, but they’re hoping that it’s going to go away. And there’s no indication that I’ve seen that this particular issue is going to go away. So people need to plan for it now and get their ducks in a row.
And what advice would you give to employers?
I would say, carefully consider your job classifications, first of all, with this new change coming. But also, now is the time to seriously look at overhauling your payroll practices to the extent that you haven’t already done so.
And with these changes, it might be time to consider automating to the extent that you can, to take care of all these issues in one fell swoop. Because this is a big issue, this is a big change that’s coming on December 1, but it’s not the last change. And it’s a lot easier to change your practices as a company if it’s changes in a few lines of code, rather than changes in hundreds of files and keeping track of things mentally and things like that.
Employers need to have the information that’s necessary to comply with these laws collected in an automated way, dealt with in an automated way, rather than spread out across hundreds of paper files that are very difficult to keep track of.