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Common Hourly Payroll Mistakes
& How to Avoid Them

Learn how payroll processing mistakes can hurt your business.
Handling payroll in a hospitality or retail business is a complicated and often thankless task. But it’s incredibly important to get it right, because payroll processing mistakes can hurt your business in more ways than one. Sure, there are the obvious (and numerous) compliance requirements outlined by the Fair Labor Standards Act (FLSA), but payroll errors can also ripple out into other areas of your operation. If an employee doesn’t get adequately compensated for hours worked, it may have an adverse effect on how they feel about your business — especially if it’s a recurring issue. That affects things like employee satisfaction, customer sentiment, and even your bottom line.

Still, there’s a lot to keep track of and mistakes happen. In fact, they happen pretty frequently. In this article, we’ll go over the most common mistakes that business owners make when processing payroll, and they can be avoided in the future.

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1. Misclassifying Employees

Businesses often struggle with classification of employees under the FLSA. The law states that employees must be classified as nonexempt, exempt, or independent contractors. Here’s what that means:

  • Nonexempt employees have the right to protections like minimum wage and overtime pay as stipulated in the FLSA. These are the hourly employees who form the backbone of your business, and of the hospitality and retail workforce as a whole.
  • Exempt employees, on the other hand, are paid a fixed salary and don’t qualify for overtime. But in order to qualify for exempt status, the job must meet certain duty requirements. That means that business owners can’t just classify an employee as exempt based solely on their job title. Instead, examine that employee’s actual duties and make sure they qualify.
  • Independent contractors, employees typically brought in on a short-term basis, are not covered by the FLSA. The U.S. Department of Labor has strict guidelines around clarifying this status.

Employee misclassification not only affects your workers, who may be missing out on compensation, but it also affects the income tax amounts collected by the federal government. For this reason, financial penalties for misclassification can be incredibly high.

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2. Not Paying for All Hours Worked

Business owners need to make sure they pay their employees for all of their time worked. That includes the time it takes to change into a work uniform, drive to a different job site, or participate in a training session. It also includes unauthorized employee work — even if you didn’t ask somebody to work that shift or didn’t want them to. You can take disciplinary action if necessary after the fact, but that employee will still need to be paid.

Just as it’s important to pay employees for all of their worked hours, you also want to make sure that you’re paying them for the time they’re actually working. Time theft issues like buddy punching are an irritating money-suck — those minutes add up to hours. An integrated, geofenced Time and Attendance solution like Fourth’s can help you avoid these problems, ensuring accurate click-in and clock-out times. This time tracking tool will not only help you maintain compliance but lower your labor cost at the same time.

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3. Overtime Miscalculation

Paying overtime is a constant worry for hospitality and retail business owners, finance teams, and in-store managers. Even when calculated correctly, overtime drives up your labor cost. But when calculated incorrectly, the financial hit can be ugly. If you don’t pay the correct overtime amount, your business will owe wages, penalties, and interest.

The FLSA mandates that if an employee works more than 40 hours in a week, those additional hours must be paid at 1.5 times the worker’s hourly rate. Failure to comply results in penalties, so whether you simply don’t pay an employee for overtime, underpay them for hours worked, or pay them at the wrong rate, you could eventually have the Department of Labor’s Wage and Hour Division breathing down your neck.

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4. Mishandling Tips

Hospitality businesses also need to comply with requirements around tips, but incorrectly applying these rules is a common error.

First, there are tip credit regulations. The FLSA allows businesses to pay an hourly below minimum wage and count reported tips as a credit toward that minimum wage. If an employee’s tips don’t reach that minimum wage threshold, then the business is responsible for making up the difference in compensation. Employees can only receive tip credit for work that generates tips — if an employee spends more than 20 percent of the hours in their workweek on non-tipped work, then business owners must pay them the full minimum wage. This often requires keeping full records of the tips received by an employee, to make sure they’re meeting the relevant thresholds for the state.

Employers also need to stay on top of tip pooling regulations. If your business pools tips, that pool must include only tipped employees, like servers or bartenders. Non-tipped employees like managers and cooks cannot participate in the tip pool. Federal regulations were revised in 2011 to specifically prohibit the inclusion of non-tipped employees in tip pools.

Outsourcing Payroll to Avoid Costly Errors

As you can see (and probably know), payroll is extremely complex. The administrative burden and compliance consequences can be intimidating, especially for small businesses who don’t have a dedicated payroll department. But it can even be a bear to handle for larger companies too!

That’s why some businesses choose to outsource core payroll functions to specialized providers like Fourth. Here at Fourth, we’re experts in hourly payroll, with deep roots in the hospitality sector that go back 20 years. By combining these expert services with a Time and Attendance solution and HotSchedules, the best employee scheduling software on the market, Fourth offers the only fully integrated workforce management solution for hospitality and retail businesses.

We’ll help you ensure that your employees get paid on time and that all legal obligations are met on both sides. As wage and scheduling compliance grow more severe across the country, you can rely on a dedicated partner to handle complex payroll calculations while minimizing your risk.

Interested in learning more about Fourth’s HR Administration, Payroll, and PEO Services?

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