As an employer, you do your best to ensure that employees are being paid correctly. However, what happens when something goes wrong and your employee files a payroll dispute?
Employers are legally obligated to pay their employees under the Fair Labor Standards Act, as well as any other state laws that apply in their particular location. No matter how hard you try to ensure that payroll is done correctly, there may always be little details that you miss.
It happens more often than you might think. The state of California recovered more than one billion dollars in unpaid wages between 2010 and 2014. In 2013 the Federal Department of Labor pursued more than 24,000 violation cases.
If this happens and your employee files a payroll dispute, this can lead to a lawsuit against the employer. Your consequences may include payment of the back pay owed, as well as fines and penalties.
Small businesses are often hit harder by these situations because they may not have even realized they were doing something wrong and they don’t have the expertise or knowledge to handle the situation. However, if you deal with the situation quickly and correctly you can reduce the damage caused to the business overall.
Reducing Your Risk of Payroll Disputes
You can reduce your risk of wage mistakes by using time tracking software to keep good time records. The best software will also create an electronic record of the hours logged and payment made so it can be used as evidence during the dispute. Without recorded hours and a payroll timesheet, an employee could claim that they received or should have received any number of hours or amount of pay.
Also, always pay your employees in full in a timely manner. To do this, you must be clear on what the relevant state or federal law means by “timely”. Never choose to ignore payment law to save money. It might seem like a good idea at the time, but if an employee makes a claim you will have to make a payment for everything you owe them and possibly more. Just because other employers do it doesn’t mean you should too.
It is also important to delegate some of the responsibility to someone who is an expert in the legislation, such as a trusted advisor or an accountant. There are many bookkeepers and accountants who specialize in ensuring that your payroll complies with local, state and federal regulations.
Resolving the Dispute
When your employee makes a payroll dispute against you, you will usually have a chance to deal with the situation right away and repay the wages.
Often the employee will use the internal compliance process of the company first. If they are unhappy with the response, they may then file a lawsuit or an administrative wage claim with the US Department of Labor.
If you can resolve the dispute as quickly as possible while the employee is still using your internal compliance process, then you will avoid having to pay fines or court/attorney fees and save yourself a lot of time, money and headache.
So, what should you do? Here are the basic steps to take.
- When the employee makes a dispute regarding their pay, make a note of this dispute as well as the date.
- Investigate the dispute as soon as possible. See if the claim has merit. If it does, then you should resolve it immediately.
- If you find that there is a mistake and you have underpaid the employee, make a payment for the shortfall as soon as possible.
- Document the process, including notes about the actions you have taken and any payroll adjustments.
If you have already paid the employee and given them a pay slip, don’t delete the record of pay associated to that pay slip. Instead, just make an adjustment on the next pay slip or give a separate payment for the adjustment (commonly known as a “bonus payroll” or “off-cycle payroll”).
It is also important to keep in mind that payroll can be a very sensitive topic for employees. They may even feel that the mistakes you have made as being a personal slight against them. For the employee to raise a payroll dispute, they have probably already reached a point of frustration. It is important to remain tactful and calm and not to get too emotional about the criticism.
Don’t Retaliate or Punish
Remember, as an employer you may not take any negative action against the employee for complaining that they haven’t been paid correctly. If the employee believes you have retaliated against them they will be able to add a charge of retaliation to their existing wage claim. This means that they may be entitled to more money damages for lost wages, out of pocket costs and more.
Even if you think the employee may be wrong or misinformed, they cannot be punished for raising the dispute.The employee is protected by federal law from retaliation for asserting their rights. If it turns out they were mistaken about the payroll violation, they are protected from retaliation as long as they had a good faith belief that you had violated the law. If you react to a false claim by retaliating against the employee, you will turn their illegitimate complaint into a legitimate one.
Retaliation could include any action that has a negative impact on the employee, including firing or demoting them, changing their job title, reducing their responsibilities or doing anything that could prevent them from seeking other employment.
Exempt vs. Non-Exempt
One of the most common wage disputes happens when non-exempt employees (hourly) are treated like exempt employees (salaried) when it comes to overtime (non-exempt employees must be paid overtime). The employee might have been working overtime in error for your company without being paid extra.
The employee may have even agreed to work these overtime hours without being paid time and a half. However, this doesn’t matter. Employment laws cannot be contracted away.
When the employee realizes that they are entitled to overtime under the FLSA, they can make a payroll dispute and can be compensated for up to three years of back overtime. Plus, some states award twice the amount of back overtime. If your company is found to be at fault, the FLSA will double the award and require you to pay the legal fees of the plaintiff as well.
This is why it is so essential to make sure that your payment policies are compliant with the FLSA. Even if your employee agrees to forego overtime, you are still putting yourself at risk for a payroll dispute. If you are not sure whether or not your employee qualifies as exempt or not, here is some more information to help you determine their status.
More Tips for Handling Payroll Disputes
- Be aware of the payment laws as they apply to your business. Ignorance is not a defense. The FLSA puts the burden on the employer to ensure records of hours worked are maintained and correct payment is made.
- Create an employee handbook that states all of the payment policies of the company as clearly as possible, just to make sure that everyone is on the same page. When employees begin work they must review this information and sign a statement confirming that they understand it.
- Hire an attorney to make sure that your company policies comply with state and federal laws. Take the time to learn about the FLSA and how it works. Conducting a full audit of your company before any payment dispute issues arise could save you a lot of hassle.
- Watch out for misclassifying workers and make sure you are clear on who is exempt and non-exempt from overtime.
- Once the dispute is resolved, perform an audit of your time tracking software to make sure that the issue will not happen again. Making a mistake once due to a mistake is excusable. Making the same mistake twice will leave you open to criticism and potential legal action.
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