One of your greatest responsibilities as an employer is paying your employees correctly. Ongoing paycheck errors can lead to high turnover, falling productivity, and disengaged workers—not to mention hefty government fines and penalties. In 2019, the Department of Labor not only recovered $33 million in back wages from employers, but increased its related penalties. For all of these reasons, it’s in your interest to ensure every payroll is calculated correctly.
But that is easier said than done. Running payroll requires more than entering numbers into a system. There are numerous key performance indicators (KPIs) that come into play. In order to calculate payroll accurately, these KPIs must be handled accurately, too—and some are trickier than others. To that end, be particularly mindful of these seven payroll KPIs and take pains to verify that you’re managing them correctly.
- Employee Classification – Misclassifying employees as exempt when they meet the definition of non-exempt deprives those workers of overtime pay—a common payroll error and FLSA violation. Don’t take chances: this payroll pitfall has led to some of the largest wage and hour class-action settlements. The solution: establish detailed practices for classifying new hires correctly and audit your classifications on a regular basis.
- Time Card Errors and Changes – You can’t pay hourly employees correctly if you don’t know their exact work time. If your current time and attendance system leaves room for errors like open punches, fix or replace your system. In addition, be sure your managers are trained to avoid making unauthorized time card changes—another compliance violation. (Some workforce management programs can actually track manager time card changes, allowing employers to better maintain compliance.)
- Shift Differentials – Many employers that operate beyond normal business hours pay a premium—a shift differential—to employees who work those less-desirable shifts. However, payroll errors can easily arise when employees work different shifts during a single pay period. If you pay shift differentials, verify that your payroll system is automatically applying the correct pay rate to the correct hours (not all systems can) by conducting regular audits. The same applies when workers are paid at multiple pay rates for completing different tasks.
- Overtime — Failing to pay overtime correctly remains yet another common payroll pitfall that triggers massive class-action lawsuits. To avoid trouble, make sure that 1) your time and attendance system captures and identifies overtime with precision and that 2) your payroll system calculates overtime pay correctly. This is particularly important when calculating blended overtime pay, as required when employees perform work at multiple pay rates within a single pay period.
- Union Dues and Rules – Employers who manage both union and non-union employees (or employees from more than one union) must be meticulous in observing those collective bargaining agreements. That means not only deducting union dues correctly, but applying union pay rules—i.e., pay rates and overtime—automatically. This requires setting employees up in your payroll system correctly and ensuring your system is one that has the ability to apply the rules as intended.
- Wage Garnishments – Seven percent of U.S. workers are subject to wage garnishments for child support, tax debt, etc. While on the surface, garnishments seem straightforward (per a court order, the employer holds back a portion of an employee’s pay, then forwards the funds as required), calculating and processing garnishments can be tricky. To ensure compliance, employers who don’t have in-house expertise may choose to offload this task to skilled payroll providers.
- State and Local Wage and Hour Regulations – In addition to complying with federal DOL regulations, you undoubtedly must comply with a growing number of state and local labor laws, affecting minimum wage, paid sick leave, overtime, and more. The answer: if you don’t have one already, implement a formal process for staying current on changing legislation—and keeping your payroll system up-to-date.
It’s true that processing payroll will always encompass many moving parts, and every payroll period will bring its own challenges. However, you can improve your overall payroll accuracy by, in a nutshell:
- Knowing your payroll KPIs
- Putting processes and technology in place to manage them correctly
- Monitoring your performance closely via reports and audits.
In an age when your employees’ paychecks matter more to them than ever—and when the risks of noncompliance have never been higher—it’s well worth the effort.
Michelle Lanter Smith is the Chief Marketing Officer of EPAY Systems, where she oversees the company’s go-to-market strategy, customer success, and technical support operations. Michelle brings 20+ years of leadership experience in driving revenue growth for high-tech and service-driven firms. She graduated summa cum laude from Marquette University, where she earned her Bachelor of Science degree in Business Administration. She holds a Masters of Business Administration with distinction from Northwestern University’s Kellogg School of Management.