Payroll Laws Every Business Owner Should Know
Employer handing an employee their paycheck.
A human resources consultant can help you comply with all applicable state and federal payroll laws pertaining to your business and your company's location. As a business owner, you have many responsibilities and obligations to your employees, customers, and the government. One of the most important and complex areas of running a business is payroll. Payroll involves not only paying your employees on time and accurately, but also complying with various federal, state, and local laws and regulations that govern how you classify, compensate, and report your workers' earned income and taxes.
In this blog post, we will discuss some of the key aspects of payroll laws that every business owner should be aware of and follow. These include:
- Other IRS worker classifications
- Who is entitled to overtime pay
- What qualifies as hours of work
- Call back and show-up pay
Other IRS Worker Classifications
One of the first steps in payroll compliance is to determine how to classify your workers for tax purposes. The IRS has different rules and requirements for different types of workers, such as employees, independent contractors, statutory employees, statutory nonemployees, and common-law employees. The classification affects how you withhold and pay income taxes, social security taxes, Medicare taxes, unemployment taxes, and other taxes and benefits for your workers.
The IRS uses a set of criteria to determine the degree of control and independence that you have over your workers. These criteria include:
- Behavioral control: How much you direct and control how the worker does their job, such as giving instructions, training, supervision, evaluation, etc.
- Financial control: How much you control the economic aspects of the worker's job, such as how they are paid, whether they can incur expenses or make investments on your behalf, whether they can work for others or have multiple clients, etc.
- Relationship: How you and the worker perceive your relationship, such as whether there is a written contract or agreement, whether you provide benefits or insurance, whether the relationship is permanent or temporary, whether the services are integral to your business, etc.
Generally speaking, the more control you have over your workers, the more likely they are to be classified as employees. The less control you have over your workers, the more likely they are to be classified as independent contractors or other non-employee categories.
It is important to classify your workers correctly because misclassification can result in serious penalties and liabilities for you and your workers. For example, if you misclassify an employee as an independent contractor, you may be liable for back taxes, interest, penalties, fines, and even criminal charges. You may also be subject to lawsuits from your workers for unpaid wages, overtime pay, benefits, and other damages.
Therefore, it is wise to consult with a human resources professional or a labor and employment attorney before hiring or contracting any workers for your business. You can also use the IRS Form SS-8 to request a determination of worker status from the IRS, though this obviously will delay your hiring process.
Who Is Entitled to Overtime Pay
Another aspect of payroll compliance is ensuring that you pay your employees according to the Fair Labor Standards Act (FLSA), which is a federal law that sets minimum wage and overtime pay standards for most workers in the United States.
The FLSA requires that you pay your nonexempt employees at least the federal minimum wage (currently $7.25 per hour) for all hours worked and overtime pay (one and a half times their regular rate) for all hours worked over 40 in a workweek. Some states and localities may have higher minimum wage and overtime pay rates than the federal ones, and you need to comply with your local pay rate laws and statutes.
Nonexempt employees are those who are covered by the FLSA and are not exempt from its minimum wage and overtime pay provisions. Most employees are nonexempt unless they meet certain criteria for exemption based on their job duties and salary level.
Exempt employees are those who are not covered by the FLSA or are exempt from its minimum wage and overtime pay provisions. Generally speaking, exempt employees are those who perform executive, administrative, professional, computer, or outside sales duties and earn at least $684 per week ($35,568 per year) as of 2020.
However, there are some exceptions and variations to these criteria depending on the specific job category and industry. Therefore, it is important to consult with the Department of Labor (DOL), a human resources professional, or an attorney to determine the correct exemption status of your employees.
It is also important to keep accurate records of your employees' hours worked and wages paid as required by the FLSA. You must maintain these records for at least three years and make them available for inspection by the DOL or other authorities if requested. Failure to comply with the FLSA can result in fines, penalties, back wages and taxes, liquidated damages, and lawsuits from your employees or the government.
What Qualifies as Hours of Work
Another aspect of payroll compliance is understanding what qualifies as hours of work for which you must pay your employees. According to the FLSA, hours worked include all time that an employee is required to be on duty, on the employer's premises, or at a prescribed workplace, as well as any additional time that the employee is allowed or suffered to work. This means that you must pay your employees for all time that they spend performing their job duties, as well as any time that they spend doing other activities that benefit you or are controlled by you, such as:
Travel time: You must pay your employees for travel time that is part of their regular workday, such as commuting between different work sites or locations. However, you do not have to pay them for travel time that is outside their regular workday, such as commuting between home and work or personal trips.
Training time: You must pay your employees for training time that is required by you or by law, such as safety training or orientation sessions. However, you do not have to pay them for training time that is voluntary, outside regular working hours, not related to their job, and does not involve any productive work.
Break time: You must pay your employees for break time that is less than 20 minutes long, such as coffee breaks or restroom breaks. However, you do not have to pay them for break time that is more than 20 minutes long, as long as they are completely relieved from duty and free to use the time as they wish.
Meal time: You do not have to pay your employees for meal time that is at least 30 minutes long, as long as they are completely relieved from duty and free to use the time as they wish. However, you must pay them for meal time that is less than 30 minutes long or that involves any work-related activities, such as answering phone calls or emails.
On-call time: You do not have to pay your employees for on-call time that is spent away from the workplace, as long as they are free to use the time as they wish and can refuse calls without penalty. However, you must pay them for on-call time that is spent at the workplace or under restrictions that prevent them from using the time effectively for their own purposes.
Waiting time: You must pay your employees for waiting time that is spent on duty or under your control, such as waiting for instructions or assignments. However, you do not have to pay them for waiting time that is spent off duty or free from your control, such as waiting for work to start or end.
These are some examples of what qualifies as hours of work under the FLSA. However, there may be other situations where you have to pay your employees for certain activities or periods of time depending on the circumstances. Therefore, it is advisable to consult with the DOL or an attorney if you have any questions or doubts about what constitutes hours of work for your employees.
Call Back and Show-Up Pay
Another aspect of payroll compliance is understanding when you have to pay your employees for call-back or show-up time.
Call back time is when you require an employee to return to work after completing their regular shift or on their day off. Show-up time is when you require an employee to report to work but then send them home before they complete their scheduled shift or without giving them any work.
According to the FLSA, you must pay your employees for call back or show-up time if it qualifies as hours of work, as discussed above. This means that you must pay them at least their regular rate for all hours worked, including any travel time, waiting time, or other activities that benefit you or are controlled by you. You may also have to pay them overtime if they work more than 40 hours in a workweek. Some states and localities may also have additional rules or requirements for call back or show-up pay, such as paying a minimum number of hours or a higher rate than normal. Therefore, it is important to check with your state labor department or an attorney to determine if there are any specific laws or regulations that apply to call back or show-up pay in your area.
Summary
In this blog post, we have discussed some of the key aspects of payroll laws that every business owner should know and follow. These include:
Other IRS worker classifications
Who is entitled to overtime pay
What qualifies as hours of work
Call back and show-up pay
Payroll compliance is a complex and challenging area that requires careful attention and diligence. Failure to comply with payroll laws can result in serious consequences for you and your workers, such as fines, penalties, back taxes, interest, lawsuits, and even criminal charges. Therefore, it is advisable to seek professional guidance from a tax expert, an attorney, or a human resources consultant.
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