April 18, 2019

The Path to Perfection in Payroll

Carl Young

Carl Young
Former CFO ,Consultant, Business Coach, Trainer specializing in COVID-19 challenges & concerns to re-imagine finance & accounting systems, organization, procedures & controls. Creating new post COVID-19 norms based on lessons learned during COVID-19 as com/C Young Consulting LLC

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The essence of payroll is perfection. Employees expect payments on time and perfectly calculated. Nothing else is acceptable. This challenge will become more complicated when the new recently announced overtime rules go into effect. All companies will face major challenges in their payroll processes.

I propose a path to payroll perfection that will assist in meeting these challenges in the new overtime rules environment.

Step #1: Determine if workers are contractors or employees
This will only apply to companies with contractors. Use the IRS ABC criteria to determine contractors and ensure you have all the required documentation as validation.

Step #2: Separate employees into Exempt or Non-Exempt
These are the only two employee classification established by the Fair Labor Standards Act (FLSA) of 1938.

There are five categories of Exempt employees based on defined criteria by the FLSA:

  • Executive
  • Administrative
  • Professional
  • Computer employee
  • Outside Sales

There are no defined criteria for Non-Exempt employees. They are by default considered Non-Exempt if they do not fully meet the criteria for Exempt.

Exempt employees are exempt from overtime. Non-Exempt Employees must be paid overtime.

Step #3: Apply Rules for Payment of Exempt employees

Exempt classification was created by the FLSA to support Employers. Employers can hire Exempt employee for a position and pay them the same salary without regard to quantity or quality of work. They are not eligible for overtime.

The primary Exempt qualifying document is the position job description. Exempt employees are required to exercise discretionary powers and independent judgment in addition to other qualifying criteria.

Step #4: Apply Rules for Payment for Non-Exempt Employees

The non-exempt category was created by the FLSA to stop worker abuse and get more workers off the unemployment line. Companies were working employee long hours without extra compensation. The FLSA required companies to pay a minimum wage and extra compensation for all hours worked in excess of 40 hours in a workweek. States are allowed to create greater overtime benefits as some have with an overtime of over 8 hours in any given day policy.

Non-exempt employees must be paid for ALL hours worked and “overtime” i.e. half time for all hours worked in excess of 40 in a given week or per the state provision.

Overtime must be calculated on total compensation. Many companies have an issue with these provisions and are at risk from the Dept of Labor especially with non-discretionary bonuses paid to the employee for additional work i.e. on call.

Step #5: Review and Update all of the following:

  • Job Descriptions by position and ensure the “other duties as assigned” provision is properly used
  • Policies and Procedures related to payments and benefits. The FLSA anticipates companies will outline all pay provision in current up to date policies and procedures. The absence of written policies and procedures will cause your practice to be substituted as your policy
  • Employee Handbook: Handbooks should be written specifically for the employee to outline their roles and responsibilities

These five steps are necessary for companies to understand and implement the new Department of Labor overtime rules which will:

    • Increase the salary threshold for Exempt employees
    • Make more employees eligible for overtime
    • Substantially increase payroll administration and record keeping
    • Increase the overall cost of payroll administration

Companies will still be expected to be perfect in payroll. These five steps are a good start to the understanding and implementation of payroll. They provide a path to the payroll perfection.

This is a comprehensive issue that cannot be adequately addressed in this short presentation. I am available to discuss further and help you understand and implement the new Dept of Labor Overtime along with a complete review of your payroll administration.

Comments? You can contact me directly via my AdvisoryCloud profile.

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