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October 15, 2020 | Payroll Software | Posted by Ascentis Thought Leadership

What are Payroll Errors Costing Your Business?

Payroll isn’t a simple process. There are a lot of moving pieces, a lot of personal data involved, and a lot of transactions to keep track of. With all of those factors involved, it’s inevitable that there are going to be errors in your payroll process from time to time — in fact, 54% of American workers say they’ve experienced payroll issues. Even so, it’s crucial for your business to avoid as many errors as possibleBy taking a closer look at the true costs of some common payroll mistakes, your business can be better prepared to combat those errors before they become a bigger problem.  

Penalties for Noncompliance 

When people think of the costs of payroll mistakes, fines and penalties are probably where their minds go first. While these are far from the only costly risks for your payroll team, they’re certainly important ones to consider. Fines vary from state to state, but they tend to be considerable. For instance, fines for misclassifying contract employees in California range from $5,000 up to $25,000 for each incident. On top of those fines, the employer may also be held responsible for the affected employees’ portions of FICA and FUTA taxes, unemployment and disability insurance and any state or local taxes that apply.  

Beyond fines, employers who misclassify workers or violate laws governing minimum wage or overtime pay also open themselves up to class action lawsuits and, in rare cases, even jail sentences — a Toronto restaurant owner served 90 days in jail for payroll violations in 2018. A business found out of compliance with FLSA minimum wage or overtime regulations may not be allowed to ship goods across state lines. This could serve as a definite hardship for any company involved in interstate commerce. 

Underpayments and Overpayments 

Whether accidental or intentional, underpaying employees can have a major impact on your bottom line. The most obvious pitfall is having to pay back employees who have been underpaid, sometimes with interest or additional penalties tacked on. In a 2017 case, for example, a major UK retail chain was ordered to pay the equivalent of $46.3 million in restitution to employees who’d been underpaid due to an accounting error. Closer to home, a California burger chain was recently ordered to pay $400,000 in back wages and fines to employees and Los Angeles County for violating minimum wage laws. In another famous case, a Texas construction company underpaid an employee $608 for overtime work and ended up paying more than $42,000 in penalties for the error. 

The financial cost of overpayments is obvious, especially since a company that attempts to recoup those losses often finds itself losing in the court of public opinion. An Ohio-based grocery chain recently discovered that they’d been overpaying some employees for work performed during the COVID-19 crisis. When the employer tried to make the workers return the extra cash, the public outcry quickly turned out to be more damaging than just accepting the loss. 

Loss of Reputation

As you can see, not only is the kind of payout mentioned above a major financial hit, it’s also hugely damaging to a company’s reputation. Compliance issues and underpayments, even unintentional ones, can saddle a business with a reputation for incompetence at best, and dishonesty at worst. That kind of negative reputation can make quality employees reluctant to apply for roles with your company, partners wary of doing business with you, and investors hesitant to put money into your operations.  

Employee Retention Issues 

As we mentioned up above, more than half of workers say they’ve experienced payroll problems in the past. At the same time, 33% of American small businesses receive some manner of payroll fine each year. Those mistakes add up quickly for a company struggling to retain a quality workforce. Understandably, it doesn’t take much financial instability to send employees toward the door. Nearly half of American workers say that two payroll errors would be enough to make them start looking for a new job. That can set in motion a chain reaction — it costs more to hire a new employee than it does to retain an existing one, and an influx of lower-quality hires can lead to decreased productivity and a rise in the same kinds of errors that drove away your best employees in the first place. 

Time Spent Fixing Mistakes 

When payroll mistakes do inevitably happen, employers seldom have the option of simply moving on from them. You’ll need to rectify the issue, identify the cause, and put in place policies and practices that keep it from happening again. All of that takes time and effort from your payroll staff, adding to the cost of any fines or penalties your business may have incurred. Time spent fixing mistakes has a negative impact on employee morale, which can lead to decreased productivity and further financial losses.  

Clearly, payroll mistakes are no minor issue. It behooves employers to establish a system that eliminates common pitfalls and reduces the chance for human error. Learn more about the ways automated payroll software from Ascentis can help keep your organization compliant and your payments accurate.  

With more than 35 years of experience in providing Software as a Service (SaaS) solutions, Ascentis thought leaders have become a respected source for insights, tips, and innovations in the Human Capital Management (HCM) space.