What Is Payroll Compliance?

5 minutes read

Maintaining payroll compliance is one of every U.S. employer’s greatest responsibilities. 

It means ensuring that employees are paid in accord with all applicable federal, state and local regulations. Payroll compliance is no small feat, given the sheer volume of wage and hour laws and the fact that they’re frequently changing.

According to the American Payroll Association, payroll compliance includes:

  • Calculating each employee’s earned pay correctly (which can be especially challenging for hourly workers.)
  • Executing employee tax withholdings and preparing required reports.
  • Withholding benefit contributions, child support, wage garnishments, etc., from employee paychecks and forwarding those funds as directed. 

In addition, employers must follow specific protocols regarding how frequently employees are paid, how payments are made and what information must be provided.   

Who Sets Payroll Laws?

At the federal level, payroll compliance laws are set by the U.S. Labor Department’s Wage and Hour Division

The Wage and Hour Division is responsible for enforcing federal payroll laws, which include the Fair Labor Standards Act (FLSA), Federal Income Tax (FIT), federal payroll tax related to Social Security via the Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA).

In addition, all 50 states have their own wage and hour laws as do many local jurisdictions. In the event of a conflict, federal law supersedes state and local regs.  

Common Wage and Hour Violations 

Maintaining payroll compliance means guarding against wage and hour violations, which often include:

  • Failing to pay employees for all compensable work time. 
  • Paying overtime incorrectly.
  • Misclassifying hourly employees as salaried. 
  • Failing to provide wage notices or pay stubs as required.
  • Failing to pay minimum wage, especially when state minimum wages exceed federal requirements.   

Employers should be familiar with the most common wage and hour violations.

The Cost of Noncompliance

Payroll violations can result in costly fines and penalties for employers, enforced payment of back wages and even criminal liability for company leaders. For example, in fiscal 2021, the Labor Department’s Wage and Hour Division recovered more than $230 million in back wages from employers.

In addition, wage and hour civil settlements continue to rise, according to Seyfarth Shaw’s 2022 Workplace Class Action Litigation Report, with the values of the top 10 highest settlements essentially doubling from 2020 to 2021. Without question, the cost of noncompliance is steep.

How to Maintain Payroll Compliance

In order to maintain payroll compliance, employers should make sure they’re on top of all relevant federal, state and local legislation—and that they have a system in place for staying abreast of changes in the law.

One of the best ways to do this is by partnering with a payroll software provider that offers this service to its clients, along with built-in compliance safeguards and expert tax filing services. 

In addition, employers who manage a hard-to-pay workforce—such as hourly paid employees—can benefit from payroll software designed specifically for the hourly workforce. While payroll compliance will never be simple, advanced payroll technology makes it much easier—and helps employers sleep better, too. 

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