Remedy payroll errors immediately

A quick fix can go a long way to solving a problem, particularly when that problem is a payroll error.

“Payroll errors unfortunately occur from time to time even at the best employers,” said Chuck McDonald, an attorney in the Greenville, S.C., office of Ogletree Deakins, in an interview with SHRM Online.

“When an employer discovers a payroll error, the best practice is to correct the error as soon as possible,” he advised. If, for example, “an employer determines that an employee has returned from a leave of absence and worked during the pay period but was still coded in the system as being on an unpaid leave of absence, the employer should notify the employee immediately and, if possible, cut a special payroll check.”

Don’t try to hide the error. “It is always best to be upfront with the employee regarding a payroll error,” he added.

An employee might have a cause of action for the delay in payment, but that depends partly on state law, McDonald noted.

“Under the Fair Labor Standards Act (FLSA), employers are required to pay nonexempt employees for all hours worked in a workweek; however, how often employees must be paid is dictated by state law,” he explained. “An employee who is not timely paid could have a claim under a state wage payment law governing frequency and timeliness of pay. While it varies among states, most states have a statutory grace period specifying when employees must be paid. In some states it is as short as five days, and in other states it is as long as 16 days after the close of the pay period.”

The U.S. Labor Department, however, “has taken the position that wages required under FLSA are due on the next regularly scheduled payday following the pay period in which the time was worked,” said Jim Coleman, an attorney in Constangy, Brooks & Smith’s Washington, D.C., metropolitan area office. “The best practice is to correct the error ASAP.”

No delay

Jennifer Shaw, an attorney at Shaw Valenza in Sacramento, Calif., was even more emphatic: “Pay the employee immediately. Do not wait until the next regular payday. Consider whether to pay any ‘penalties’ such as under California Labor Code Section 203, which provides that former employees may receive up to 30 days of wages for an employer’s failure to comply with pay rules.”

Paul DeCamp, an attorney in Jackson Lewis’ Washington, D.C., metropolitan area office, agreed: “I would not wait for the next payroll run, but instead issue a special check immediately, as employers in many states do for final wages for separating employees. Paying the wages in this manner does not necessarily absolve the employer fully as though the mistake never happened, but it is the best an employer can do under the circumstances and is the right way to proceed.”

If all wages due are not paid, an employee may file a private lawsuit or complaint with the state or federal Labor Department to recover unpaid wages, plus liquidated damages and attorneys’ fees.

Vacation, 401(k), interest

In addition to wage payment concerns, payroll errors can raise vacation accrual issues. “A coding error that causes the computers to think that an employee is still on leave when in fact the employee is working again could also result in the employee not accruing vacation,” DeCamp said. “In that instance, an employer should correct the vacation accrual issue as soon as it discovers the error.”

Vacation accrual issues typically can be easily resolved as long as the employer appropriately credits the vacation accrual at the time the payroll error is discovered, McDonald noted.

An employee’s 401(k) contributions also may suffer because of unpaid wages, DeCamp said. “To the extent that an employer’s delay of a few days or even weeks in making a wage payment and a related 401(k) contribution may cause the employee to miss out on investment gains, the employer may make the employee whole through a supplemental 401(k) contribution that gives the employee the benefit of what the investments would have looked like had the contribution occurred at the correct time,” he explained.

As for interest, “it is unlikely that an employee will be entitled to interest for a short one- or two-week delay in wage payment. However, if the payroll error is not discovered for a lengthier period of time—such as six months—an employer is more likely to be charged interest on the amount that was improperly withheld,” McDonald remarked.

Shaw said employers should pay interest if an employee files a claim with the California Division of Labor Standards Enforcement or the court. “Otherwise, no,” she concluded.

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

©2014, Society for Human Resource Management.

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