Warning: Avoid $1,000,000 +/- of Uninsurable Penalties & Damages - It's Time to Audit Your Pay Stubs

March 19, 2015

Well-intended employers often lament the various "gotchas" that await them down the dark and winding road that's also known as California Labor Code. Perhaps no turn is more treacherous than the one at the Wage Statement/Stub Junction. Here, one crosses at extreme peril, for in Labor Code Section 226, California has planted legal land mines that can blow up and cost a fortune at the slightest clerical error.

 

And blow up is EXACTLY what has just happened to one of our “by the book” clients. We are currently working to assist with their "pay-stub violation"  which is as a result of the employees 4 digit social or employee ID was left off of their pay-stubs.  So far, they’ve received a letter from an attorney about this Labor Code 226 violation.

 

NO BIG DEAL, RIGHT? WRONG - It’s a HUGE deal! Our client's attorney went through the potential penalties and damages, which total about $1,500,000 – which by the way, is mostly uninsurable.

 

Think your payroll company will take responsibility for your pay stub errors? Think again!

 

California Labor Code Section 226 requires that employers provide the following 9 items of information at the time wages are paid on the pay stub:

 

1. Gross wages earned (before taxes and deductions)

2. Hours worked in the pay period

3. The dates of the pay period

4. The hourly rates in effect during the pay period and number of hours worked at each hourly rate (for example regular rate and overtime rate)

5. If applicable, the number of piece units earned and the rate for each piece

6. Deductions, which may be totaled and shown as one item

7. The net wages earned (after taxes and deductions)

8. The employee's name and last 4 digits of the employees SSN or an Employee ID #

9. The employer's legal name and address

 

The pay stub, or pay record, must show the date that the statement was printed. Also, employers must keep a record of all complete payroll records for at least three years at the employment place or at a central location in California. Electronice copies are acceptable, as long as your records remain HIPPA compliant.

 

A Common Sense Question With a Less-Than-Intuitive Answer:  “Can’t I avoid hazards if I just pay them the right amounts and on time?” Sadly, no, there’s much more to it. Labor Code section 226(a) lays out a long list of other requirements, some more sensible than others.

 

Not So Simple. Timely paychecks must be accompanied by a “simple” wage statement at least semi-monthly, and the wage statement must include the ninedistinct pieces of information for each employee:

 

The Logical Questions In Response: “Nine? Do I really need to include each of these items on every employee’s pay stub twice a month?” To quote The Who, “You better, you better, you bet,” and you better believe these rules apply to electronic pay stubs too. And while it’s true that some of these requirements—like listing net wages earned during the pay period—may seem like no-brainers, others are less intuitive. The employee should know how much she has earned. But an employee may argue that she can’t know whether her pay was right without knowing all of the types of deductions that get her from gross to net.

 

You may assume your company and/or your payroll company are in full compliance, but we urge you to conduct a self-audit by reviewing the sample pay stub here. Comparing the sample wage statement with your form can expose whether any red flags appear from which you might need additional scrutiny of your payroll process.  Your self-audit should encompass not only the format and content of the pay stub but the underlying information to determine whether you are paying your employees correctly taking into consideration all of the intricacies that go into calculations for overtime, piece rate, minimum wage, standby time, call-back and reporting time, etc.

 

Silver Lining: The amendments expressly exempts from liability an employer who makes an “isolated and unintentional payroll error due to a clerical or inadvertent mistake.” The key word here is AND, in this part of the code. In what should be a given, Section 226 now expressly authorizes, a judge or jury to consider an employer’s adoption of policies, procedures, and practices that fully comply with Section 226 in determining damages.

 

Aren’t there any exceptions for companies that make a mistake?  No harm, no foul, right?  Plaintiffs argue that the only exception to penalty liability for errors and mistakes is the codified exception for any “isolated and unintentional payroll error due to a clerical or inadvertent mistake.”

 

Stay in compliance with California's Pay Stub Law and see the sample pay stub here.

 

When your self-audit or an employee complaint raises the possibility of wage statement violations or underlying wage and hour violations, you should take prompt action to stop any further liability from accruing and consider a strategic plan to implement changes that will reduce exposure.

 

What’s going to happen with our clients pay stub violation?  Stay tuned, we will offer an update once we know more. In the meantime check out the "Must Do" HR Compliance Checklist and be sure to add your pay stub audit!

 

As always, if you have questions or concerns, we here at Granite Insurance Brokers are here to support you. 

 

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