Payroll Compliance: What HR Needs to Know

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By Gyn Wylie

As HR professionals, we are expected to be aware of all workplace aspects affecting employees.  We must be able to differentiate between established norms and the law.  If you join a company and follow the established norms without questioning whether or not you are in compliance, you put your career and the company at risk.

For instance, are you paying your employees correctly?  Let’s look at some scenarios.

Determining hours for salaried employees
An established norm is to take the number of weeks in a year and to multiply by the number of hours worked per week to come up with annual hours.  Since both annual salary and hourly rate must be determined, the norm is to either take the negotiated annual salary and divide by the total annual hours to obtain the hourly rate, or to reverse the process and take the negotiated hourly rate and multiply by the annual hours.

Example:

52 weeks x 40 hours per week = 2080 hours per year

$41,600 salary divided by 2080 hours = $20.00 hourly rate

$20.00 hourly rate X 2080 hours = $41,600 salary

Overtime rate: $30.00 per hour

The problem is that some years the employees’ work 260 days (2080 hours) and other years they work 261 days (2088 hours).  For instance, if you used the established norm for the last 10 years, you have shorted each employee 5 days’ pay.  Years 2004, 2008, 2009, 2010, 2013 all have 261 work days.  

To correct for this error, for those employees whom you negotiated a flat salary, utilize the days for that year, then either add or subtract your standard work day for the years that differ.  For the employees whom you negotiated their employment based on an hourly rate, determine their salary by utilizing the correct number of work days for each year.

Calculating vacation accruals
In BC, our Employment Standards Act section 58 sets our vacationable earnings.  These are all earnings which we must add into the calculation for the employees’ vacation accrual banks and they include:

  • Cash bonuses (work related)
  • Call in/Call back pay
  • Commission
  • Overtime
  • Salary, earnings, retroactive pay
  • Severance pay
  • Shift premium
  • Company paid sick time
  • Statutory holidays
  • Vacation pay (previously paid)
  • Wages in lieu of notice

Programs originating from outside BC may not be in compliance.  For instance, we submit our payroll through ADP and the projected vacation accrual for 2013 was short for all employees.  It alerted us to the fact that the calculation was off.  ADP customer services checked and found the vacation pay (previously paid) had been excluded from the calculation.  They were able to do a correction for all employees. Fortunately, we are just finishing our first year of business and this was an easy one to catch. However, it did indicate that their program was not automatically linking vacation pay to be accrued for BC organizations. 

We also looked at another payroll program but opted not to go with it as it was not set up to be in compliance with BC Employment Standards Act legislation and had no plans to do so.  They offered a calculation to increase the vacation percentage but given the number of our employees who work on statutory holidays and who accrue overtime, this would increase the employees’ vacation accrual bank more than it would under a properly set up program. 

Check for compliance by working out expected vacation accrual by multiplying each of the vacationable earnings by the employee’s vacation percentage (two weeks’ vacation = 4%) and compare it to what was accrued.  If there are discrepancies, subtract the difference, which should give you the area that was missed.

Example:

$41,600/26 pay periods = $1,600 salary per pay period

$1,600 X 4% = $64.00 per pay period

If the employee took five days of vacation for the pay period, you reduce their salary by the number of hour’s vacation that will be paid from their accrual bank.

Salary: $800            Vacation accrual: $32

Vacation paid: $800   Vacation accrued: $32

Total vacation accrued should still be $64 for that pay period if only $32 is shown as accrued, the payroll has not been set up correctly for vacationable earnings on vacation paid.

For those companies who have their employees take their paid vacation in their first year of employment rather than having them wait one full year, they would find that the employee’s total salary paid and vacation pay would be very close to the employee’s  negotiated salary. 

$41,600 X 4% = $1,664.00

Two weeks’ vacation = $1600.00

While the employer may like to reduce the vacation accrued percentage to cover just the vacation time taken, the Employment Standards Act of BC requires 4 per cent vacation accrual for the first five years of employment and 6 per cent after five years are completed. 

Established norms or assumptions that payroll is accurate whether in-house or outsourced, are not always correct.  It is our job as HR professionals, to challenge those norms and perform audits to ensure the companies we work for are in compliance.  After all, that is why they hired an HR professional.

Gyn Wylie BGS, CHRP is the Operations and HR Director for Olive Fertility Centre.  She has spent the last 20 years working as a senior Operations and HR professional in the health care field.

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