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7 mistakes payroll managers make calculating overtime

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Overtime; the bane of nearly every payroll manager’s existence. Yet, it is a necessary part of operating a profitable businesses when employees need to be paid for time on the clock that extends beyond regular work hours. The correct tracking, calculation and payment of overtime is something that must happen to avoid breaking a number of employment laws. Accurately paying overtime also fosters good will with employees who have sacrificed their personal time in order to help the company meet important project deadlines.

Unfortunately, sometimes even seasoned payroll managers make errors when calculating overtime. Here is a rundown of the top 7 most common overtime payroll mistakes made. 

  1. Poor Payroll Record Keeping
    The worst case scenario when it comes to managing payroll is relying on an antiquated or unreliable source of record keeping. Paper or punch card payroll methods have a tendency to fail when not backed up with a computer based payroll system. Overtime hours can easily be missed or not documented, leaving the payroll manager in the dark until the employee complains to the Labor Board.
  2. Classifying all Employees as Exempt Status
    While you may think that all your employees are exempt from payment of overtime because they are salaried; think again. The Fair Labor Standards Act (FLSA) has very strict guidelines when it comes to determining employee classification, including provisions for minimum wage and overtime pay. It’s important to check these guidelines before assuming all salaried employees are exempt from overtime payment.
  3. Granting Comp Time Instead of Paying Overtime
    It can be tempting to cut corners by offering paid time off instead of overtime payment for employees who go above and beyond their normal work week. However, most states do not approve of comp time in lieu of paying overtime to eligible employees. If you see employees regularly working overtime hours, check with management to see if there are personnel shortages causing this rather than allowing comp time every week for hours worked over 40.
  4. Hiring Contractors to Avoid Overtime Payments
    Some companies think they can get out of payment of overtime simply by only hiring a contract workforce. While 1099 contractors are exempt from overtime, the mere presence of a contract stating this does not prove they do not meet employee status under IRS guidelines. Carefully determine if you must pay overtime by checking that the contractors are not controlled by your company, base their business finances on your company, or receive employee benefits that could imply otherwise.
  5. Asking Employees to Volunteer to Work Overtime
    Similar to #3, going a step further and actually asking employees to work overtime hours off the company clock is a mistake you do not want to make as a payroll manager. First, it’s illegal under FLSA provisions. Second, it’s unethical and can get you in trouble if an employee reports this or gets injured while engaged in work for your company.
  6. Missed Overtime for Off-the-Clock Work
    Oftentimes, employees must take work home or stay later than their scheduled shifts to beat project deadlines. This means work hours are not being documented or are being done off the clock – both problems that can lead to incorrect payroll calculation. When an employer asks an employee to work longer than 40 hours per week, they are responsible for paying overtime.
  7. Incorrect Overtime Payments for Holidays and Shift Differentials
    The rate of overtime is not always time and a half. If an employee works from one shift into a paid holiday, the hours worked on the holiday must be calculated at double time. Also, when an employee works another shift that normally gets an added production or shift differential bonus, the time worked in that shift must be increased accordingly when calculating overtime.

By avoiding the most common payroll processing and calculation errors, your organization can better control your personnel costs and have the resources to improve the workplace.

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