Usually payroll moves along smoothly. You record time worked and pay the hourly wage or overtime. Still, every once in a while, a situation crops up that makes you shake your head and start frantically thumbing through your policy manual for an answer. Here are a few common issues.
Overpayment of Wages
Sometimes, there’s a glitch—an employee is overpaid, and maybe you don’t catch it for several weeks.
In general, if employees are overpaid, they will be required to pay that amount back. That can be done by future wage deduction, but in order to be fully compliant with Iowa code 91A, you should have a conversation with the employee about the overpayment and how it will be withheld from payroll.
Don’t take a large sum from one paycheck or drop the employee’s pay below minimum wage. Doing so can create a number of problems, ranging from internal PR and morale to Fair Labor Standards Act (FLSA) issues. And in some instances, use of paid time off (PTO) for repayment can create a constructive receipt issue with the IRS. Your best course of action is to agree on a repayment plan the employee sign an agreement.
Failure to Pay Wages
For whatever reason—maybe sheer pigheadedness—your employee just doesn’t get his time sheet in or fails to record time. As tempting as it may be to just not pay him (a stubbornness surcharge), you can’t do that—it would be a violation of the FLSA.
Under the FLSA, you are required to pay for hours that you’re aware the employee may have worked. This falls under the suffer-or-permit standard. In other words, if you think he is working, you have to pay him. In this instance, you would estimate the number of hours he worked and pay on that basis.
Provide the employee notice that you are estimating his pay because of his failure to follow policy. If he has an alternate calculation, he must inform you before the next payroll period. You should also set forth the time-recording policy and note that discipline will occur for future violations. Discipline can include the standard warning as well as lack of eligibility for future raises or bonuses.
Going in the Hole on PTO
When you allow employees to use more PTO than they have accrued, you run the risk that someone will quit and end up owing you for unearned time off.
If you allow employees to go in the hole on PTO, you should have a clearly articulated policy that sets limits on the amount allowed and time frames for repayment. You should also have a signed agreement for repayment to avoid issues, even in the event of termination. Remember that without a deduction agreement, you may be stuck without a way to collect or have to look for assistance from the small claims court.
Employee Purchases and Use of the Company Credit Card
If you have employees purchasing goods or services that your company provides, you need policies to ensure the security of the purchases.
You can treat employees as regular customers, using the same process for collection of debt. You may also have a program that allows the cost of certain purchases to be deducted from their wages, which would be accomplished through a wage deduction agreement. Such agreements for purchases need to be specific to the purchasing program in place.
Having employees use company cards can streamline bills, track expenses, and as the advertisements tell us, build points. However, misuse of credit cards by employees is rampant. Clear policies on use and acceptable charges, as well as regular oversight of charges made, are critical. Policies on repayment of any charges deemed personal must be clear, well publicized, and evenly enforced. Credit card perks don’t belong to the employee—they belong to the company.
Wages After Employee Death
When an employee dies, it’s natural to mourn the loss. But you must also remember your obligations as the employer.
In general under the FLSA, you would owe wages for all hours worked. If the employee was exempt, you only have to pay through the last day he worked, based on the rules for initial and terminal weeks of employment. Wages would normally be paid on the next regular payday. Depending on the circumstances, they may be paid into the employee’s bank account, as they were before his death, or to the estate through the executor.
There’s a somewhat complicated mechanism for paying out wages (including accrued PTO) in the event of an employee’s death. The appropriate mechanism depends on whether the payment is made in the same calendar year as his death. If wages are paid out in the same year they were earned, the employee’s W-2 for 2018 should include the following:
- Box 1: all wages already paid before the date of death, but not the PTO amount or any wages that the employee had earned but not yet received.
- Box 2: the federal income tax withheld for the wages already paid before the date of death. Don’t withhold or report federal income tax for the PTO amount or any other wages earned but not yet received.
- Box 3: all wages already paid, the PTO amount, and any wages earned but not yet received.
- Box 4: the Social Security (SS) taxes withheld for wages already paid, the PTO amount, and any wages earned but not yet received. SS tax should be withheld for all these items.
- Box 5: all wages already paid, the PTO amount, and any wages earned but not yet received.
- Box 6: the Medicare taxes withheld for wages already paid, the PTO amount, and any wages earned but not yet received. Medicare tax should be withheld for all these items.
- Box 16: the wages for purposes of state withholding are the same as the federal, so same as Box 1.
- Box 17: same as Box 2 (don’t withhold state income tax for the PTO or any other wages earned but not yet received).
You must also issue a Form 1099-MISC for 2018. You should obtain a W-9 for the estate (if there is one) or for the beneficiary/next of kin (if no estate is opened) to obtain the correct name and tax identification number (TIN) for the recipient of the accrued PTO and wages that were earned but not yet received.
If an estate has been opened, it is the proper recipient, even if the spouse takes everything under the deceased employee’s will. The 1099-MISC should be filled out as follows:
- Box 3: Include the total amount of accrued PTO and wages that were earned but not yet received. Don’t include any amount included in Box 1 of the W-2 (i.e., the amounts already earned and received by the deceased employee in 2018).
For example, let’s say an employee had earned and received (i.e., cashed the paycheck) $5,000 for 2018 before the date of his death. He had earned an additional $1,000 for which he hadn’t cashed a paycheck. He had $30,000 of accrued PTO. Here’s what his W-2 (issued using his SS number) should look like:
- Box 1: $5,000;
- Box 2: whatever amount had already been withheld for federal income tax on the $5,000;
- Box 3: $36,000;
- Box 4: appropriate amount of SS taxes to be withheld on $36,000;
- Box 5: $36,000;
- Box 6: appropriate amount of SS taxes to be withheld on $36,000;
- Box 16: $5,000;
- Box 17: whatever amount had already been withheld for federal income tax on the $5,000.
If an estate has been opened, the 1099-MISC (issued to the estate using its TIN obtained by sending a W-9) should have $31,000 in Box 3.
Bottom Line
There are various reasons and explanations for payroll quirks. If you have questions, contact your employment lawyer to help you find the best solution.
Jo Ellen Whitney, an editor of the Iowa Employment Law Letter, may be contacted at joellenwhitney@davisbrownlaw.com. Mike Gilmer, special counsel at the Davis Brown Law Firm, may be contacted at mikegilmer@davisbrownlaw.com.