If California employer loses employee payroll records, what happens?

What happens if an employer loses their payroll records or other basic employee records in California? Basic records include things like payroll records, employee benefit plans, trusts, collective bargaining agreements, incentive plans, employee contracts, all employee notices, etc. Many laws require maintenance of these basic records. But how long must they be kept? And what happens if they get destroyed too soon?

In short, the employer may be subject to several different types of penalties and even jail time. Read on for more information on how long to keep such records and what happens if you don’t.

How long must payroll records be kept in California?

In general, these types of records should be kept for a minimum of 3years—this is the amount of time employers in California are legally obligated to maintain such records. However, the best practice would be to keep them for at least 6 years. There are two reasons for this:

• An unfair business practice claim can be based on wage and hour related claims. This type of claim has a 4-year statute of limitation.
• ERISA-related claims have a 6-year statute of limitation. To prove ERISA-related claims, both employees and employers may be referencing wage records.

Another best practice is to consider retaining compensation plans indefinitely. The Lilly Ledbetter Fair Pay Act of 2009 has a 2-year statute of limitation for pay discrimination claims that resets with each new discriminatory check. While claims for back pay are limited to 2 years, compensation policies and practices are subject to challenge years later.

What happens if I toss my payroll records?

What happens if a California employer’s payroll records are lost? Or inadvertently deleted or thrown out? In that case, the employer may be subject to several different penalties and violations.

For an “employee suffering injury,” the employee is entitled to up to $4,000 plus attorney’s fees and costs. Additionally, this action may be brought as a class action lawsuit. Obviously, this could increase the costs significantly. It is important to note that the definition of employee “injury” in this case includes the situation where the employer fails to provide a complete wage statement that shows all required items have been satisfied. For all the information that’s required on an itemized wage statement, see our related article.

“What’s interesting here is that the employee doesn’t need to show that they’ve had an actual loss of pay or that they’ve been actually injured. All they need to show is that you as the employer either didn’t give them a wage statement, or you did give them a wage statement but it didn’t include all of the information that was required to be included. This is a new revision to the law for 2013.” Amber Grayhorse told us in a recent CER webinar.

However, the violation must be a knowing and intentional failure for all of this to occur.

“To the extent that it’s an isolated or an unintentional payroll error, clerical error, or an inadvertent mistake—then you should be off the hook.” Grayhorse explained. If you do end up in litigation, they may consider whether, prior to the violation, you adopted compliant policies and remained in compliance with all such policies.

“It’s a good idea now – especially with all the changes in [California Labor Code] Section 226 – for you to sit down with your lawyer or your HR team and just make sure that your wage statements are indeed in compliance, that you do have a policy . . . that’s aimed to be in compliance with Section 226, and that you are in compliance with your own policy. That way, in the unlucky event that you do have a clerical error down the road, you’ll have a good defense.” Grayhorse told us.

That said, other penalties may still occur. Employers are subject to civil penalties of $500 for a failure to maintain basic payroll records for at least 2 years or for a failure to maintain or allow the federal Department of Labor (or, in California, the Industrial Welfare Commission (IWC) or Division of Labor Standards Enforcement (DLSE)) members to inspect these records.

California employers are also subject to Private Attorneys General Act penalties for some California Labor Code recordkeeping violations such as failure to maintain records to monitor wage gender discrimination. These penalties are payable to both the California agency that is enforcing the law and to the employee who is enforcing the law. The penalty may include a fine of at least $100 and/or imprisonment of at least 30 days.

The above information is excerpted from the webinar “HR Recordkeeping in California: What to Keep, How to Store, and When to Toss.” To register for a future webinar, visit CER webinars.

Attorney Amber M. Grayhorse is a senior associate in the Los Angeles office of Nossaman LLP. Grayhorse has significant experience advising employers on a wide range of employment-related matters and litigating employment disputes in state and federal courts.