One of the Biggest Hazards to Your Business is Processing Your Own Payroll
Approximately eight years ago, I was confronted with some clients that preferred to pay their employees “off the books” rather than deal with the complexities or expense of payroll. In order to “ease” them into compliance, I started to process their payroll, with the simple assurance that all they needed to do was give me the hours worked, and I would provide the amounts of the paychecks. My approach was simple, $50 a month for five or fewer employees.
Being an accountant, I’ve always looked at payroll as something I could do in my sleep. For the smaller companies, the payroll processors were charging unimaginable fees. One client, a company with five employees was paying more than $25 a paycheck. In that instance, I objected because the employer as part of a larger company with over 300 employees – also with the same processor. In response, the payroll processor refigured the fees (and lost the account), thinking they were “doing me a favor” reducing the rate to approximately $18 a paycheck. Aside from the significant savings I offered, it also worked well to give me exposure to companies that in addition to needing an economical payroll processor, also needed a Part-Time CFO.
Since then, the payroll industry has seen a lot of competition with several new companies looking to service the abused smaller companies. Remember, successful small companies that hire employees to turn into larger companies with large workforces. Thus, their payroll processing needs gave the new processors access to potential high growth companies and with their presence, the abusive fees of the payroll processor became a thing of the past.
The State Assembly and the New Labor Laws
Today, we have a new problem – The State Assembly. From what I’ve learned at the annual legal seminars that review the new laws coming into effect, 2013 was the year that California’s budget crisis effectively put enforcement of the labor laws outside the budget of the State of California. As a result, a series of laws were passed that effectively moved enforcement to the civil courts to enforce the California labor laws. This new legislation laid the groundwork so that if someone suffering from an employer who didn’t comply with the labor laws, they could engage an attorney to sue that employer. Uniquely, it was legislated that damages were deemed significant, no matter how minor the infraction (i.e. an error on a pay stub). Worse, it was also legislated that if it could be shown that an employer did not comply with any labor law, that employer would have to pay the legal fees of the employee who sued them.
I initially continued in comfort with my “casual payroll” service because I couldn’t imagine something so straightforward causing legal repercussions for my clients. Next came the new bundle of new laws going into effect for 2015. The one that I believe threatens me the most is the one that mandates sick pay for all employees of all employers. Compliance with this law will cause enough trouble for most employers. For me (as a payroll processor), it also mandates certain accruals be added to the regular paystub. Specifically, in addition to disclosing accrued vacation time, the accrued sick days must also be regularly disclosed. While the law is in effect, the legal practice of complying with sick day accruals is still being figured out.
Use a Payroll Processor
Thus, I have a new solution: ”I’m getting out of the “Payroll Business.”
The most meaningful benefit of a payroll processor is generally not economic. The most meaningful element is the indemnification to the customer should the payroll processor make a mistake. Therefore, it is my recommendation that you use a payroll processor to process your payroll. When signing the paperwork, make sure it offers indemnification. Then, make sure you correctly report your payroll activity to the payroll processor. Beyond that, COMPLY WITH ALL LABOR LAWS!