In our previous installment in this 3-part series, we talked about the intricacies of building up your team by asking the right questions during interviews and following the correct procedures and regulations when you’re ready to bring them on board. Today, we continue further into the heart of setting up a robust HR department you can be proud of, and next up: payroll and personnel files.
When it comes to the payroll process, you have two routes to choose from: the DIY path, facilitated by specialized software, or entrusting the task to a qualified professional, such as your trusted accountant or an outsourced service. If your first thought is, “I can do this all on my own without using special payroll software”, you best forget it, attempting to manually manage your payroll demands precision beyond the average person’s capacity. The rules around something as simple as a paystub will take you out.
So, assuming you’ve opted for the do it yourself, with the help of a software application option, you still must consider the following:
Let's consider the frequency of your payroll runs, options include —
- Weekly
- Bi-weekly (every two weeks)
- Semi-monthly (twice a month)
In specific sectors like hospitality, weekly payrolls are prevalent, while bi-weekly and semi-monthly schedules are more common in most scenarios. Note that in California, employees eligible for overtime must receive payments at least twice a month, rendering monthly payroll impractical.
Distinguishing between bi-weekly and semi-monthly payrolls:
- Bi-weekly: results in 26 pay periods annually.
- Semi-monthly: amounts to 24 pay periods per year.
These options vary not only in how often employees are paid, but also in the specific amounts with each payment. This difference adds complexity, especially in ensuring accurate payments.
For instance, paying 1/26th of an employee’s salary every two weeks ensures accuracy. Whereas, paying 1/24th of their salary twice a month leads to inconsistencies due to differing month lengths. Shorter months your employees are a bit overpaid, and longer months they are a bit underpaid. This small difference can lead to major legal issues and is a top cause of employee lawsuits.
To address this, let's talk math. You must come up with a daily rate, and then pay them for the number of days in any given pay period. Of course, this will vary for the 2nd payroll of the month.
And speaking of pay periods, the pay period is the working time you are paying for. Since it takes a bit of time to process payroll (gathering timecards, putting date in the system, running the calculations, cutting the checks and/or processing direct deposits), generally, there will be a few days break between the end of the pay period and the actual pay date. This is called payroll in arrears and is the most common processing method.
Let’s break it down —
Bi-Weekly Payroll:
- The pay period ends a week before payday. For instance, if the pay period runs from the 1st to the 14th, employees receive their pay on the 20th.
- Time between 16th and 20th is dedicate to processing payroll data.
- The 15th marks the beginning of a new pay period.
Semi-Monthly Payroll:
- Important dates include the 15th, 30th/31st, and the 20th for payday.
- In the second pay period, the cutoff is on the 27th, with payment on the 31st.
- Calculating overtime tends to be more complicated, especially if the pay period end date (e.g., 15th) falls mid-week. This requires careful handling and adjustments in the next payroll cycle.
Now, let's circle back to another important decision in the payroll process… are you going to allow direct deposits? Keep in mind that you don’t have to and while it’s a convenient choice, you cannot mandate all employees to opt for it. Direct deposits must be the employee’s choice. Additionally, with direct deposits, you’ll need to ensure that payroll is funded at least two days in advance to allow banks the necessary time to process the allocations. Depending on your payroll volume and cash flow, keeping the funds an extra two days may make a big difference.
Processing payroll can sometimes throw unexpected curve balls your way. The unemployment rate for example can change each year, so you must be on the lookout for notices from the state on your new rate and be sure it gets updated in your payroll processing system. There may be other deductions — garnishments, employee benefit premium payments, retirement plans. These will have to be carefully processed because each has specific tax and withholding rules associated with them.
On the statutory compliance side of things — you’ll need to register as an employer with the state, get workers compensation and disability coverage. And make sure you know or have access to information on federal, state, and local employment laws. Things like minimum wage rates, overtime, anti-harassment training, etc.
Keeping a watchful eye on shifts in employment laws and requirements highlights the necessity of having a dependable source for timely alerts and continuous learning opportunities. Consult with your legal counsel — many law firms offer seminars, webinars, and email updates. Join their mailing lists and make it a point to attend those events.
This isn’t meant to scare you, but there will be a lot of information steadily coming at you, and nobody likes unpleasant surprises.
Let's shift our attention to the care and feeding of personnel files. First, what goes in the darn thing?
A personnel file isn’t just one file. It’s made up of several different files and records — each with their own purpose. The four main types of personnel files are:
- Benefits file: This file holds information about an employee’s benefits, such as their enrollment application, claim disputes, and any other information related to their benefits coverage.
- Payroll file: This file hold information about an employee’s payroll, such as copies of pay stubs, W2’s, and direct deposit forms. It also holds timecard records, tax withholding information, and reimbursement documents.
- Leave file: This file holds information about an employee's leaves, such as leaves for pregnancy, illness, or worker’s compensation-related injuries. It may also hold doctor’s notes related to these leaves.
- Employment records file: This file holds information about an employee’s employment, such as their job offer, promotions, demotions, transfers, salary and other compensation, training, policy acknowledgements, signed agreements (such as confidentiality or inventions agreements), performance documents like warnings and other disciplinary notices, evaluations, job descriptions, and new hire documents.
Wondering why so many files? The concept of the personnel file is that if an employee is transferred from one department to another, their new manager could be given their personnel file for review, and it wouldn’t divulge any information that might trigger possible discrimination — things like age, or ethnicity, or medical records. The new manager should only have access to the employment version of the employee's name, rank, or serial number. So, hire date, salary, promotions, evaluations etc. — and that's it.
Anything related to benefits, leave, or medical history should be held in a separate file — in a separate filing cabinet, with a different key. This is because these types of information are protected information and should not be disclosed to unauthorized individuals. In fact, any medical information that falls under the health information privacy laws, such as HIPAA, is subject to special protection rules.
You see, HIPAA information is considered ‘need to know’, and an auditor doesn’t think the whole HR department, or all of company leadership, has a need to know over protected medical information. So, if you do find yourself audited, you’ll have to explain who has access, what their job function is, and why they might have a need to know. If that all doesn’t convince you — the American with Disabilities Act specifically prohibits you from including medical information in employee's general employment file.
Other documents that should be kept separately from personnel files include:
- Interview documents: Such as interview notes and test results. These documents often contain confidential information that the company may not want to disclose to unauthorized individuals.
- The I9 form: This form is used to verify an employee’s eligibility to work in the United States. This form contains extremely sensitive information, such as an employee’s birthdate, immigration status, and ethnicity. This form must be separately stored together away from employee records, secure, and access must be restricted to authorized personnel only.
A secret tip from us — the very first thing an auditor does when they come in to look at the personnel records, is look for I9’s in the personnel files — because they know there’s a very good chance that’s where they are. And it’s an automatic fine.
Bridging it all together, to maintain accurate and confidential personnel files, it’s crucial to establish a secure communication channel for exchanging sensitive information. Employees should not rely on email for salary updates, promotion details, or exchanges to tax withholding or direct deposit information. Instead, implement a secure portal or form-based system where employees can submit these requests. If email communication is unavoidable, encrypting documents before sending them can add a layer of protection. However, it’s always preferable to utilize a more secure communication channel when handling confidential personnel data.
Congrats! You successfully made it past part 2. We hope you found the information on payroll management and personnel files helpful. Stay tuned for part 3, where we’ll wrap up this series. You’re well on your way to having all the tools needed for a successful HR department.
That’s it for now, until next time! As always, thank you for taking time out of your day to join us. Onward!
