Setting Up an HR Dept from Scratch pt 2
By VICKY BROWN
Now, when it comes to setting up payroll for your company, there are two ways you can go. You can do it yourself – either using software or without software or have someone do it for you like your accountant or an outsourced service.
First off, I’m just going to tell you straight out – if you are thinking of doing it yourself, in house, without using special payroll software – my advice is to absolutely forget it! Payroll is WAY too complicated to try to do it yourself. And the rules around something as simple as a pay stub, will take you out.
So, I’m going to assume you have decided to do it yourself, with the help of a software application.
Well, there are still some things to think about – how often are you going to run payroll. You can do weekly, bi-weekly (meaning every 2 weeks) or semi monthly (meaning 2 times a month). I almost never see weekly payroll outside of specific settings like restaurants. Mostly I see bi-weekly or semi-monthly. And in CA, you have to pay employees who are eligible for overtime at least 2 times each month – so the monthly payroll option is out.
Let me clear something up – bi-weekly and semi monthly are not the same thing. If you pay every 2 weeks, you’ll pay 26 times in a year. If you pay twice a month, you’ll pay 24 times in a year. Not only are the number of payrolls different, the amount you pay each time is also different. And this is where we get in the weeds a bit.
If you pay someone 1/26th of their salary every 2 weeks, then they have been paid the correct amount. However, if you pay someone 1/24th of their salary twice a month – because months are not all the same amount of days, you’ll find that for shorter months the person is a bit overpaid, and for longer months they are a bit underpaid. Now this may not feel like a big deal to you – but let me tell you, paying people incorrectly is one of the top reasons for employee lawsuits.
So, how do you make it right – well the accurate way to pay on a semi monthly basis involves math. You have to 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 – what the heck is that? Well, the pay period is the working time you are paying for. Since it takes a bit of time to process payroll (gathering timecards, putting the data in the system, running the calculations, cutting the checks and/or processing the 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 it is the most common processing method.
So, for a bi-weekly payroll – usually the pay period cutoff is the week before the pay date. For example, for the bi-weekly pay period of the 1st through the 14th, the actual pay date would be the 20th And the 16th through the 20th would be used for gathering and processing the payroll information. The week of the 15th would then be week 1 of the next pay period and so on.
With a semi monthly payroll, you might have something like a pay period cutoff date of the 15th, with a pay date of the 20th, and for the second pay period in the month, a cutoff on the 27th for a pay date of the 31st. And then the 30th and 31st would belong to the next pay period.
Another challenge with a semi-monthly pay period is doing the calculations when you have employees who are eligible for overtime. If the end of the pay period (for instance the 15th) falls in the middle of a week, you have to calculate any weekly overtime and pay it retroactively on the next payroll. It’s all doable – but trust me, it’s not the easiest way to take on payroll processing.
See – I told you, in the weeds.
So, back to the decisions…are you going to allow direct deposits? And no, you don’t have to. A couple of things to keep in mind about direct deposits – one, you can’t force everyone to be on direct deposit, it has to be the employee’s choice; and two, although convenient, keep in mind with direct deposits you must fund payroll at least 2 days in advance so that the banks can process the direct deposit allocations. Depending on your payroll load, and your cashflow, keeping the funds an extra 2 days may make a big difference.
Processing payroll can also throw you some curve balls. The unemployment rate can change each year, so you have to be on the lookout for notices from the state on your new rate, and be sure it gets updated in your payroll processing system. Also, there may be other deductions – garnishments, employee benefit premium payments, retirement plans. These will all 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, safety – well, the list goes on.
So it’s going to be really important that you have some way of getting alerts about changes to the law and requirements, and to get yourself some sort of ongoing learning opportunity. Again, check with your counsel, many law firms do seminars, webinars and eMail updates. Get yourself on all those lists, and attend the events.
I don’t mean to scare you, but there will be a lot of information steadily coming at you, so we don’t want any unpleasant surprises.
So, let’s get right to the care and feeding of a personnel file. First, what goes in the darn thing?
Well actually a personnel file isn’t just one file. It’s made up of a number of different files and records – each with their own purpose. There’s the benefits file, the payroll file, the leave file and the employment records file. Oh, and don’t forget the authorization to work in the US – that’s a completely separate file – more on that later.
“… the very first thing an auditor does when they come in to look at the personnel records, is look for I9s in the personnel files – because they know there’s a very good chance that’s where they are. And it’s an automatic fine.”
Why so many files? Well the concept of the personnel file is that if I get transferred from one department to another, my new manager could be given my personnel file for review, and it wouldn’t divulge any information that might trigger possible discrimination – things like my age, or ethnicity, or my medical history. My new manager should only have access to the employment version of my name, rank and serial number. So, hire date, salary, promotions, evaluations etc. – and that’s it!
That means anything related to benefits like an enrollment application, claim disputes and anything else related to my benefits coverage, has to be held in a separate file. In fact, even beyond that – any medical information that falls under the health information privacy laws, such as HIPAA, are subject to special protection rules. All that to say that not only should you hold my medical file separate and not provide it to my new manager, it actually has to be physically segregated from the rest of my employment information – and by that I mean filed in a separate filing cabinet, with a different key.
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 my protected medical info. So if you do find yourself being audited, you’ll have to explain who has access, what their job function is, and why they might have a need to know. And if all that doesn’t convince you, how about this – the American with Disabilities Act specifically prohibits you from including medical information in my general employment file.
Next up, the payroll file this would hold things like copies of pay stubs, W2s and direct deposit forms (because they have banking information). Timecard records, tax withholding and reimbursement documents would also be in the payroll file. And something like a wage garnishment actually has 2 pieces, one part goes with the payroll records, and the other (the part that notifies the employee etc.) goes in the employment records file. The big positive with holding payroll records all together is that you don’t have to dig through each person’s record when you’re researching a payroll question. You can file things under the payroll date, and easily look at all the documents, company wide, for that payroll period.
Don’t waste another minute trying to figure out how to get your business going and what should come next.
Grab your Free 3-Step Leader’s Journey Business Builder course, and get freedom and peace of mind, knowing you are on the right, proven track.
The leave file houses anything and everything related to leaves. Whether it’s a leave for pregnancy, or illness, or a workers comp related injury – as you might guess, there could easily be doctor’s notes in this record. And while you should always be very careful to only get the start and ending date of when the employee is unavailable to work – sometimes a doctor’s office is gonna include something about diagnosis or prognosis. So for that, among other reasons, it’s important that you hold the leave file separately.
So with all that – what actually does go in the employment records file? Well, anything around job offers, 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 – as long as they don’t contain any of the protected information that we talked about earlier). And of course, anything related to litigation or a workplace investigation – well, that would be held in an even more top secret, separate file. But if that were to happen, your legal counsel would be involved, and would also give you guidance on how to maintain information related to the case.
And a quick word about interview documents, such as interview notes, test results etc. Those should be held with the job recruiting file vs. making them part of the personnel file. Often there may be notes or information the company would prefer to keep confidential, in those materials. So we suggest you not store them in the personnel file.
Oh, and one more thing – that’s the authorization to work in the US, commonly called the I-9 form. This form is a big deal, because it has a whole host of confidential information, birthdate, immigration status. possibly ethnicity etc. In fact, I-9 forms are so special that you’re required to keep them all together, and separate from the employee records. I’ll tell you secret – the very first thing an auditor does when they come in to look at the personnel records, is look for I9s in the personnel files – because they know there’s a very good chance that’s where they are. And it’s an automatic fine.
Now on the process side, make sure you have a system for people to get information to you, confidentiality. Managers will need to be able to give you salary update and promotion information, employees will need to change their tax withholding or direct deposit information. And putting that kind of thing through eMail – well, that’s not a very good practice. You’ll need a more secure form of communicating for that type of sensitive information. Even if you just commit to encrypting documents before you eMail, that will at least add a small layer of protection.