If you are a California Employer you should have a keen understanding of Labor Code Section 226 and what it requires to be included on your paystubs.
California law requires 9 specific items to be included on every paystub for every employee for every pay period- no exceptions.
The items are:
- gross wages earned (before any deductions)
- total hours worked by the employees- unless the employee is a salaried employee exempt from overtime
- if the employee is paid on a piece-rate basis, then the number of piece-rate units earned and the piece-rate
- all deductions taken such taxes, healthcare, etc.
- net wages earned (after all deductions)
- the inclusive dates of the period for which the employee is paid
- the name of employee and last four digits of the employees social security number or employee identification number
- the name and address of the legal entity that is the employer
- the applicable hourly rates in effect during that pay period and the corresponding number of hours worked at each hourly rate. Think 40 hours rate and then overtime rate hours and maybe even double time hours
Copies of the above need to be printed in ink or other indelible form, properly dated, showing month, year and a copy of the statement or record should be kept for 3 years at the place of employment or at a central location within the State of California.
Oops! What if you have not been complying with this Labor Code Section? Unfortunately, failure to comply with each and every requirement of this Labor Code Section 226 is a misdemeanor. The Employer is liable for $50 for the first violation, and $100 per pay period for each violation thereafter up to a total of $4,000. While on an individual claim it may not seem to be a steep fine, if you made the same mistake on all 50 employees’ stubs for a number of pay periods you may have a liability of up to $4,000 per employee!!
This is one of the many reasons that processing your own payroll and can be tricky. Outsourced services help protect the employer from violations such as this.
As of January 2013, it wasn’t only a number of laws that changed, but certain forms and poster disclosures as well.
Are you using the correct forms?
Effective May 7, 2013 new Employment Eligibility Verification Forms I-9’s are required to be used. The new revised form was published March 8, 2013 and can be found here. Starting in May, any employer hiring a new employee needs to use this revised form.
FMLA Posters and Forms
Effective March 8, 2013, employers must ensure that they post the new Family and Medical Leave Act Poster (FMLA) and updated FMLA notice and certification forms. The Forms can be found here. To ensure compliance, make sure the poster is posted in the appropriate place in your office.
FCRA Forms and Enforcement AgencyEffective January 1, 2013, employers who use a third-party service (such as Small Business Compliance Services, Inc.) to conduct background checks on applicants or new hires are required to provide three revised notices under the Fair Credit Reporting Act (FCRA):
- Summary of Consumer Rights:
- Notice to Users of Consumer Reports of Their Obligations;
- Notice of Furnisher of Information of Their Obligations.
The forms can be found here.
Additionally the Consumer Financial Protection Bureau (CFPB) has become the new enforcement agency for the FCRA. CFPB is replacing the Federal Trade Commission. A result of the change is that now both private individuals and the CFPB can bring claims for negligent violations of the FCRA; seeking damages and attorneys fees and for willful violations punitive damages.
Major aspects of the Affordable Healthcare Act are now in effect and many more will be effective in the near future.
Below are some of the most important aspects that business owners should be aware of.
- Additional Medicare Tax: There will be an increase of 0.9% on the employee portion of the hospital insurance tax portion of FICA for wage earners who earn above a threshold amount for tax years beginning after 12/31/2012. The threshold for joint returns or surviving spouse is $250,000. For a married individual filing separately, it is $125,000, and for any other filer, the threshold is $200,000.
- Medicare Tax on Unearned Income: Individuals making $200,000 or joint filers making $250,000 will pay an additional 3.8% Medicare payroll tax in unearned income. Excluded from the increased tax is Interest on tax-free bonds veteran benefits, and gain from the sale of a principal residence that are excluded from gross income are not considered net investment income for purposes of the additional tax, nor are qualified retirement plan and IRA contributions.
- Flexible Spending Account Contribution Limits: The contributions to Flexible Spending Accounts cannot exceed $2,500 per year. After December 31, 2013, the amount will increase.
- Employer Retiree Subsidy: In 2013, Employers will no longer be able to receive a subsidy to and also claim tax deduction for providing prescription coverage to retirees. Instead the amount the Employer is able to deduct will be reduced by the amount of the federal subsidy received.
- State Based Insurance Exchange: State health exchanges will be set up to facilitate the purchase of qualified health plans and provide for a Small Business Health Options Program to assist small employers in enrolling their employees in qualified plans. Beginning in 2017, states may allow employers of any size to offer coverage through an exchange.
- Notice of Exchange: By March 1, 2013, employers will be required to provide all new hires and current employees written notice about the state health benefit exchanges and the consequences if an employee decides to purchase a qualified health plan through one in lieu of employer-sponsored coverage.
- W-2 reporting: Tax form W-2s issued in 2013 for wages paid in 2012 must for the first time include a line showing the benefit employees receive from their employer-sponsored health care. The provision is an attempt to make health-care benefits and spending more transparent.
For more information and guidance see www.healthcare.gov/law. There you can read the full text of the law, view a timeline and find other helpful resources.
One of the biggest employment problem areas for small business owners is the misclassification of workers. So often, employers will label someone as an independent contractor when in fact they should be labeled as an employee.
Why does it matter? What’s the difference? Generally, employers withhold money for taxes from an employee’s payroll check. Employers also pay unemployment tax for employees. However, for independent contractors, the employer does not pay payroll taxes or contribute to the unemployment insurance fund.
Classification of a worker as an employee or independent contractor can have dramatically different tax consequences. Thus, the IRS has created a publication to explain the differences between the two and help business owners properly classify their workers. Here are some of the factors that should be considered when classifying a worker:
- Level of Control (Does the employer control how the worker completes the work? Does the employer require the worker to show up and leave at a certain time? The general rule is, the more control, the more likely the worker is an employee.)
- Tools or Equipment Used (Does the employer provide the necessary tools? If the employer provides the tools, this factor weighs in favor of the worker being an employee. If the worker uses his/her own tools this weighs in favor of the worker being an independent contractor. This applies to other items such as supplies as well.)
- What Kind of Work (Generally, if the worker is doing the same kind of work that your business does, they likely qualify as an employee. Example – I own a bakery and I have a worker who makes cupcakes. This worker would likely be an employee. However, consider this example. I own a bakery and I pay someone to come clean the facilities after hours. This worker would likely be an independent contractor. My business is to bake and this worker’s main job is to clean. Of course there are exceptions to this rule, but it is a good rule of thumb for most classifications cases.)
There is no black and white answer for independent contractor and employee classifications. Generally, courts look at the facts of each case and balance a series of factors to determine the proper classification. If you are ever in doubt as to whether someone should be classified as an independent contractor or employee, I would highly suggest contacting an attorney. A little money up front can save you a ton in the end if you are faced with a misclassification lawsuit.