Your Payroll Company Is Not Responsible for Your Business’ Legal Compliance

We know — we’ve been talking about wage and hour compliance a lot on this blog lately. Some of you may be tired of hearing about it. “You need to classify your employees correctly,” you might say, “blah blah blah. We GET IT!” And we hear you.

Admittedly, compliance is not the most exciting thing to talk (or read) about. Heck, we’re the ones that have been writing about it for the last couple of months. But, try to bear with us.

The only reason we’ve been harping on this subject is because it’s important — more than 1-in-10 of you reading this will face a wage and hour audit one day — and a great many of the thousands of dental and medical professionals we’ve worked with have been operating on some common misconceptions in this regard. We’re an HR company, and our goal is to make sure you’re protected. Sometimes a big part of that conversation involves dispelling common compliance myths.

So, without any further ado, here’s one more misunderstanding the HR experts in our Solution Center hear a lot:

“I don’t have to worry about wage compliance — that’s what my payroll company is for.”

It’s a common refrain among dental and medical practitioners — “Employee classification? Wage and hour issues? Doesn’t my payroll company handle all of that?”

Though it might seem like the type of thing that a payroll company could (and perhaps even should) help you with, the unfortunate answer to that rhetorical query is, “No,” and a recent decision by the California Supreme Court supports that negative refrain.

Your payroll company can help you pay your employees properly and ensure that the appropriate amount of taxes are withheld from each employee’s check. They can also help facilitate direct deposits for your employees, provide 401k and other benefits assistance, and a whole lot more (if you need help with any of those things, CEDR partner Payday HCM offers payroll services. Then you don’t have to worry about knowing this stuff!).

One thing your payroll company will not do, however, is absorb your legal responsibilities as an employer.

So, who’s responsible for keeping my business compliant?

Short answer here: you are!

When it comes down to it, you, the employer, are the one who has to make sure that all of your employees are classified correctly, that they are paid correctly for the work that they do, and that you are keeping records of the time they spend on the job.

In the legal case mentioned above, an employee was terminated from her job at a travel agency before she turned around and filed suit against her employer for discrimination, unpaid overtime and breaks, wrongful termination, and other claims. The employee then added the travel agency’s payroll company — ADP — to that lawsuit, as well.

Naturally, ADP tried to get out of the lawsuit, insisting that it’s not the payroll company’s legal obligation to oversee its clients’ compliance with employment laws. The California Supreme Court agreed. ADP agreed to provide payroll services to the employer — not the employees of the company that hired them. So, even if ADP made any mistakes in this case, that’s an issue for the employer to resolve — not the employees of the payroll company’s clients. The employee’s relationship is with their actual employer, who is legally responsible for abiding by all applicable employment laws.

Though that addition of the payroll company to the docket was upheld on two separate appeals, the California Supreme Court ultimately found that the contract between the plaintiff’s former employer and ADP did not constitute a contract between the payroll company and the employees of its clients, so ADP was let off the hook.

Long story short

Your employees can’t hold your payroll company liable for wage and hour violations, so neither should you. In the event that an employer loses a wage and hour case as a result of a mistake made by their payroll company, there may be some potential recourse for a breach of contract claim by that employer against the payroll provider.

Still, the employer is going to have to cover all fines, fees, payment of back wages and taxes, as well as the attorneys’ fees of both parties before they can pursue that second level of litigation.

Plus, there’s no guarantee that an employer would prevail in such a breach of contract suit — you can bet that any payroll company’s contract will do all it can to absolve the company of any such responsibility.

Ultimately, this case just serves to reinforce the need for employers to be familiar with all employment laws that apply to them at the local, state, and federal level, and to get help from HR experts as needed to ensure compliance with those laws, lest you place your faith unduly in a third party that may not actually be protecting you.

Have a burning HR question you’d like to ask the experts at CEDR? Send us a message to claim a FREE HR CONSULTATION and get one HR issue solved for free!

May 15, 2019

Friendly Disclaimer: This information is general in nature and is not intended to provide legal advice or replace individual guidance about a specific issue with an attorney or HR expert. The information on this page is general human resources guidance based on applicable local, state and/or federal U.S. employment law that is believed to be current as of the date of publication. Note that CEDR is not a law firm, and as the law is always changing, you should consult with a qualified attorney or HR expert who is familiar with all of the facts of your situation before making a decision about any human resources or employment law matter.

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