Warning! Know Your Payroll Service Contract!

Many – maybe even most – contracts issued by major payroll processing services contain traps for the unwary. Many employers I speak with turn over all payroll processing responsibilities, including issuance of accurate checks and wage statements and record storage, to their payroll processing service.

This may be a big mistake.

When faced with an individual or a class-action wage and hour claim, many employers turn to their payroll processing service to produce records that evidence the Company’s compliance with California law. Yet many of these payroll processing services expressly disclaim any responsibility to maintain records or to ensure wage statements comply with the law.  Indeed, some of these contracts actually require employers to indemnify the payroll services company against any claims that wage statements or wages were not in paid compliance with applicable law.

Maybe it’s just me, but I think that this is outrageous. Most employers I talk to believe their payroll processing company is their partner in ensuring that the business complies with California law. Read your payroll processing contract carefully. You may not have a partner in your payroll processing company. In fact, your company may be completely on its own. Employers have statutory duties to ensure that they both pay their employees properly and keep records of those payments.  Additionally, the law requires that employers issue detailed wage statements explaining how the wages were calculated and paid.  Failure to comply with these wage statement, payment and record keeping requirements can result in breathtakingly large liability.

To my mind these common contract provisions in payroll processing contracts require employers to do two things:

  1. Shop aggressively for a payroll service that will indemnify your business against the payroll service’s errors and that will agree to keep and maintain all records required under California law without additional charge.
  2. Audit the performance of your payroll service company (to ensure compliance) and regularly download all records the employer is obligated to maintain.

PAGA and class action liability for failure to comply with these laws can be breathtaking. If you have any doubt about your Company’s obligations please contact your employment law advisor immediately.