Learn what paycheck records are and how to properly retain them to maintain legal compliance.
- Paycheck records are documentation of employee compensation.
- Employers should keep paycheck records for at least four years; some states may have stricter requirements.
- Only authorized personnel should have access to paycheck records.
- This article is for business owners and HR managers who want to their responsibilities when it comes to employee paycheck records.
A key component of running a successful business or human resources department is collecting and maintaining the proper documentation on your employees – including paycheck records. Retaining information on employee compensation is not only a good business practice, but is also sometimes required by law. Although you might think you can simply toss out a former employee's information as soon as they depart the company, that can land you in legal trouble. To stay legally compliant, you need to understand what paycheck records are and how they affect your small business.
What are paycheck records?
Paycheck records, also known as payroll records or pay records, are the documentation of employee compensation (wages, timecards, time schedules, time off, bonuses, benefit payments, etc.) that employers must retain for each nonexempt employee.
"While there is no officially designated form for paycheck records, businesses are required to have accurate records on each employee, along with the hours worked and earned wages," Kelly DuFord Williams, CEO and managing partner of Slate Law Group, told Business News Daily.
Since certain state-level requirements may be stricter than federal requirements regarding documentation type and record retention length, experts recommend that employers work closely with legal counsel to ensure paycheck record compliance. You should also only hire an experienced and knowledgeable person, team, or service to take care of payroll.
"Make sure that you either hire a payroll company with a good reputation or hire an internal payroll person who you know is an expert in payroll laws," said Jilian Dimitt, HR director at Optima Office.
Key takeaway: Paycheck records are documentation of employee compensation details.
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What paycheck records are employers required to keep?
- Employee's identifying information: Full name, Social Security number, address (including ZIP code), birthdate (if younger than 19 years old), sex and occupation
- Employee's hours: Time and day of week when the employee's workweek begins, the hours they worked each day, and their total hours for each workweek
- Employee's wages and earnings: Basis on which employee's wages are paid (e.g., per hour, per week, piecework), regular hourly pay rate, total daily or weekly straight-time earnings, total overtime earnings for the workweek, and all additions to or deductions from the employee's wages
- Employee's pay periods: Total wages paid each pay period, date of payment, and the period covered by the payment
Employers are also required to keep personnel records like copies of the employee's job application, resume, cover letter and transcripts.
"Additionally, employers must also keep signed copies of each employee's W-4 form, which shows federal withholding, along with any such form that shows pay deductions, benefits, and donations," Williams said. "Employers should also keep a record of any wage-level changes from promotions and demotions, with detailed reasonings for such."
Key takeaway: Employers must retain nonexempt employee pay records like each employee's identifying information, hours, wages, earnings and pay periods.
How long do you need to keep paycheck records?
There are federal laws regarding what documents you must keep, how to maintain paycheck records and how long you retain them. Since record retention laws can vary, it is best practice to keep all records in compliance with the longest retention law.
"Under federal labor law, employers are required to keep three years of payroll or other records for every employee, including their name, address, date of birth, occupation, rate of pay and compensation earned each week," Williams said.
The IRS requires employers to maintain records for all employees for at least four years after filing the fourth quarter for the year. Although the FLSA only requires three years, you would want to maintain records for four years to comply with the IRS.
Keep in mind that each state has its own requirements for employee record retention as well. An example Dimitt points to is California.
"The paycheck stub in California needs to show how much sick leave the employee has taken and how much sick time they still have available," she said. "California legally requires you maintain paycheck records for three years, but best practice would be six years."
Key takeaway: Most federal laws require employers to retain paycheck records for three to four years, although some state laws may be stricter.
How do you retain paycheck records?
The way you store your pay records is another thing to consider. Some employers prefer the manual method of keeping paper records in a locked filing cabinet, whereas others prefer to streamline the process with a secure document management system. Regardless of preference, every business owner or HR team should have a secure and organized way of storing records.
"For privacy and accuracy, paycheck records should be kept in a separate file for each employee, and regardless of your company's size, employers should employ a records management system that delineates access to the records themselves and the standard in which they are recorded and kept," Williams said.
You could also use any method available to record employee time and attendance (physical or web-based time clocks, manual employee reporting, etc.) as long as timekeeping is complete and accurate. Choose a method that integrates well with how you store your paycheck records.
Key takeaway: Paycheck records should be securely retained in confidential files, whether digitally or manually.
Who should be allowed to see employee records?
To comply with labor and employment laws, employers should always keep employee records private and confidential. Access to these documents should be limited to priority individuals who need access to carry out their official duties (e.g., managers, executives, the HR department, the payroll department).
In some situations, you might also need to grant an external party access to your employee paycheck records. For example, certain federal and state auditors may need these records during an audit or legal matter, or an employee's attorney may need them during a lawsuit. In either scenario, you may be able to request a warrant before granting the external party access to the restricted records.
There is currently no federal law that requires employers to provide employees access to their own payroll records; however, Williams said many states have their own laws that do require such access.
"California's Division of Labor Standards Enforcement denotes that the statute Labor Code Section 226(b) requires employers to furnish both current and former employees their payroll records when requested, and imposes a penalty for noncompliance," she said.
Key takeaway: Employee records should only be accessible to those who need access to carry out their official duties, as well as auditors or an employee's attorney in some situations.