As a new business owner, or someone managing employees for the first time, it can be confusing to know what is required for employee pay. The Fair Labor Standard Act (FLSA) requires employers to follow specific guidelines when it comes to wages, overtime pay, and recordkeeping.
Pay Frequency and Lag Time
Depending on the state in which your business operates, you may have different requirements (or none at all) for pay frequency. For example, Michigan has a minimum pay frequency that all employees must be paid on a semi-monthly basis. Obviously, you can pay your employees on a more frequent basis than what is stated above but no later than that. It should also be noted that each state has provisions on the amount of time that can pass before you pay an employee for their work, i.e. lag time. In Michigan, you must pay out wages earned from the 1st through 15th by the first of the next month. The 16th through month-end by the 15th of the next month. If you’re following a weekly or biweekly pay schedule, then the lag time is 14 days after the end of the pay period.
If you are paying an employee who is no longer with the company, the timeline can vary. First, you will need to determine whether the employee left voluntarily or involuntarily. In the state of Michigan, employees must be paid on the next regularly scheduled payday for the period in which the termination occurs.
Methods of Issuing Pay
Typical methods of payment are cash, check, pay card, or direct deposit. Since the FLSA doesn’t state specifics of the form of payment, it is up to the employer and the employer’s state of business to choose a method to pay employees. Depending on your business location, you will have varying guidelines. For example, Michigan does not require employees to participate in direct deposit, but an employer may strongly encourage or incentivize it. Also, in Michigan, you cannot implement added fees on employees for ‘withdrawing’ their pay once it has been deposited in their account. Lastly, the employee has the freedom to choose which financial institution their check will be deposited to. If you operate your business outside of Michigan, please make sure to look up the rules and regulations specific to your state.
If you have chosen to issue payment through a payment card and your business operates in Michigan, you are required to have the following:
- Employees are allowed to transfer or withdraw money no more than once a week per pay period without incurring a fee.
- If an employee requests a change in payment method, that request must be implemented within one pay period.
- Changes in fees or terms must be made available to employees at least 21 days prior.
- The employee must be able to check their balance without incurring fees either electronically or by phone.
- The payment card cannot be linked to any sort of credit line, loan, or cash advance.
- The written disclosure must be provided to employees for the following: ways to obtain balance inquiries without fees, the right to change payment method at any time, and the card is not a savings or checking account.
- Again, these regulations are specific to pay cards issued in the state of Michigan. Other states may have different requirements.
If an employee (or former employee) fails to pick up or cash their paycheck, you will need to transfer those funds to the appropriate state agency. Many states will require the employer to contact the employee for whom the wages belong so that they do not reach ‘abandoned’ status. Each state has a timeline of how long they are required to wait before submitting the wages as abandoned. For Michigan, unclaimed wages become abandoned after 1 year.
Wages Owed to Deceased Employees
As with everything else we have covered, each state has its own rules for paying out wages to deceased employees. These rules state the maximum amount to be paid out, to whom, and what conditions apply. Michigan law requires employers to pay out all due unpaid wages including, any fringe benefits to the employee’s designee. If there is no written designee, the surviving spouse, children, or parents (in that order) will receive the wages.
There are also rules governed federally on which taxes to withhold from the employee based on when the time is worked and when the payment is issued. If payment is issued in the same year as the employee’s death, only FICA and FUTA taxes are withheld. If the payment is issued in the following year, no taxes are withheld, and a 1099-MISC is issued for that payment.
Pay Stub Information
Each state can determine what information should be included on an employee’s pay stub. Michigan requires employers to show hours worked, gross earnings, pay periods, and itemized deductions. Any information provided beyond that is up to the employer to include. For example, some employers may opt to incorporate remaining paid time off balances, 401(k) employer match, health benefits paid on behalf of the employer, and so on. Each state is different in what they will require of the employer to include so it’s important for you to remain up-to-date with your state’s requirements.
Outsourcing your payroll can help you stay compliant with pay, taxes, and ACA compliance. Dominion does automatic tax filing for all of our clients when year-end rolls around. If you’re interested in what Dominion has to offer, schedule a demo with us and see how we can help your business.