Payroll Errors HR Must Watch For

2/6/2026

In the world of Human Resources, few things are as unforgiving as a payroll mistake. While a typo in a company memo might cause some confusion, a mistake on a paycheck can cause real financial hardship for an employee and trigger significant legal risk for the employer. Effective payroll management is a zero-error game, yet mistakes are surprisingly common, often stemming from complex regulations, manual processes, and a lack of specialized training.

For HR professionals, who are often on the front lines of managing employee data and relations, understanding and preventing these payroll errors is a critical function. It’s not just about ensuring numbers are correct; it’s about safeguarding employee satisfaction, maintaining payroll compliance, and protecting the organization from costly penalties and litigation. Ignoring this crucial aspect of HR functions is a gamble no company can afford to take.

This guide will illuminate the most common and costly payroll errors that HR professionals must watch for. We will explore their root causes, their serious consequences, and most importantly, the proactive steps HR can take to prevent them from ever happening.

1. Misclassifying Employees: The Exempt vs. Non-Exempt Minefield

This is arguably the single most expensive payroll error an organization can make. The Fair Labor Standards Act (FLSA) requires that most employees be classified as "non-exempt," meaning they are entitled to overtime pay (at least 1.5 times their regular rate of pay) for all hours worked over 40 in a workweek. Only certain employees who meet specific salary and duties tests can be classified as "exempt" from these overtime requirements.

The Common Mistake

Many organizations misclassify employees based on incorrect assumptions. A common error is believing that any employee paid a salary is automatically exempt. This is false. To be properly classified as exempt, an employee must meet both a salary basis test (being paid a fixed salary that is not subject to reduction based on quality or quantity of work) and a duties test (their primary job duties must fall under specific executive, administrative, professional, computer, or outside sales categories).

The Consequences

The financial fallout from a misclassification lawsuit can be catastrophic. If a court finds that a group of employees was misclassified as exempt, the employer can be held liable for:

• Back Overtime Pay: Up to two years (or three years for willful violations) of unpaid overtime for all affected employees.
• Liquidated Damages: An additional amount equal to the back pay owed, effectively doubling the damages.
• Attorneys' Fees: The employer is often required to pay the plaintiffs' legal fees, which can be substantial.

A single misclassification lawsuit can easily run into hundreds of thousands or even millions of dollars, making it a true company-killer.

How HR Can Prevent This

• Conduct Regular Audits: HR should partner with legal counsel to conduct periodic audits of all exempt positions to ensure their job duties still align with the legal requirements. Job descriptions should be up-to-date and accurately reflect what employees actually do.
• Train Managers: Educate managers on the differences between exempt and non-exempt roles so they don't assign non-exempt duties to exempt employees, which could jeopardize their classification.
• Seek Expert Training: Mastering the nuances of FLSA classification is a high-level skill. HR professionals should pursue specializedPayroll Management Training to gain the expertise needed to make these critical classification decisions correctly.

2. Incorrect Calculation of Overtime Pay

Even when employees are correctly classified as non-exempt, many employers make mistakes when calculating the overtime rate.

The Common Mistake

The most frequent error is calculating overtime based only on an employee's base hourly wage. The FLSA requires that the overtime rate be based on the employee's "regular rate of pay." This rate must include not only the hourly wage but also all other non-discretionary compensation the employee earns. This includes payments like:

• Shift differentials
• On-call pay
• Commissions
• Non-discretionary bonuses (e.g., bonuses tied to production or performance goals)

Failing to include these additional payments when calculating the regular rate of pay results in the employee being underpaid for their overtime hours.

The Consequences

Similar to misclassification, this error can lead to class-action lawsuits for unpaid wages, liquidated damages, and attorneys' fees. It also erodes trust, as employees who discover they have been consistently short-changed on their overtime pay will feel cheated.

How HR Can Prevent This

• Automate Calculations: Use a modern payroll system that can be configured to automatically include all required forms of compensation in the regular rate of pay calculation. Manual calculations using spreadsheets are highly prone to error.
• Policy Clarity: Work with department heads to clearly define which bonuses are discretionary (and thus not included) and which are non-discretionary (and must be included).
• Stay Informed: Rely onPayroll Compliance Resources to stay current on which types of payments the Department of Labor considers part of the regular rate of pay.

3. Errors in Handling Garnishments and Levies

When a court or government agency orders an employer to withhold a portion of an employee's wages to pay a debt (such as for child support, back taxes, or an unpaid loan), this is known as a garnishment. Handling these correctly is a legal obligation.

The Common Mistake

Payroll errors in this area are frequent and varied. They include:

• Failing to Remit Payments: Simply forgetting or failing to send the withheld funds to the appropriate party.
• Incorrect Withholding Amount: Miscalculating the amount to be withheld based on the complex rules of the Consumer Credit Protection Act (CCPA) and state laws, which limit how much of an employee's disposable income can be garnished.
• Ignoring a Garnishment Order: Some employers mistakenly believe they don't have to comply or simply fail to process the order in a timely manner.
• Terminating an Employee: Firing an employee because their wages are being garnished is illegal under federal law.

The Consequences

The consequences are severe. If an employer fails to honor a garnishment, they can be held liable for the entire amount of the employee's debt. Failing to comply with a tax levy from the IRS can result in significant penalties. Firing an employee over a single garnishment can lead to a wrongful termination lawsuit.

How HR Can Prevent This

• Centralize the Process: All garnishment orders should be immediately sent to a designated person in HR or payroll who is trained to handle them.
• Use System Checklists: Implement a clear, documented procedure for processing every garnishment order to ensure no steps are missed.
• Prioritize Orders: Understand the priority rules when an employee has multiple garnishments, as child support and tax levies often take precedence.

4. Mismanagement of Final Paychecks

When an employee separates from the company, whether voluntarily or involuntarily, state laws dictate strict rules for when their final paycheck must be delivered.

The Common Mistake

The most common error is simply not knowing the specific rules for the state in which the employee works. Some states require the final paycheck to be given on the employee's last day of work if they are terminated. Others might allow until the next scheduled payday. Assuming a single company-wide policy will work for a multi-state workforce is a recipe for non-compliance.

The Consequences

Penalties for violating final pay laws can be steep. Many states impose "waiting time penalties," where the employer must pay the employee their daily wage for each day the final paycheck is late, up to a certain maximum. This can quickly turn a final paycheck of a few hundred dollars into a liability of several thousand.

How HR Can Prevent This

• Know Your State Laws: This is a core competency for HR professionals. Maintaining a chart of the final pay requirements for every state in which you operate is essential. This is a topic often covered in depth in advancedHR Certification Programs.
• Create an Offboarding Workflow: Develop a rapid-response offboarding process. The moment HR is notified of a termination, a workflow should be triggered to immediately alert payroll, ensuring they have the information needed to process the final check on time.

5. Inaccurate Timekeeping and Recordkeeping

The FLSA requires employers to keep accurate records of all hours worked by non-exempt employees. "Close enough" is not a valid legal defense.

The Common Mistake

Errors often result from informal or manual timekeeping systems. These include:

• Allowing employees to submit timesheets with unrecorded breaks.
• Rounding time punches in a way that consistently favors the employer.
• Failing to pay employees for "off-the-clock" work, such as time spent putting on required protective gear or checking emails from home.

The Consequences

Inaccurate time records can lead to wage and hour lawsuits for unpaid regular and overtime wages. If an employer's records are found to be sloppy or inaccurate, courts are more likely to believe the employee's testimony about the hours they worked, putting the employer at a significant disadvantage.

How HR Can Prevent This

• Implement an Automated System: Use a digital time and attendance system that requires employees to clock in and out for all shifts and meal breaks.
• Establish a Clear Policy: Have a written policy that explicitly states all hours worked must be recorded, that off-the-clock work is prohibited, and that employees will be disciplined for violating the policy.
• Train Employees and Managers: Train non-exempt employees on how to use the timekeeping system correctly. Train managers on their responsibility to review and approve timesheets for accuracy each pay period.

Conclusion: Turning Payroll into a Strategic Advantage

The list of potential payroll errors is long and daunting, but they are not inevitable. By understanding the risks and taking proactive steps, HR professionals can transform payroll management from a source of liability into a pillar of organizational strength. Preventing these errors protects the company's finances, builds a foundation of trust and positive employee satisfaction, and ensures the organization remains in good standing with the law.

This requires a commitment to education, process improvement, and leveraging technology. It means treating payroll not as a siloed administrative task, but as an integral part of the strategic HR function. A flawlessly executed payroll is a silent testament to a company's competence and its respect for its employees.

Don't let preventable mistakes put your organization at risk. To build a truly resilient and compliant payroll process, you need a foundation of expert knowledge. Explore a comprehensivePayroll Management Training program to gain the skills and confidence needed to identify, prevent, and correct costly payroll errors, turning a potential weakness into a powerful strategic asset.