The alphabet soup of keeping paid time-off compliant.

by Jeff Rutherford

Whether your organization has already defined a formal absence management program or is starting to do so, the issue of tracking paid time off is a hot one in the time-and-attendance category. What exactly is paid time-off? By definition, it’s any time not worked by an employee for which the regular rate—a fixed or a prorated amount of pay—is accrued and paid to the employee. Most often, this is in the form of vacation time or paid holidays.

HR professionals are now looking beyond simple time tracking because they are forced to closely monitor areas of potential organizational risk. That includes dealing with the plethora of regulations under the Family and Medical Leave Act (FMLA), Fair Labor Standards Act (FSLA), and Sarbanes-Oxley (SOX), placing plenty of pressure on HR to provide accurate tracking of leave accrual liabilities.

With all the potential improvements that an HR or payroll department can make, a consensus has been reached that the return on investment from an online time-and-reporting solution is substantial. Savings emanate from several sources, including reduced pay for unearned overtime, increased payroll accuracy, reduced “time theft” for buddy punching, and reduced time that management spends on payroll and data administration. As more companies automate their time and attendance—moving away from cumbersome paper time sheets—they’ve realized other gains: “insurance” against unwanted compliance violations.

On-line time reporting solutions can document paid time-off with greater clarity than merely when it occurred. They can be used to substantiate the pay type and length of leave and also identify excessive absences. Additionally, one doesn’t have to overhaul the entire payroll system to ensure compliance with complex labor regulations. A point solution designed especially for time reporting and approval can readily integrate with existing systems and processes while reducing the workload of data entry and error correction. For example, a very well-known industry leader was able to automate key processes to reduce administrative costs and improve paid-time-off reporting capabilities. Since its salaried employees were finding the paper-based process of reporting vacation time too time-consuming, individuals were underreporting their vacation time. In this instance, vacation accruals were piling up on the books and becoming a major liability. It was an accounting nightmare at best. However, let’s consider the other, even more serious ramifications of failing to track paid time off properly.

Section 404 of the Sarbanes-Oxley Act mandates financial reporting accuracy, and the single largest line item for most employers is people-related costs, including salary, benefits, incentives, and training. These costs are typically between 40 percent and 60 percent of most HR budgets. HR departments are finding that Section 404 (the most costly and time-intensive aspect of the act) has a big impact on their operations and procedures.

Section 404 requires that U.S. public companies certify that their financial numbers are accurate, and that they have processes in place to ensure that accuracy. Public companies with market capitalization of more than $75 million were required to meet Section 404 compliance in November 2004. Companies with a market capitalization of less than $75 million have until July 2006 to comply.

The changes are significant. Before SOX, if financial reports were accurate, no one delved too far to question how they were obtained. Now, the way an organization arrives at its numbers is almost as important as what those numbers actually are.

Here is a list of a few of the controls that companies are implementing to ensure the accuracy of HR financials and the ways that time-reporting best practices can help ensure compliance:  

• Adequate security over payroll-related information and software applications and documented procedures that are SAS-70- and SOX-compliant;
• Validation and reconciliation of proper payroll amounts, preferably validation and audit trail from timesheet entry through payroll;
• Verification of accurate timekeeping;
• Verification that required payroll documentation is current and maintained, with easy access to the most current documentation and procedures.

For companies with California employees, accurate time reporting that takes into consideration the state’s unique overtime rules is essential for compliance. A solution programmed to account for the state laws and integrates those into the calculation of hours worked, breaks, and paid time-off is critical. You’ll also want to take into account the hours calculations as well as tracking alternative work week schedules, required meal breaks, and make-up of personal time off.

Leveraging a time-reporting system where hours and overtime can be correctly reported and allocated to the proper departments can have substantial process improvements. At one extreme, it can reduce the risk of penalties for accounting irregularities. Making it an integral part of daily operations discourages fraud, reduces vacation-time-related, balance-sheet liabilities, and frees up valuable resources for assignments more meaningful than timesheet data entry. Either way, automating time and attendance means better control and better
compliance!