Updated: August 30, 2024
What is a payroll policy? Definition and meaning
A payroll policy is an organizational document that outlines a company’s procedures and guidelines related to employee compensation. It covers topics such as pay rates, timesheets, pay periods, overtime, deductions, payment methods, and what employees should do if they find an error on their paycheck.
More about payroll policies and their purpose
When writing a payroll policy, it is important to clearly outline the procedures for key processes such as timekeeping, calculating wages and deductions, payment schedules, reporting requirements, and who employees need to speak to if there’s a discrepancy. The policy should specify team members’ roles and responsibilities and guidelines for securely handling confidential payroll data. It should also explain how employees can report payroll errors or discrepancies and the steps the company will take to resolve any issues.
Why is a payroll policy important?
A clearly defined payroll policy is important for many reasons. It makes it easy for employees to understand what to expect regarding compensation, ideally eliminating many questions when onboarding new staff regarding when and how they will be paid. It also explains to employees what their role and responsibilities are with regard to accurate recording or time keeping of their hours worked.
In addition, a payroll policy ensures that employees are paid on a specific schedule, while also helping employers to remain compliant with federal, state and local laws — thus avoiding any penalties.
What should be included in a payroll policy?
A payroll policy should, at the very least, include the pay period used by the company, how employees receive wages, such as direct deposit or paychecks, the specific payday wage, and information on taxes that employees must pay (and why), such as FICA, federal, and state taxes. A thoroughly written payroll policy will also specify the employees to which the policy applies – whether that be only full- and part-time staffers or staffers and contractors.
Your payroll policy can also cover such topics as bonus pay or any other type of commissions or incentive pay. In addition, if employees in your organization work overtime, the company’s approach to compensation for the extra hours could also be included in your overall payroll policy guide. This would include explaining which employees are eligible for OT pay and how that payment is calculated.
Finally, your payroll policy should also cover and explain the company’s rules and approach to various types of leave that can impact an employee’s pay – such as vacation, sick days and parental leave. You may even want to spell out how an employee should request theses types of leave.
How do you write a payroll policy?
Writing a payroll policy is an important task. Here are some of the steps to follow in order to draft a comprehensive policy for your company and ensure you’ve covered all the key bases, particularly if your business is just getting established.
- Review local, state and federal laws
Your first step should typically involve developing an understanding of any relevant local, state and federal labor laws surrounding the payment of employees. This includes laws surrounding such things as your state’s minimum wage, overtime, and tax rules. Understanding these requirements can help inform the policy you come up with. To ensure your company does not run afoul of labor laws when writing a payroll policy, it can be a good idea to consult with a legal advisor. Or at the very least, a human resources professional whose specialty is payroll and employment matters.
- Establish a pay schedule
Another key step in developing a payroll policy is deciding what the company’s payment schedule will be (if you’re running a new company that hasn’t done this already). Will you pay employees weekly? Bi-weekly? Monthly? Whatever option your company uses, it should be included in your policy.
- Explain the details of pay structure
Writing a policy also involves covering the nuts and bolts of how employees will be paid. This should include how salaries or wages will be determined, as well as how bonuses or commissions are calculated and implemented. You’ll also want to address such topics as overtime pay, holiday pay, vacation pay, and any other type of leave payments, whether paid or unpaid.
- Include information about deductions
Outlining and explaining payroll deductions is another important step when drafting a payroll policy. Your policy should cover all mandatory payroll deductions such as taxes and social security, as well as voluntary deductions (These could range from retirement plans to health insurance if you offer it.)
- Explanations of timekeeping and payroll processing – including deadlines
Another element to address when drafting a payroll policy is your company’s time-tracking methods and the process for submission and approval of timesheets. Each of these tasks should be detailed and explained for employees as part of the policy. You’ll also want to include instructions regarding the deadline for submitting timesheets.
- Ensure compliance
These are just some of the key steps to work through when writing a payroll policy. You may also want to define payment methods – whether it’s direct deposit or paper checks, and you could also cover how employees should record their time each day and week. It’s also a good idea to have an HR professional who specializes in this subject matter review your policy or obtain a legal review of your draft policy to ensure that it adheres to all laws, whether on the local, state or federal level.
Using payroll policy in a sentence
“As our company grew, there were more questions popping up around wages and how deductions work, so we developed a formal payroll policy and send a company-wide reminder once a quarter to remind employees to review it.”
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