Business Tips

how long to keep payroll records

How Long Should You Keep Payroll Records?

Payroll record retention is an important part of the job of any accounting, HR or payroll admin at a business with non-exempt employees—i.e., most hourly wage workers. Given there is an entire Wage and Hour Division within the U.S. Department of Labor, it should come as no surprise that the biggest federal wage law, the Fair Labor Standards Act (FLSA), addresses employee payroll records and recordkeeping practices. Knowing and following federal and state rules surrounding recordkeeping is one sure way to protect yourself against expensive labor lawsuits.

How Long to Keep Time Cards & Payroll Records?

You may be doing everything in your power to hang onto every payroll record, whether they are on paper or—now much more common—in a digital format. But if you toss all of it six months or a year down the road while cleaning up your files or saving space on your server, you could still be facing big fines or lawsuits, regardless of how fairly and accurately you paid everyone.

There are federal laws, and sometimes state laws as well, that dictate how long you must keep your payroll records around (Hint: It’s more than a year). And anything within that time is fair game when it comes to auditors looking for concrete proof of what you paid.

Federal law

As mentioned above, the Department of Labor’s FLSA is the go-to law when it comes to employee wages, overtime, wage and overtime exemption, rest breaks and more. The FLSA also establishes what records must be kept by employers and the minimum amount of time those employee records must be stored.

According to the FLSA, the following are basic records U.S. employers must keep for all non-exempt employees, i.e. those who fall under its provisions, for at least 3 (three) years:

  • Employee’s full name and social security number
  • Address, including zip code
  • Birthdate, if younger than 19
  • Sex and occupation
  • Time and day of week when employee’s workweek begins
  • Hours worked each day
  • Total hours worked each workweek
  • Basis on which employee’s wages are paid (e.g., “$9 per hour”, “$440 a week”, “piecework”)
  • Regular hourly pay rate
  • Total daily or weekly straight-time earnings
  • Total overtime earnings for the workweek
  • All additions to or deductions from the employee’s wages
  • Total wages paid each pay period
  • Date of payment and the pay period covered by the payment

The FLSA further dictates that records on which their pay computations are based—e.g. time cards, piece-rate tickets, or time and work schedules—should be held onto for two years.

State law

Sometimes states have unique laws for recordkeeping and record retention. As with federal versus state minimum wage laws, the law employers must follow is generally the law most favorable to employees. In other words, employers must pay the higher minimum wage, and they are typically expected to follow more stringent state rules regarding record retention.

For example, the state of California requires that payroll records like those detailed in our bullets above—in addition to rest and recovery periods and non-productive time for piece-rate workers—must be kept for four years instead of three. California also mandates that wage-related records on which pay computations are based should be kept for three years instead of two years. Finally, according to the Society for Human Resource Management, California requires that the records be in pen or permanent ink, and in English.

Other states have specific laws as well, so it is advised that businesses research their state and local regulations before tossing records.

How to store payroll records safely

Payroll records must be legible and available for inspection in the event of a routine or investigative audit by the DOL’s Wage and Hour Division or your state’s equivalent agency.

Undated payroll documents or those that are written by hand is a poor way to start—and the same goes for the supporting hours or wage records.

But let’s assume you have your payroll records themselves under control. They’re in ink if required, and are tidy, consistent and legible across the board.

When it comes to actually storing the records, it is entirely up to the discretion of the company to choose a storage method that is organized, safe from damage or theft, and easy to access.

If your payroll records are on paper, it’s imperative that you choose an organized filing method that will remain clear to you and others as you go—and that everyone with access to them knows how long the files must be kept. Perhaps you’ll file by last name, then by month and then by year. If you have some exempt or non-hourly employees, you might choose to file their records separately.

Remember: The FLSA requires all U.S. employers to keep time cards or timesheets used for calculating payroll for two years. So those must be securely stored as well.

Although records can still be printed out and saved in paper filing if desired, businesses that choose digital timekeeping, HR or accounting systems with secure cloud servers do not have to concern themselves with the physical storage of payroll and time records.

The other plus to digital maintenance and storage of payroll and time records is that they don’t take up space in your files or even on your own server, if you’re using a cloud-based platform. And there is no decision involved in how to file the records: They are automatically filed within the platform you use for time tracking or payroll (or often both), and you can produce reports containing the records you need at a moment’s notice.

FLSA Lawsuits

Why is it so important to follow a little FLSA requirement about payroll record storage? Here’s why: You will likely have many employees over the years, and one might try to accuse you of not paying them for all their regular or overtime hours worked. If that happens, it will be your word against the employees—and the burden of proof in the courts lies on the employer.

Let’s say an employee and their co-workers testify in a lawsuit that certain hours were worked and went unpaid, or that they put in overtime hours that were simply shuffled around to look like regular hours. If an employer is not able to produce records for the time period in which the employee claims to have worked extra hours off the clock, or to have worked overtime hours that weren’t properly recorded or compensated, they could be in a bad place.

Once again, we come back to the DOL’s Wage and Hour Division (WHD), as it is the agency that enforces rules around wages and hours. The DOL website publishes recent WHD statistics on back-wages garnered from employers by their agency. For example, the WHD recovered $322 million in back wages for workers in 2019, and some $1.4 billion in the last five years.

This isn’t to mention damages that might have been paid by employers in lawsuits, settlements, or fines that were owed the DOL. In 2016 and 2017, settlements in unpaid wage cases totaled $1.2 billion, according to SHRM.

Tips for businesses

If you don’t have proof refuting that an employee’s claims of unpaid wages are without merit, then your defense will be very hard to establish.

The first step to having clear payroll and time tracking records is enforcing a policy of creating and collecting the information needed from your employees. If employees don’t know that they must track all their hours or they aren’t shown the importance of this by the employer, it won’t get done.

Having a clear and consistent system in place for time tracking is therefore paramount for both your employees and you. While paper time cards may be your system of choice and can serve as records of time worked that you then use to calculate payroll, they are obviously more vulnerable to loss, theft, fraud and hour-rounding issues than an automated system.

A digital time tracking system like ExakTime provides automation by capturing the accurate time work is started and stopped, without “buddy-punching”, and sending it straight to the cloud for secure storage and access from the office or anywhere.

Not only are they securely stored, but you know the records are accurate because workers can only clock in when they’re at the job site, as that’s where our JobClocks are located or that’s where their GPS time stamp that you can see instantly on the backend will be in-range of the worksite. They can only clock in with their own keytab or their own PIN number, and, if you are using a biometric or photo ID system, with their own face.

To recap, whatever methods you choose for your recordkeeping and record storage, it’s essential to following regulations and protection from litigation that your system be:

  • Consistent—easy to understand, keep up, replicate and follow by others
  • Easy to maintain as time goes on, so that you keep those records until you are clear of any exposure to wage and hour lawsuits alleging FLSA or state law violations

Contact us at ExakTime to discuss how to automate and simplify your payroll recordkeeping, time tracking and FLSA compliance today.