Few business owners like to waste their company’s money. They’re always on the lookout for cost savings. With labor being one of the largest cost components for many organizations, it may seem logical to look for new or innovative ways to cut payroll costs.

Unfortunately, some business owners’ attempts at “creative cost containment” go horribly awry, and end up costing their businesses much more in the long run than they ever saved. Here are a few stories of lessons learned the hard way:

“Waiting Time” is Paid Time

At several car washes in California, owners thought they’d found a great way to reduce payroll expenses. They instructed their workers to show up on time, but simply wouldn’t allow them to clock in until the first car arrived to be washed. They thought they were “saving” two hours or more of pay per worker per day.

A car wash in Nashville, Tennessee, took the idea one step further: workers clocked in when a car pulled in to be washed, then clocked out again until the next vehicle arrived. An advocate for low-wage workers worked undercover at the car wash and was clocked in and out over 10 times during a single 8-hour shift. In the end, he only received pay for four hours, despite being on the job for the full day.

Of course, the “savings” from these practices quickly evaporated once the Department of Labor caught wind of what was going on. For instance, the Nashville car wash owner found himself on the hook for over $130,000 in back wages, fines and penalties, plus attorney fees.

When employees are required to stay on premises and be available at a moment’s notice to begin work, they are generally considered “engaged to wait” and must be paid for the time they spend waiting.

The Real Cost of the “Underground Economy”

The owner of a temp agency that supplied workers to light manufacturing facilities around Worcester County, Massachusetts, thought he could save money by compensating his workers at a little less than the market rate. So he paid them $6.25 to $6.50 an hour. The only problem was this: at the time the state minimum wage was $7.50 an hour, later raised to $8.00 per hour.

Well, there were also the tiny added issues that he didn’t pay overtime for hours over 40 worked in a week, and he didn’t make any state unemployment insurance contributions. Evidently, he believed by paying his workers in cash, he could “fly under the radar” and avoid these extra expenses.

He chose to “save” even more money by avoiding the expense of printing up pay stubs for all these workers, as well. This also turns out to be against the law.

Authorities began an investigation after receiving numerous complaints from employees who had not been paid properly for their work. Following their investigation, the company and its owner were charged with 65 counts of violating state wage and hour laws.

Eventually, the company and the owner pled guilty to all charges and were ordered to pay restitution of $500,000. The company owner was also ordered to serve 5 years’ probation.

Those Minimum Wage Laws? The DOL is Serious About Them

Then there’s the story of a pair of Mexican restaurants in Jacksonville, Florida. For starters, restaurant management classified the kitchen help as exempt from overtime, and paid nothing for time worked over 40 hours a week.

Of course, since the restaurants kept inaccurate records of the number of hours employees worked in the first place, it’s doubtful they would have been able to pay these employees correctly, even if the workers had been properly classified.

But wait — it gets even better. Tipped employees received their tips plus a paycheck that made it look on paper as though they were being paid according to the law. However, management required the employees to sign their checks back over to the restaurant. They were only allowed to keep their tips.

In the end, this “cost saving maneuver” cost the owners of these two restaurants a total of over $934,000 in back pay and damages.

The Best Way to Save on Labor Costs

Obviously, these attempts at cost savings backfired in a big way. But there are legitimate ways to get a handle on your organization’s labor costs:

  • Install, configure and use a reliable time tracking solution. Relying on handwritten records or “dead reckoning” to calculate employee work time is a recipe for disaster.

    If you’re concerned about employees clocking in or out for each other (a practice known as “buddy punching”), invest in a biometric solution that requires an employee to identify him or herself before being allowed to clock in or out. Many automated time tracking software solutions offer biometric options, such as finger-scan, hand-scan or facial recognition options.

    Computer based time and attendance systems offer an added benefit: automatic calculation of hours and data export to your payroll system. This eliminates clerical errors, which can otherwise cost a significant amount of time and money to correct.

  • Pay employees according to the law. Overtime pay can be expensive, but it’s nothing compared to the cost of back wages, fines, penalties and attorney fees you’ll incur if you find yourself on the losing end of a wage and hour lawsuit.

    Many automated time tracking systems offer reports that warn you of employees who are approaching 40 hours for the week and could possibly incur overtime. Using these reports, you can proactively manage your employees’ schedules to minimize or eliminate unnecessary overtime.

  • When in doubt, consult your employment law attorney. You may be eligible to use alternative overtime calculations (such as the “fluctuating work week” method) or otherwise limit the overtime you pay, while still remaining within the bounds of the law. Your lawyer can also alert you if any of your “creative” cost saving ideas may put you at risk — before you find yourself in court.

    A good legal advisor can help ensure you stay on the right side of the law while you avoid paying more than necessary for your payroll.

In the end, when it comes to payroll it’s generally much less expensive to do things right the first time!

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