Washington Wage Theft Case: Why Payroll Compliance and Proper Accounting Matter
A recent Washington wage theft case should serve as a serious reminder to every business owner with employees: payroll, wage practices, employment policies and recordkeeping are not areas where a business can afford to operate informally.
According to a September 7 report from KOMO News, 70 former bikini baristas who worked at Beehive Espresso locations across Western Washington prevailed in a years-long class action lawsuit involving unpaid wages and other workplace violations. A King County Superior Court judge ordered the business owner to pay more than $1.85 million in unpaid wages and damages.
The case involved allegations that employees were required to return portions of their wages and tips to meet sales goals. Workers also alleged that when two employees were scheduled for the same shift, only one would be paid. The court ultimately awarded double damages for wages and tips that workers had been required to rebate to the owner.
The lawsuit reportedly encountered additional difficulties because of poor recordkeeping. That detail should get the attention of every business owner, regardless of the size or industry of the company.
Compliance Is Part of Running a Business
Most employers will never find themselves facing allegations resembling those involved in this case. Nevertheless, the size of the judgment illustrates how quickly employment and payroll problems can become extraordinarily expensive.
A business may begin with only a few employees and relatively simple payroll. As it grows, however, its responsibilities grow with it. There are wages, overtime requirements, tips, deductions, payroll taxes, paid leave, employee classifications, timekeeping, benefits and numerous state and federal reporting requirements to consider.
Informal practices that may have seemed manageable with three employees can become serious liabilities with 10, 20 or 50 employees.
Business owners should also remember that payroll compliance is not simply about issuing a paycheck for the correct amount. The records supporting that paycheck matter. Hours worked, rates of pay, deductions, commissions, tips, reimbursements and other adjustments should be properly documented and retained.
When records are incomplete, inconsistent or nonexistent, resolving a disagreement becomes considerably more difficult.
Your Employee Handbook Has a Purpose
An employee handbook should not be viewed as a document that is created when a business opens and then forgotten in a filing cabinet.
A well-developed handbook establishes expectations for both employees and management. It can document policies concerning timekeeping, payroll periods, overtime authorization, meal and rest periods, tips where applicable, workplace conduct, harassment, complaints, attendance, disciplinary procedures and many other employment matters.
More importantly, policies should reflect what the company actually does.
There is little value in having an impressive employee handbook if managers routinely ignore it or employees have never been given the opportunity to read it. Businesses should periodically review their handbooks and operating procedures, particularly as employment laws change or the company grows.
An employment attorney or qualified human resources professional should be involved in developing and reviewing employment policies. Your accountant should understand how those policies affect payroll, accounting records and financial reporting.
Those functions should work together rather than operate independently.
Human Resources Provides an Important Layer of Protection
Small businesses sometimes assume that a formal human resources function is something reserved for large corporations. It is not.
That does not necessarily mean every small business needs to hire a full-time HR director. Depending upon the size of the organization, HR responsibilities may be handled internally, through an outside HR professional or through a combination of management and professional advisors.
What matters is that someone qualified is paying attention.
Employees need a clearly defined process for reporting payroll discrepancies, workplace concerns and potential policy violations. Managers need guidance regarding what they can and cannot do. Owners need someone who understands employment requirements and can identify a questionable practice before it becomes an established company habit.
A problem identified internally today may cost relatively little to correct. The same problem discovered years later across dozens of employees can become an entirely different financial matter.
Your Accountant Should Be Looking Beyond the Tax Return
An accountant’s role in a business should not necessarily begin and end with preparing an annual tax return.
Payroll represents one of the largest and most complicated expenses for many businesses. It deserves periodic review.
An accountant can examine payroll records against the company’s books, reconcile payroll liabilities, review payroll tax accounts, identify unusual adjustments, examine inconsistencies between payroll reports and financial statements and help determine whether appropriate financial controls are in place.
Periodic payroll reviews can also uncover ordinary mistakes before they accumulate. A payroll problem does not have to originate from intentional wrongdoing. Incorrect software settings, improperly entered wage rates, misunderstood deductions, classification errors, missed payroll tax deposits or inconsistent procedures can create significant problems over time.
That is precisely why independent review is valuable.
The person entering payroll information should not always be the only person evaluating whether payroll is correct.
Good Records Protect Employees and Employers
The KOMO report noted that poor recordkeeping created delays and barriers during the litigation. That is another important lesson for Washington businesses.
Accurate records are not merely paperwork required by the government. They are evidence of what actually occurred.
If an employee questions how much they were paid six months ago, the employer should be able to produce records. If there is a disagreement about hours, there should be reliable timekeeping documentation. If a deduction was made, there should be documentation explaining why it occurred and demonstrating that it was permissible.
Good documentation protects employees because it helps ensure they receive what they are owed. It also protects responsible employers because they can demonstrate what was paid, when it was paid and how the amount was calculated.
The longer a business operates with incomplete records, the greater its potential exposure can become.
Internal Controls Matter in Small Businesses Too
Internal controls are frequently associated with large corporations, audits and fraud prevention, but small businesses need them just as much.
No single employee or manager should have unlimited authority over payroll without some form of oversight. Changes to wage rates should be documented. Payroll reports should periodically be compared with accounting records. Unusual deductions or adjustments should be reviewed. Terminated employees should be removed from payroll systems promptly, and access to payroll and accounting systems should be restricted appropriately.
Business owners should also periodically review payroll totals and compare them with prior periods. Unexpected changes should be investigated rather than simply accepted.
These procedures are not about assuming employees or managers are doing something wrong. They are about creating a financial system capable of identifying mistakes, inconsistencies and inappropriate activity when they occur.
The Cost of Prevention Is Usually Far Less Than the Cost of Correction
A $1.85 million judgment involving 70 workers did not materialize from a single payroll period. Cases of this magnitude demonstrate what can happen when disputed practices continue and financial exposure accumulates.
Compliance should therefore be viewed as an ongoing business responsibility rather than something addressed only after a complaint, audit or lawsuit arrives.
Business owners should periodically ask whether their employee handbook is current, whether managers understand employment policies, whether employees know how to report concerns, whether payroll records are complete, whether payroll accounts reconcile with the general ledger and whether someone independent of the day-to-day payroll process periodically reviews the numbers.
If the answer to several of those questions is “no,” the business has an opportunity to correct those weaknesses now.
Pivotal Forensic Accounting & Audits
At Pivotal Forensic Accounting & Audits, we encourage business owners to establish sound accounting procedures before a financial problem becomes a legal or regulatory problem.
Regular bookkeeping, properly administered payroll, reconciliations, internal controls and periodic accounting reviews can help identify discrepancies and weaknesses that might otherwise continue unnoticed. When something does not reconcile or financial activity does not make sense, investigating it early can make an enormous difference.
An accountant does not replace an employment attorney or qualified HR professional. Likewise, an HR professional does not replace an accountant. Each provides a different layer of expertise and protection. Businesses are often best served when accounting, payroll, human resources, management and legal advisors communicate with one another.
The lesson from this Washington case extends well beyond one coffee company or one industry. If you employ people, you have responsibilities. Document your policies. Maintain accurate records. Review your payroll. Establish internal controls. Give employees a legitimate process for raising concerns. Most importantly, do not wait until a government agency, attorney or lawsuit forces you to examine practices that should have been reviewed years earlier.
Compliance costs money.
Noncompliance can cost considerably more.
In reality, it can cost you everything.
Pivotal Forensic Accounting & Audits
2602 N Proctor Street, #201
Tacoma, WA 98407
