When you run payroll, you must comply with payroll and labor laws. Brush up on payroll compliance legislation and common compliance mistakes so you can accurately run payroll without fear of penalties.

Payroll compliance legislation

All employers must follow payroll compliance legislation. While it might seem like a burden, it’s extremely important. Why is payroll compliance legislation important? It makes sure employees are paid and treated fairly. And, legislation ensures that governments receive the funding they need for certain programs.

Below are payroll compliance laws you must follow.


The Fair Labor Standards Act (FLSA) regulates minimum wage, child labor, overtime laws, and recordkeeping.

The FLSA sets the federal minimum wage at $7.25. You must pay employees at least this much per hour. You might have to pay even more if your state or locality has a higher minimum wage.

The Act includes child labor laws to protect workers under the age of 18. It regulates the types of jobs children can do at certain ages, what times children can work, how many hours children can work, and how much you must pay children.

Because of the FLSA, many employees are entitled to extra wages when they work overtime. Overtime wages are 1.5 times an employee’s regular rate of pay.

You must give overtime wages to nonexempt employees, but you don’t need to give overtime wages to exempt employees. The FLSA sets the rules for determining exempt vs. nonexempt employees.

The FLSA requires you keep certain information about your employees on file. For example, you need to have the each employee’s full name, Social Security number, occupation, and details about their wages. For a full list of information you need to keep, consult the U.S. Department of Labor.

You must keep payroll records for at least three years. And, you must keep documents that involve wage calculations, such as time cards and deduction information, for at least two years.

Economic realities test

The economic realities test isn’t really a law so much as it is a guide. It helps you determine if the people who work for you are independent contractors or employees. Employees have certain rights that independent contractors don’t have, such as overtime wages.

The economic realities test looks at six things:

  1. Does the performed work relate to your business?
  2. How permanent is the worker?
  3. How much does the worker invest into doing the job?
  4. How much control do you have over the worker?
  5. Does the worker have opportunities for profit and loss?
  6. How much skill and judgment does the worker need?

You cannot look at one part of the test by itself. You must consider all parts together.


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