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Chapter 1

Chapter 1 of 'Payroll Accounting' discusses the importance of payroll and personnel records, outlining various laws that impact payroll operations, including the Fair Labor Standards Act and other federal and state regulations. It emphasizes the evolving role of payroll professionals, their responsibilities in maintaining compliance, and the necessity for accurate recordkeeping. The chapter also highlights the significance of payroll accounting systems and the need for ongoing education and certification in the field.

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Chapter 1

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Chapter 1: The Need for Payroll and Personnel Records Chapter Contents
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

Chapter 1
The Need for Payroll and Personnel Records
Chapter Introduction

1-1 The Payroll Profession

1-2 Fair Labor Standards Act

1-3 Federal Insurance Contributions Act

1-4 Income Tax Withholding Laws

1-5 Unemployment Tax Acts

1-6 Recordkeeping Requirements

1-7 Fair Employment Laws

1-7a Civil Rights Act of 1964

1-7b Executive Orders

1-7c Age Discrimination in Employment Act

1-7d Americans with Disabilities Act

1-8 Other Federal Laws Affecting the Need for Payroll and Personnel Records
1-8a Federal Personal Responsibility and Work Opportunity Reconciliation Act
of 1996

1-8b Immigration Reform and Control Act of 1986

1-8c Family and Medical Leave Act of 1993

1-8d Uniformed Services Employment and Reemployment Rights Act of 1994

1-8e Employee Retirement Income Security Act of 1974

1-8f Affordable Care Act of 2010 (ACA)

1-9 Other State Laws Affecting the Need for Payroll and Personnel Records
1-9a Workers’ Compensation Laws

1-9b Disability Benefit Laws

1-10 Human Resources and Payroll Accounting Systems

1-11 Human Resources System

1-11a Job Descriptions

1-11b Requisition for Personnel

1-11c Application for Employment

1-11d Reference Inquiry

1-11e Hiring Notice

1-11f Employee History Record

1-11g Change in Payroll Rate

1-11h Terminating an Employee

1-12 Recordkeeping System

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1-12a Employee Access—Personnel Files

1-13 Payroll Accounting System

1-13a Payroll Register

1-13b Employee’s Earnings Record

1-13c Paycheck

1-13d Outsourcing Payroll

1-14 Chapter Review

1-14a Key Terms

1-14b Key Points Summary

1-14c Matching Quiz

1-14d Questions for Review

1-14e Questions for Discussion

1-14f Case Problem

© 2025 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other
manner - without the written permission of the copyright holder.

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Chapter 1: The Need for Payroll and Personnel Records Chapter Introduction
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

Chapter Introduction

Learning Objectives

After studying this chapter, you should be able to:

1. Identify the various laws that affect employers in their payroll operations.

2. Examine the recordkeeping requirements of these laws.

3. Describe the employment procedures generally followed in a Human

Resources Department.

4. Identify the various personnel records used by businesses and the type of
information shown on each form.

5. Identify the payroll register and the employee’s earnings record.

Most of our exposure to payroll has been with the receipt of a paycheck. But there is so
much in the payroll process that is done before each payday, and the process is always
being changed and improved. Even the paycheck is being updated into direct deposits and
even on-demand pay.

The process begins with hiring employees—applications, interviews, references, and credit
reports. There are many legal do’s and don’ts that must be followed. How far can we go in
checking on the background of an individual applicant? What records should we keep on
each employee? Where do we show the calculations that must be completed in order to
give each employee a paycheck?

Get ready to experience the nuts and bolts of payroll operations.

No matter the size of the company, the profitability, the product or service being sold, or the
type of organization, employees have to be paid. This task has become more difficult as
numerous regulations have been enacted. Recent legislation has only added to the
administrative burden, and future legislation will continue this trend. The payroll person is no
longer the employee stuck in the corner who only appears on payday to distribute
paychecks. The job responsibilities have multiplied and now require persons with advanced
knowledge in the area of payroll to handle the position. In many cases, the payroll specialist
has been on the leading edge of change and automation.

Payroll professionals are responsible for processing over 4 billion pay statements each year
to more than 164 million people in the workforce of the United States. The processing of
payrolls allows no margin for error. Employees, employers, and government agencies
monitor the work performed by payroll professionals. A payroll accounting system is the only
operation in a business that is almost completely governed by various federal, state, and
local laws and regulations. Rules establish who is an employee, what is time worked, when
overtime is to be paid, what deductions are made, when to pay an employee, what benefits
have to be provided, and when taxes are paid. Local, state, federal, and international
legislation must be monitored to follow the impact on payroll operations. Changes in
legislation bring the potential for fraud and errors. Lack of compliance with these laws and
regulations can result in both fines and back-pay awards.

Payroll professionals have risen in the ranks of the accounting profession and now demand
salaries commensurate with their peers. The confidentiality of the payroll information from
each employee’s pay rate to the garnishments imposed on some employees has tightened

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the link to the upper management teams. The confidence and trust that must be placed in
payroll professionals have made them an integral part of the “inner circle.” This chapter
briefly examines the various laws that affect employers in their payroll operations and the
payroll and personnel records that they use to meet the requirements of the laws. First,
however, let’s take a brief look at payroll accounting as a profession.

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Chapter 1: The Need for Payroll and Personnel Records: 1-1 The Payroll Profession
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-1 The Payroll Profession

A 2024 payroll survey conducted by Robert Half Associates revealed an average of salaries
for payroll managers of $88,750 and for payroll clerks of $45,000.

Typically, an entry-level payroll clerk collects, reviews, approves, and records time records.
The clerk also updates attendance records, including vacation, sick, and personal days.
Once a payroll is processed, the clerk reviews the information to ensure the accuracy of
each employee’s pay statement. Job responsibilities will include entering the following
information into the payroll system:

1. Time-worked data.

2. Pay rate changes.

3. Tax rate changes.

4. Employee-authorized payroll deductions.

5. New employee information.

6. Marital and employee allowance changes.

Providing information to the Finance Department concerning the amounts to be paid for
taxes, health insurance premiums, retirement plans, etc., may also be part of the evolving
duties of the advancing payroll professional. One of the final stages involves the completion
of payroll tax returns, employee information returns, federal and state census surveys, and
fringe benefit and welfare plan returns.

Payroll professionals must keep abreast of the changes in their field so that they can remain
technically proficient. This need has been met by an association of payroll practitioners—the
American Payroll Association (APA). Membership in the association is open to anyone
interested in or engaged in the support of payroll accounting. The APA offers professional
training seminars and various publications to its members. Each year, the APA administers
examinations for the payroll accountant and awards certificates to those who pass the
exams, Fundamental Payroll Certification (to demonstrate a baseline of payroll competency)
and Payroll Professional Certification (for the experienced professional to demonstrate the
full-range of payroll competency). This testing and certification process has helped the
payroll profession to gain recognition in the business community. The APA has also
established guidelines for the conduct of the payroll professional. This “Code of Ethics,”
shown in Figure 1.1, sets the direction for the profession.

In 2023, the American Payroll Association (APA) merged with the Global Payroll
Management Institute and became PayrollOrg (PAYO). This change will be reflected in
future editions.

Figure 1.1

APA Code of Ethics

1. To be mindful of the personal aspect of the payroll relationship between

employer and employee, and to ensure that harmony is maintained through
constant concern for the Payroll Professional’s fellow employees.

2. To strive for perfect compliance, accuracy, and timeliness of all payroll activities.

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3. To keep abreast of the state of the payroll art with regard to developments in
payroll technologies.

4. To be current with legislative developments and actions on the part of

regulatory bodies, insofar as they affect payroll.

5. To maintain the absolute confidentiality of the payroll within the procedures of

the employer.

6. To refrain from using Association activities for one’s personal self-interest or

financial gain.

7. To take as one’s commitment the enhancement of one’s professional abilities

through the resources of the American Payroll Association.

8. To support one’s fellow payroll professionals, both within and outside one’s
organization.

Source: For more information on the organization, contact the American Payroll Association, 660 North
Main Avenue, Suite 100, San Antonio, TX 78205-1217; Tel: 210-224-6406; APA@[Link].

One of a number of online publications designed to provide current information to the

practitioner is created by Thomson Reuters. This research tool is titled Checkpoint Edge
and is a daily review of changes in regulations on both federal and state levels affecting
payroll.

Washington Update

In order to keep abreast of major changes in the laws concerning payroll activities,
please refer to our online version of the textbook where these developing changes
can be listed as they become law. The printed version will be as current as possible
based on the information available to the authors at the time of the writing of the
manuscript.

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Chapter 1: The Need for Payroll and Personnel Records: 1-2 Fair Labor Standards Act
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-2 Fair Labor Standards Act

The Fair Labor Standards Act (FLSA),
referred to as the Federal Wage and LO 1
Hour Law, is covered in Chapter 2. The
outline of the law deals with: Identify the various laws that affect
employers in their payroll operations.
Minimum wage ($7.25 per hour)
and overtime pay requirements.

In addition, equal pay for equal work, employment of child labor, public service
contracts, and wage garnishment.

Coverage of employers engaged in interstate commerce or in production of goods and

services for interstate commerce.

Maintaining records that explain the basis of wage differentials paid to employees of
opposite sex for equal work.

Displaying a poster (from the regional office of the Wage and Hour Division) informing
employees of the provisions of the law.

States’ Minimum Wage and Maximum Hour Laws that also establish minimum wage
rates for covered employees. Where both federal and state laws cover the same
employee, the higher of two rates prevails (e.g., Rhode Island—$15.00 per hour, in
2025).

States’ wage orders that also can affect pay periods, pay for call-in and waiting times,
rest and meal periods, absences, meals and lodging, uniforms, etc.

On the Job

Up until July 24, 2009, the minimum wage was $6.55 per hour.

On the Net

[Link] This Web site contains the minimum

wage laws by state in map and text form.

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Chapter 1: The Need for Payroll and Personnel Records: 1-3 Federal Insurance Contributions Act
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-3 Federal Insurance Contributions Act

Chapter 3 covers FICA (social security) in detail; however, the basic provisions of the act
deal with:

Tax on employees (set percent of their gross wages) and employers for the Federal
Old-Age and Survivors’ Trust Fund and the Federal Disability Insurance Trust Fund.

Separate tax on employees and employers to finance the Health Insurance Plan—
Medicare.

Tax on net earnings of the self-employed individual (Self-Employment Contributions

Act—SECA).

Making payments to persons who are entitled to benefits under these social security
taxes.

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Chapter 1: The Need for Payroll and Personnel Records: 1-4 Income Tax Withholding Laws
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-4 Income Tax Withholding Laws

Chapter 4 covers income tax withholding, but basically:

Income tax (levy on the earnings of most employees that is deducted from their gross
pay.) is levied on the earnings of most employees and is deducted from their gross
pay.

Income taxes can be imposed by federal, state, and local governments.

Federal Income Tax (FIT) employs a percentage formula or a wage bracket chart used
by each employer to withhold a specified amount from each wage payment.

State tax rates vary from state to state.

On the Net

[Link] Premiere Payroll Tax Research Library. This site

contains addresses, phone numbers, form numbers (with explanations), and filing
dates for federal and state taxing authorities.

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Chapter 1: The Need for Payroll and Personnel Records: 1-5 Unemployment Tax Acts
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-5 Unemployment Tax Acts

Chapter 5 covers unemployment taxes with a detailed discussion of:

Tax levied on employers (Federal Unemployment Tax Act—FUTA) that is used to pay
state and federal administrative expenses of the unemployment program.

A credit granted against most of the FUTA tax if the employer pays a state
unemployment tax. A smaller credit is granted to states that have not paid back
borrowings from the federal government, which were used to pay the cost of benefits
to their eligible unemployed workers.

State unemployment taxes (SUTA) on employers imposed by all states. These taxes
are used to pay unemployment benefits.

Standards set by the Social Security Act that result in a high degree of uniformity in
the requirements of state unemployment laws.

Employers’ need to be aware of the SUTA laws in the states where they operate.

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Chapter 1: The Need for Payroll and Personnel Records: 1-6 Recordkeeping Requirements
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-6 Recordkeeping Requirements

Although the laws do impose
recordkeeping requirements on LO 2
employers, no specific form of record is
mandated. Figure 1.2, lists the specific Examine the recordkeeping requirements of
information needed and the retention these laws.
time periods required.

Figure 1.2
Summary of Information Required by Major Federal Payroll Laws

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Chapter 1: The Need for Payroll and Personnel Records: 1-7 Fair Employment Laws
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-7 Fair Employment Laws

Federal and state legislations have been enacted to enforce fair employment practices
(laws that deal with discrimination on the basis of age, race, color, religion, gender, or
national origin as a condition of employment.) . Many of these laws deal with discrimination
on the basis of age, race, color, religion, sex, or national origin.

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Chapter 1: The Need for Payroll and Personnel Records: 1-7a Civil Rights Act of 1964
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-7a Civil Rights Act of 1964

Title VII of the Civil Rights Act of 1964, entitled “Equal Employment Opportunity,” provides
for several fair employment practices. The act, as amended, forbids employers to
discriminate in hiring, firing, promoting, compensating, or in any other condition of
employment on the basis of race, color, religion, sex, or national origin. Guidelines,
established by the Equal Employment Opportunity Commission (EEOC), also include
physical characteristics in the definition of national origin discrimination. For example,
unnecessary height or weight requirements could exclude some individuals on the basis of
their national origin. The EEOC has also declared that sexual harassment violates the Civil
Rights Act. Unwelcome sexual advances, requests for sexual favors, and other verbal or
physical conduct of a sexual nature can constitute sexual harassment.

On the Net

[Link] This EEOC homepage overviews guidelines and services of

the Equal Employment Opportunity Commission (EEOC).

The EEOC consists of five members who administer the law. The commission is bipartisan
and can have no more than three members of the same political party. A General Counsel of
the Commission, appointed by the President for a period of four years, handles all EEOC
litigations.

On the Job

Title VII requires employers to reasonably accommodate workers’ religious-based

requests without causing an undue hardship to others.

The EEOC prohibits unions from excluding or segregating their members on these bases,
and employment agencies may not refer or refuse to refer applicants for employment on the
basis of race, color, religion, sex, or national origin.

This act covers all employers who engage in an industry “affecting commerce” and who
employ 15 or more workers for each working day in each of 20 or more weeks in the current
or preceding calendar year. Employers specifically excluded from coverage of the fair
employment practices include the U.S. government (state and local governments are
covered), a corporation wholly owned by the United States, Native Americans, private
membership clubs (other than labor unions) exempt from federal income tax, and religious
societies in the employment of members of a particular religion to work on the societies’
religious activities. Although the U.S. government is classified as an exempt employer, the
act states that the policy of the U.S. government provides equal employment opportunities
without discrimination and that the president should use his existing authority to implement
this policy.

The act requires an employer information report (EEO-I) to be filed annually by employers
with federal government contracts of $50,000 or more who have 50 or more employees, and
employers without a government contract who have 100 or more employees.

Title VII does not protect an employee from arbitrary treatment or dismissal. As long as the
employer applies these policies in a nondiscriminatory manner, Title VII requirements have
not been violated.

To accomplish the purpose of eliminating discrimination, the EEOC tries to obtain voluntary
compliance with the law before filing a court action for an injunction. It can institute court

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proceedings for an injunction if it believes that any person or group of persons is not
complying with the law. Where a state or local law forbids discriminatory practices, relief
must first be sought under the state or local law before a complaint is filed with the
Commission. In most states, a special commission or the state Department of Labor
administers the laws and may authorize cease-and-desist orders that are enforceable in the
courts.

The Civil Rights Act of 1991 grants compensatory and punitive damages in cases where the
discrimination is intentional. It also provides for the repayment of attorney fees and the
possibility of a jury trial.

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Chapter 1: The Need for Payroll and Personnel Records: 1-7b Executive Orders
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-7b Executive Orders

Employers not subject to the Title VII coverage discussed above may come within the scope
of the Civil Rights Act by reason of a contract or a subcontract involving federal funds. In a
series of executive orders (official documents through which the president of the United
States manages the operations of the federal government.) , the federal government has
banned, in employment on government contracts, discrimination based on race, color,
religion, sex, or national origin.

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Chapter 1: The Need for Payroll and Personnel Records: 1-7c Age Discrimination in Employment Act
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-7c Age Discrimination in Employment Act

The Age Discrimination in Employment Act of 1967 (ADEA) prohibits employers,

employment agencies, and labor unions from discriminating on the basis of age in their
employment practices. The act covers employers engaged in an industry affecting interstate
commerce (who employ 20 or more workers), employment agencies, and labor unions. The
act also covers federal, state, and local government employees, other than elected officials
and certain aides not covered by civil service. The ADEA provides protection for virtually all
workers over 40. Exceptions do exist in cases of bona fide occupational qualifications and a
legitimate seniority system. Another key exception is executives who are 65 or older and
who have held high policy-making positions during the two-year period prior to retirement. If
such an employee is entitled to an annual retirement benefit from the employer of at least
$44,000, the employee can be forcibly retired.

On the Job

Court rulings have updated the regulations to state that favoring an older individual
over a younger individual because of age is not unlawful discrimination under the
ADEA.

In order to prove compliance with the various fair employment laws, employers must keep
accurate personnel and payroll records. All employment applications, along with notations
as to their disposition and the reasons for the disposition, should be retained. All records
pertaining to promotions, discharges, seniority plans, merit programs, incentive payment
plans, etc., should also be retained.

Over the Line

Louisville-based Texas Roadhouse with more than 450 locations in the United
States fought a lawsuit brought by 55 women and men charging discrimination
against workers age 40 and older by refusing to employ them as hosts, bartenders,
and servers. In legal filings, the company stated that even if its policies had an
adverse impact on older workers, they were lawful, because they are job-related
and consistent with business necessity (in that servers must line dance, wear jeans,
and work evenings). The company had to pay $12 million to settle the Equal
Employment Opportunity Commission’s lawsuit.

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Chapter 1: The Need for Payroll and Personnel Records: 1-7d Americans with Disabilities Act
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-7d Americans with Disabilities Act

The Americans with Disabilities Act of 1990 (ADA) prohibits employers with 15 or more
employees, employment agencies, labor organizations, or joint labormanagement
committees from discriminating against qualified persons with disabilities because of their
disability.

On the Job

Even though alcoholism is a disability under the ADA, employees can be disciplined
for misconduct that occurred while under the influence.

The prohibition of disability-based discrimination applies to job application procedures,

hiring, advancement, termination, compensation, job training, and other conditions of
employment. In addition, reasonable accommodations, such as wheelchair-accessible
restrooms and ramps for qualified disabled job applicants and workers, must be provided.

Under the ADA, a person is considered “qualified” if the individual can perform the essential
functions of the job with or without reasonable accommodation.

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Chapter 1: The Need for Payroll and Personnel Records: 1-8 Other Federal Laws Affecting the Need for Payroll and Personnel Records
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-8 Other Federal Laws Affecting the Need for Payroll and Personnel Records
Generally, the payroll and personnel records and reports that a business prepares and
retains to meet the requirements of the laws already discussed provide sufficient information
needed under the laws outlined in Figure 1.3 and discussed below.

Figure 1.3
Federal Laws Affecting the Need for Payroll and Personnel Records

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Chapter 1: The Need for Payroll and Personnel Records: 1-8a Federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-8a Federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996

The Federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996
(PRWORA) mandates that all states must establish new-hire reporting programs. Every
employer is required to report the name, address, and social security number on each new
employee and the employer’s name, address, and federal employer identification number
within 20 days of hire to the State Directory of New Hire Reporting. In many states,
submission of a copy of the employee’s W-4 form (Employee’s Withholding Allowance
Certificate) will satisfy the reporting requirement. This information must then be forwarded
within 5 business days by the state to the federal Office of Child Support Enforcement
(OCSE) for entry into the National Directory of New Hires. Employers with operations in
more than one state may file one report with the state of their choice. That state is then to
share the information with the other states.

New-hire reporting requirements in some states now also include information reporting on
independent contractors. The main reason for this requirement is to help in the enforcement
of child support obligations. In addition, it will reduce fraud in the unemployment, workers’
compensation, and public assistance programs. Failure to report this information can result
in fines of up to $25.00 per new hire. Even though under federal law employers do not have
to report this same information on independent contractors, some states do require such
reporting.

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Chapter 1: The Need for Payroll and Personnel Records: 1-8b Immigration Reform and Control Act of 1986
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-8b Immigration Reform and Control Act of 1986

The Immigration Reform and Control Act of 1986 (IRCA) bars employers from hiring and
retaining persons unauthorized to work in the United States (an exception is non-immigrant
aliens as temporary workers in occupations where an adequate domestic workforce cannot
be recruited). It also requires all employers to verify employment eligibility for all individuals
by examining the employee’s verification documents and having the employee complete
Form I-9, Employment Eligibility Verification (Verification form that lists the documents
an employee can choose to furnish to the employer; they identify the employee and verify
authorization to work in the United States.) . Form I-9 lists the documents that an employee
can choose from to furnish to the employer. These documents identify the employee and, if
an immigrant, verify authorization to work in the United States. The employer must examine
the documents to verify their authenticity and then record the appropriate information on the
employee’s Form I-9. Employers must also follow up on documents (with an expiration date)
that limit the employee’s authorization to work. The employer cannot ask an applicant about
the candidate’s immigration status before a conditional job offer.

Photocopying new employees’ I-9 documents is permitted but not required. If done,
photocopying should apply to all new employees. Employers are not required to submit
Form I-9 to the U.S. Citizenship and Immigration Service.

Section 1 of the form must be signed by the employee no later than the first day of
employment, but not before accepting a job offer. Section 2 must be signed by the employer
or authorized representative within three business days of the employee’s first day of
employment. The person signing Section 2 must be the same person who examined the
employee’s documents.

Failure to produce the required documents can result in termination as long as the employer
applies this rule uniformly to all employees. If it is confirmed that an employee is not legally
authorized to work in this country, the employee must be fired immediately.

The process of collecting, filing, and retaining I-9 forms and supporting documentation
should be a centralized function so that inconsistencies are eliminated. The forms (I-9) and
supporting documentation should be filed separately from other personnel records so that
the information contained in the forms is kept private. The form must be retained for three
years after the date of hiring or for one year after the date the employment is terminated,
whichever is later. Terminated employees who are rehired within three years of the date of
the initially filed Form I-9 need only reverify the information to the employer.

The U.S. Citizenship and Immigration Services (USCIS) can levy fines if an audit uncovers
hiring, recruiting, or referring violations.

The fines on employers are broken down as follows:

First offense—$676 to $5,404 per undocumented employee.

Second and subsequent offenses—$5,404 to $27,108 per undocumented employee.

Pattern of violations—extra fines and up to six months in jail.

There are also fines levied for document fraud.

Over the Line

One of the largest ever penalties in an immigration case ($95 million) was assessed
to a Pennsylvania-based tree company for hiring workers whom company
executives knew lacked proper immigration documents.

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E-Verify

This is a government-run Internet-based system that allows employers to check the

employment eligibility of new hires by comparing the information on an employee’s Form I-9
with databases of the Social Security Administration and the Department of Homeland
Security. E-Verify requires a social security number (SSN) for the employee, so even though
a newly hired employee is not required to have applied for an SSN before completing Form
I-9, the employee must apply for it as soon as possible.

For most employers, this is a voluntary program; however, all new federal employees must
have their employment eligibility confirmed through E-Verify. Federal contractors and
subcontractors are now required to use the E-Verify system to verify employees’ eligibility
(contracts for less than $100,000 are exempt). State laws can also require employers to E-
Verify (mandatory in over 20 states for some or all employees).

If there is a record mismatch, a tentative nonconfirmation is issued to the employer who

must then notify the affected employee. If the employee had voluntarily provided their e-mail
address on Form I-9, E-Verify will inform the employee at the same time as the employer. In
case of a mismatch, the employee has eight working days to correct the discrepancy or be
fired.

Employers can also use the Social Security Number Verification Services (SSNVS) to verify
that an employee’s name matches a social security number. However, even if a person has
a valid social security number, it does not mean that the person is authorized to work in the
United States.

A new E-Verify Next Gen service was being phased in during 2024. Employees will now be
able to enter their own information into the system and provide identity documents on their
secure internet-based myE-Verify account. The system will confirm the details and notify the
employer.

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Chapter 1: The Need for Payroll and Personnel Records: 1-8c Family and Medical Leave Act of 1993
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-8c Family and Medical Leave Act of 1993

The Family and Medical Leave Act of 1993 (FMLA) requires employers that have 50 or more
employees within a 75-mile radius, for at least 20 weeks in the current or preceding
calendar year, to grant workers unpaid leave for a family or medical emergency. In cases of
childbirth, adoption, serious illness of the employee or the employee’s child, spouse, or
parent, or emergency due to active duty in the Armed Forces, the employer must offer the
worker as many as 12 weeks of unpaid leave. The leave may be used all at once, or in
separate weeks, days, or hours. However, the leave must be taken within 12 months of the
qualifying event. In cases of an employee’s chronic serious health condition, a reduced
number of hours per day for an indefinite period can be used for leave. It is the employer’s
obligation to designate leave as an FMLA-qualifying event. Employees cannot pick and
choose when they want to use FMLA time (even if they have accumulated sick leave);
however, the FMLA time can run concurrently with paid sick time.

On the Job

The 12-month FMLA period can be based on calendar year, any fixed 12-month
period measured forward from the first date an employee takes FMLA leave, or a
rolling period measured backward from the date an employee takes FMLA leave.

During the leave, employers must continue health-care coverage, and they must also
guarantee that the employee will return to the same job or to a comparable position. The
employer can substitute an employee’s earned paid leave for any part of the 12-week family
leave as long as notification is given to the employee within two business days of receiving
the request for the leave and it does not violate an existing employment contract.

Employers that pay employees on family and medical leave at least 50% of their normal
wages may take a general business tax credit equal to 12.5% of the wages paid. The credit
increases (to a maximum of 25%) in increments of 0.25% for each percentage point over
the 50% starting point. The credit applies to wages paid for up to 12 weeks of leave time
and does not apply to employees with wages over $78,000.

An expansion of FMLA allowed employees to take leave (up to 12 weeks) when a family
member is on active duty or when the employee cares for a family member with a serious
injury or illness incurred in the line of duty (up to 26 weeks).

An employee who has used the 12-week allotment under FMLA may be entitled to
additional time off as a reasonable accommodation under the Americans with Disabilities Act
as long as the employee’s condition qualifies as a disability.

Employers can exempt the following:

1. The highest-paid 10% of their workforce.

2. Those who have not worked at least one year and at least 1,250 hours in the previous
12 months for the company.

On the Job

FMLA absenteeism is highest among health-care employees with 39% of their

workforce with open FMLA leave (average length of 28 days). Employers subject to
FMLA failure to comply with posting the requirements may be subject to a fine of
$211.

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Current regulations allow employers to contact employees’ doctors for clarification on the
information on the employees’ certification forms. This contact cannot be made by the
employees’ direct supervisors but must be done by human resources professionals, leave
administrators, or management officials.

The definition of “spouse” was revised to examine the law of the state in which the marriage
was entered into instead of the law of the state in which the employee resides. This allows
all legally married couples, including same-sex and common-law, to have consistent family
leave rights regardless of where they live.

An organization that is below the limits of coverage could be courting an FMLA lawsuit if in
its employee handbook or benefits materials there is a statement that it complies with the
FMLA. An employee can sue an employer who violates the general leave requirements
within two years of the violation or three years if it is a willful violation.

Eleven states and the District of Columbia have established paid family leave plans. For
example, in 2024, New Jersey allowed workers 12 weeks’ paid leave (at two-thirds of their
salary up to $1,055/week) to care for family members with a serious health condition, or to
be with a child during the first 12 months after the child’s birth or adoption. The program was
funded through payroll deductions of 0.09% on the first $161,400 in covered wages.

News Alert

Bloomington, Minnesota, requires certain employers with six or more employees to

provide sick leave to employees who work at least 80 hours a year in the city.
Employees accrue up to 48 hours of paid leave by earning one hour for every 30
hours worked.

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Chapter 1: The Need for Payroll and Personnel Records: 1-8d Uniformed Services Employment and Reemployment Rights Act of 1994
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-8d Uniformed Services Employment and Reemployment Rights Act of 1994

The Uniformed Services Employment and Reemployment Rights Act (USERRA) gives
military personnel the right to take leaves of absences from their civilian jobs for active
military service and to return to their jobs with accrued seniority. The reinstatement must be
to the employee’s original position or its equivalent, except for the dishonorably discharged.
In addition, the return must be granted within two weeks of the job request, and health
benefits must be started without any waiting period.

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Chapter 1: The Need for Payroll and Personnel Records: 1-8e Employee Retirement Income Security Act of 1974
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-8e Employee Retirement Income Security Act of 1974

The Employee Retirement Income Security Act of 1974 (ERISA) covers employee pension
and welfare plans established or maintained by any employer or employee organization
representing employees engaged in commerce or in any industry or activity affecting
commerce. The legislation safeguards pension funds by regulating how the funds are to be
raised and disbursed, who controls them, and what is to be done when funds are insufficient
to pay promised benefits. The law does not require every employer to establish a pension
plan; however, if there is an employer pension plan, every employee is eligible after
reaching age 21 or completing one year of service, whichever is later. The year of service is
a 12-month period during which the employee works at least 1,000 hours. An employer can
have a two-year service requirement as long as the plan benefits become 100% vested as
soon as the employee is a plan participant.

ERISA has different funding requirements on benefit plans depending on whether they are
a:

Defined benefit plan: Benefits to the employee or their beneficiary will be based on a
definitive formula based on length of service, average compensation, or compensation
during the final year of service.

Defined contribution plan: Benefits are based solely on the contributions into the
employee’s account. There are no ERISA funding requirements on most defined
contribution plans.

ERISA was designed primarily to ensure that workers covered by private pension plans
receive benefits from those plans in accordance with their credited years of service with
their employers. Vesting (the process of conveying to employees the right to share in a
retirement fund if they are terminated before the normal retirement age.) conveys to
employees the right to share in a retirement fund if they are terminated before the normal
retirement age. The vesting process is linked to the number of years needed for workers to
earn an equity in their retirement plans and to become entitled to full or partial benefits at
some future date if they leave the company before retirement. Once vested, a worker has
the right to receive a pension at retirement age, based on years of covered service, even
though the worker may not be working for the firm at that time. Currently, the law provides
for two minimum vesting schedules on the employer’s contributions:

Zero vesting for the first five years of service, with 100% vesting at the end of the fifth
year.

Three-to-seven-year vesting provides for 20% vesting after three years of service and
20% annual increase until 100% vesting is reached after seven years.

The plan administrator must file an annual report (Form 5500) with the federal government
by the end of the seventh month following the close of the plan year.

On the Job

Certain plans are exempt from ERISA: governmental plans; church plans; workers’
compensation; disability and unemployment insurance plans.

Benefit payouts must begin within 60 days of the latest of these events:

When the employee reaches age 65,

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10 years after participation began, or

The plan year in which the employee leaves the company.

To protect against potential benefit losses because of a plan’s termination, ERISA set up a
government insurance program, the Pension Benefit Guaranty Corporation, to pay any
benefits that could not be met with funds from the plan.

Disclosure Requirements

Informational reports must be filed with the U.S. Department of Labor, the IRS, and the
government insurance program. In general, the reports consist of descriptions of the plans
and the annual financial data. The plan descriptions include the eligibility requirements for
participation and for benefits; provisions for nonforfeitable pension benefits; circumstances
that may result in disqualification, loss, or denial of benefits; and procedures for presenting
claims. The annual reports include financial statements and schedules showing the current
value of plan assets and liabilities, receipts and disbursements, and employer contributions;
the assets held for investment purposes; insurance data; and an opinion by an independent
qualified public accountant. Upon written request from the participants, the administrator
must also furnish a statement, not more than once in a 12-month period, of the total benefits
accrued, accrued benefits that are vested, if any, or the earliest date on which accrued
benefits will become vested.

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Chapter 1: The Need for Payroll and Personnel Records: 1-8f Affordable Care Act of 2010 (ACA)
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-8f Affordable Care Act of 2010 (ACA)

The Affordable Care Act (Obamacare) consists of two pieces of legislation: Patient
Protection and Affordable Care Act and Health Care and Education Reconciliation Act. The
act was designed to expand health insurance coverage to more Americans while increasing
benefits and lowering costs for consumers.

State-based health insurance exchanges are established for those who do not have access
to employer-provided coverage or do not qualify for public programs like Medicaid. These
will be marketplaces where individuals can comparison shop. Individuals and families with
incomes between 100% and 400% of the federal poverty level will receive subsidies to buy
coverage.

The Tax Overhaul Bill of 2017 repealed the requirement that all Americans obtain health
insurance. This has caused a drop in the number of insurance companies on the states’
insurance exchanges. It has also added to an uncertain future for the ACA.

Applicable Large Employers (ALEs)

Employers with 50 or more full-time employees during the previous year (applicable large
employers—ALEs (employers with 50 or more full-time employees during the previous
year.) ) are required to provide coverage for all full-time employees and their dependents. If
an employer does not offer coverage, the employer will owe a penalty for each full-time
employee who, under the health law, is eligible for and receives federally subsidized health-
care coverage.

There are two information reporting obligations for applicable large employers (Form 1095-
C):

A return to be filed with the IRS for each employee with information about the health
coverage offered, or not offered, to that employee during the previous year. This
return is due to the IRS by February 28 on paper or March 31 if filed electronically.

An information statement to each full-time employee containing certain health

coverage facts. This statement is due by January 31.

On the Job

According to the Kaiser Family Foundation, in 2023, the total average cost of
employer-provided health insurance was more than $8,435 for single coverage and
more than $23,968 for family coverage.

Penalties for failing to comply with the information reporting requirements can result in fines
of $310 for each return with a total maximum penalty of $3,783,000.

Small Employers

A sliding scale income tax credit is established for small employers (employers with fewer
than 50 full-time equivalent employees with average annual wages of less than $50,000.)
(fewer than 25 full-time equivalent employees with average annual wages of less than
$58,000) who offer health insurance coverage to their employees. Employers can purchase
affordable insurance through the Small Business Health Options Program. If the employer
pays at least 50% of the cost (the premium rate for an employee with single coverage),
there is a 50% maximum credit of the employer’s premium cost (35% for tax-exempt
employers) against the employer’s income tax liability.

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The law also provides for a Medicare tax increase on wages over $200,000 for single filers
and $250,000 for joint filers. This tax must be withheld by the employer of any worker whose
wages exceed $200,000.

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Chapter 1: The Need for Payroll and Personnel Records: 1-9 Other State Laws Affecting the Need for Payroll and Personnel Records
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-9 Other State Laws Affecting the Need for Payroll and Personnel Records
States have enacted other laws that have a direct bearing on the payroll and personnel
records that an employer must maintain and on the rights that must be extended to
employees.

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Chapter 1: The Need for Payroll and Personnel Records: 1-9a Workers’ Compensation Laws
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-9a Workers’ Compensation Laws

Workers’ compensation insurance (protection provided to employees and their

dependents against losses due to injury or death incurred during employment.) protects
employees and their dependents against losses due to work-related injury, illness, or death.
Most states have passed laws that require employers to provide workers’ compensation
insurance through one of the following plans:

1. Contribution to a state compensation insurance fund administered by an insurance

department of the state.

2. Purchase of workers’ compensation insurance from a private insurance company

authorized by the state to issue this type of policy.

3. Establishment of a self-insurance plan, approved by the state, under which the

company bears all risk itself.

Over the Line

A New Jersey plumbing company denied workers’ compensation benefits to an

employee who was in a car accident as he was driving to get coffee because his
meeting at a work site was delayed. An appeals court awarded benefits, stating that
off-site employees are covered during slight diversions from their normal activities.

Benefits are paid to cover medical bills and also to provide a percentage of the worker’s
regular wages during the time that the employee is unable to work. The employer bears the
cost of the workers’ compensation insurance premiums, except in Montana, New Mexico,
Oregon, and Washington, where both the employer and the employee contribute to the
workers’ compensation fund.

The insurance premiums are often based upon the total gross payroll of the business and
may be stated in terms of an amount for each $100 of weekly wages paid to employees.
The premium rates vary among types of jobs and the employers’ accident experience rate.

Example 1-1

The rate for office workers of Volpe Parts Company is $0.75 per $100 of payroll,
while the rate for machine-shop workers is $1.90 per $100 of payroll.

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Chapter 1: The Need for Payroll and Personnel Records: 1-9b Disability Benefit Laws
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-9b Disability Benefit Laws

The Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI)
programs provide assistance to people with disabilities. The SSDI program pays benefits to
workers and certain family members. The SSI program pays benefits to those disabled who
have limited income.

Five states (California, Hawaii, New York, New Jersey, and Rhode Island) have disability
benefit laws (provide benefits to employees absent from work because of illness, accident,
or death.) to provide benefits to employees absent from work because of illness, accident,
or death. This coverage is different from Worker’s Compensation because it covers injuries
away from the worker’s place of employment. Chapter 5 presents further discussion of state
disability benefit laws.

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Chapter 1: The Need for Payroll and Personnel Records: 1-10 Human Resources and Payroll Accounting Systems
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-10 Human Resources and Payroll Accounting Systems

Up to this point, we have seen that a business must keep human resources and payroll
records to meet the requirements of the various laws under which it operates. In developing
its human resources and payroll accounting systems, a business should design basic forms
and records that satisfy the requirements of all the laws applicable to that organization.
Properly designed forms and records, as described later in this chapter, not only supply the
information required by the various laws but also provide management with information
needed in its decision-making process. They also result in savings in both time and work
because the necessary information is recorded, stored, retrieved, and distributed
economically, efficiently, and quickly.

Before studying the employment process, it is important to examine the close relationship
between the Payroll Department and the Human Resources Department. Some businesses
consider payroll to be strictly an accounting function and, as such, place it under the direct
control of the chief financial officer. However, because of the need for frequent interchange
of information between the Payroll and Human Resources departments, the trend has been
to place payroll under the control of the director of human resources. This movement toward
centralization eliminates the duplication of many tasks. With the required information in one
department, the process of completing these forms is shortened. Further, questions from
employees concerning sick pay, vacation pay, and other benefits can be answered from one
source.

Individual computer programs have been developed for the combined needs of payroll and
human resources. Information concerning such diverse activities as attendance, retirement
benefits, health insurance coverages, and bonus pay is now available to designated
employees in the Human Resources Department through a computer terminal.

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Chapter 1: The Need for Payroll and Personnel Records: 1-11 Human Resources System
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-11 Human Resources System

In many medium-size and large
companies, the human resources LO 3
system (procedures and methods
related to recruiting, selecting, orienting, Describe the employment procedures
training, and terminating personnel.) generally followed in a Human Resources
embodies all those procedures and Department.
methods related to recruiting, selecting,
orienting, training, and terminating
personnel. Extensive recordkeeping procedures are required in order to:

1. Provide data for considering promotions and changes in the status and earnings of
workers.

2. Provide the information required by various federal, state, and local laws.

3. Justify company actions if investigated by national or state labor relations boards.

4. Justify company actions in discussions with local unions or plant committees.

Before the Payroll Department can pay newly hired employees, the Human Resources
Department must process those employees. Figure 1.4, charts the procedure that the
Human Resources Department follows in this hiring process.

Figure 1.4
Human Resources Department Procedure in the Hiring Process

A number of companies that manufacture business forms have available standard

personnel forms and records that may be successfully used if a business does not care to
design its own special forms. In small companies, an application form or an employee
history record may be the only document needed. Throughout the remainder of this chapter,
several illustrations augment the discussion of the various human resources and payroll
records. In these examples, we shall follow Cheryl Crowson from her initial application for
employment with Palmero Maintenance Company to her entry onto the company’s payroll
records.

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Chapter 1: The Need for Payroll and Personnel Records: 1-11a Job Descriptions
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-11a Job Descriptions

One way to protect companies from discrimination charges in hiring practices is to have true
and clear job descriptions for every position in the organization. This is one of the items that
courts examine in determining the validity of a discrimination charge. The descriptions must
be accurate and must have been prepared before the job was advertised or the interviewing
began.

The descriptions should include:

Job title.

Essential and nonessential duties.

Department/supervisor.

Necessary skills.

Needed experience.

Education, credentials required.

Working conditions.

Results expected.

In today’s world, many of the paper forms presented in this chapter have been
replaced with electronic substitutes. They are illustrated here to show the type of
information that should be included no matter what format is used.

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Chapter 1: The Need for Payroll and Personnel Records: 1-11b Requisition for Personnel
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-11b Requisition for Personnel

The requisition for personnel (document submitted to the Human Resources Department
asking for additional or replacement employees.) form notifies the Human Resources
Department of the need for additional or replacement employees. The requisition for new
employees can be initiated in a number of ways. Some companies utilize a memo that is
forwarded to the Human Resources Department stating the title of the position to be filled, a
brief description of the duties of the job, and the salary range. Other companies may use
preprinted forms. A preprinted form should indicate the type and number of persons needed,
the position to be filled, the rate of pay for the job, the salary range, the date the employee
is needed, a summary of any special qualifications, and whether the position is permanent
or temporary. This process can also be completed electronically, through the use of a
company’s e-mail system.

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Chapter 1: The Need for Payroll and Personnel Records: 1-11c Application for Employment
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-11c Application for Employment

Every business, regardless of size,

should have an application form (similar LO 4
to that in Figure 1.5) to be filled out by a
person seeking employment. The Identify the various personnel records used
application form (personnel record that by businesses and the type of information
gives the applicant an opportunity to shown on each form.
provide information about personal
qualifications, training, and experience.)
gives the applicant an opportunity to provide complete information as to:

1. Personal information, including the name, address, telephone number, and social
security number of the applicant.

2. Educational background, including a summary of the schools attended, whether the

applicant graduated, and degrees conferred.

3. Employment and experience record.

4. Type of employment desired.

5. References.

Figure 1.5
Application for Employment

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The application form also provides information for the checking of references, serves as a
guide to effective interviewing, and provides information for correlation with data obtained
from employment tests. It serves as a permanent record for the business. This form can
also be set up to be completed electronically by the applicant.

Employers subject to fair employment laws must make certain that all aspects of the pre-
hire inquiries are free of discrimination on the basis of race, color, religion, sex, national
origin, or age. A number of states have instituted a “lifestyle discrimination law” that deals
with discrimination based on employees’ use of legal products on their own time, for
example tobacco use. Pre-hire inquiries (questions asked in the employment interview and
on application forms, résumés of experience or education required of an applicant, and any
kind of written testing.) include questions asked in the employment interview and on
application forms, résumés of experience or education required of an applicant, and any
kind of written testing. None of the federal civil rights laws specifically outlaws questions
concerning the race, color, religion, sex, national origin, or age of an applicant. However, if
the employer can offer no logical explanation for asking such questions, the EEOC and the
Wage and Hour Administrator view such questions as discriminatory. Of course, pre-hire
questions pertaining to religion, sex, national origin, or age are allowed when these factors
are bona fide occupational qualifications for a job. Many states have banned the use of a
check box relating to an applicant’s criminal past; however, employers can still ask about
arrest records during the job interview. The EEOC has stated that criminal background
checks can only be used if there is a solid business reason for them. Asking for arrest
records is illegal.

Background checks must be in compliance with the rules established by the Fair Credit
Reporting Act (FCRA). These steps must be closely followed where an investigative
consumer report (study done by a consumer reporting agency on a job applicant or current
employee concerning the individual’s character, general reputation, and mode of living.) is
being used:

Notify the applicant in writing that the information obtained will be used in the
employment decision.

Have the applicant sign the notification.

Give the applicant a notice and a copy of the report at least five days before making
an adverse employment decision.

Provide a copy of the government document “A Summary of Your Rights Under the
FCRA.”

Over the Line

Wells Fargo had to pay more than $12 million to 6,255 unsuccessful job applicants
due to background check violations. The lead plaintiff in the case stated that Wells
Fargo ran an employment-purposed consumer report on him without telling him
about the report, nor did the bank give him a copy of the report after being rejected
for the job.

Testing applicants can also be an area fraught with legal ramifications. Aptitude and
psychological testing are unlawful unless results can be related to job performance. The use
of online personality tests has surged in the past decade. These tests are used to assess

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the personality, skills, cognitive abilities, and other traits of 60 to 70% of prospective workers
in the United States. These types of tests must be approved by the EEOC. Lie detector tests
are strictly illegal. With regard to drug testing, employers must consult their state’s laws.

On the Job

In 2021, Quest Diagnostics reported a workforce drug positivity testing of 4.6%. This
represented the highest rate since 2003.

Asking an applicant’s age or date of birth may tend to deter the older worker. Thus, if an
application form calls for such information, a statement should appear on that form notifying
the applicant that the ADEA prohibits discrimination on the basis of age with respect to
individuals who are at least 40. Questions on the application and during the interview
process should be used only to determine the applicant’s ability to do the job.

Some of the safeguards to prevent lawsuits would be:

Accept applications almost exclusively online.

Have someone not involved in the interview process review applications.

Screen applications with computer software that looks for experience, education, and
training characteristics.

Another recent development that will affect the job interviewing process concerns past
salary information. In an effort to ensure pay equality for women, over half of the states have
enacted salary history bans.

The final part of the application form should be a statement affirming the employer’s right to:

Verify the information on the application.

Terminate the employee for providing false information on the application or during the
interview process.

Obtain authorization for any planned credit or background checks.

The application should then be signed by the applicant.

Federal antidiscrimination laws require employers to keep all applications for at least one
year from the date of hiring decision, even those from unqualified candidates.

News Alert

A survey conducted by the Society for Human Resource Management found that
53% of employers have been subject to employment-related lawsuits. The majority
of lawsuits were filed by former or current employees; only 5% were from
prospective employees.

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Chapter 1: The Need for Payroll and Personnel Records: 1-11d Reference Inquiry
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-11d Reference Inquiry

Before employing an applicant, a company may check some of the references given on the
application. Many businesses use a standard reference inquiry form (document used by
the employer to check the references that an applicant gives on a job application.) , which
can be mailed or e-mailed to the person or company given as a reference. Other companies
prefer a telephone reference check because they feel that a more frank opinion of the
candidate is received over the telephone. Some companies prefer not to check on personal
references given by the job applicant, since these tend to be less objective than business
references (e.g., prior employers).

Today, any type of reference checking has taken on new meaning—expensive litigation. In
most cases, respondents to these inquiries will verify dates of employment and job titles
only, with no information on former employees’ work habits. To reduce the increasing
number of “failure-to-warn” lawsuits, a number of states have passed laws providing
protection from liability to employers who want to provide references. Recent court decisions
have held the reference process to be privileged. Some companies have also made an
“Employment Reference Release” part of the employment application.

On the Job

Jumping to a new job—an ADP study found that a 13% raise in salary is the turning
point at which employees will change to a new job.

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Chapter 1: The Need for Payroll and Personnel Records: 1-11e Hiring Notice
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-11e Hiring Notice

After the successful applicant is notified of employment and the starting date, time, and to
whom to report, a hiring notice (form that is sent to the Payroll Department so that new
employees are properly added to the payroll.) is sent to the Payroll Department so that the
new employee can be added properly to the payroll. A hiring notice, such as that shown in
Figure 1.6, usually gives the name, address, and telephone number of the new employee,
the department in which employed, the starting date, the rate of pay, and any other
information pertaining to deductions that are to be made from the employee’s wages.

Figure 1.6
Hiring Notice

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Chapter 1: The Need for Payroll and Personnel Records: 1-11f Employee History Record
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-11f Employee History Record

Although many businesses keep no personnel records other than the application, a more
detailed record is needed to provide a continuous record of the relationship between the
employer and the employee. The employee history record (continuous record of the
relationship between the employer and the employee including employee’s progress,
attendance, promotions, performance appraisals, and salary increases.) is such a record
and, in addition to providing personal and other information usually found on an application,
provides space to record the employee’s progress, attendance, promotions, performance
appraisals, and salary increases. As with most records, the individual employee must have
access to the worker’s human resource files.

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Chapter 1: The Need for Payroll and Personnel Records: 1-11g Change in Payroll Rate
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-11g Change in Payroll Rate

The change in payroll rate form (document that notifies the proper departments of a
change in the employee’s rate of remuneration.) notifies the proper departments of a
change in the employee’s rate of remuneration. The change in rate may originate in the
Human Resources Department or with the head of the department in which the employee
works. In either event, the Payroll Department must be informed of the change for the
employee so that the rate change is put into effect at the proper time and so that the records
reflect the new rate. Figure 1.7 shows a form that may be used for this purpose.

Figure 1.7
Change in Status Form

IRS Connection

In 2024, April 16 was the day on which the average American worker’s income,
since the beginning of the year, equaled the tax obligations to federal, state, and
local governments.

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Chapter 1: The Need for Payroll and Personnel Records: 1-11h Terminating an Employee
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-11h Terminating an Employee

If an employee has an employee contract or if promises were made to the employee,

termination can only be done with “good cause.” This means the firing must be based on
reasons related to business needs and goals. An “at-will” employee can be discharged for
any reason as long as it is not a discriminatory reason, even if the employee just does not
work well together with the staff. In cases where the company has made past mistakes in
the handling of the employee, it would be wise to consult a lawyer before making the final
decision. The lawyer can check all the angles in order to protect the company from lawsuit
liability.

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Chapter 1: The Need for Payroll and Personnel Records: 1-12 Recordkeeping System
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-12 Recordkeeping System

Whether the system is paper-based or computer-based or records in the cloud, it is
advantageous to have four separate sets of records for each employee:

Personnel file—basic information (e.g., name, address).

Payroll file—salary and benefits.

Medical file—insurance and private medical data.

I-9 file—copies of the forms and the appropriate documents.

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Chapter 1: The Need for Payroll and Personnel Records: 1-12a Employee Access—Personnel Files
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-12a Employee Access—Personnel Files

Even though personnel files are the property of the employer, employees may have the right
to view and receive a copy of their own files. Even though no federal law guarantees it,
more than half of the states allow current employees access to their records.

On the Job

Payroll schemes account for almost 10% of all reported business frauds.
Companies become most vulnerable when employees have access to check-writing
software and hardware and when outsiders have access to company checks that
are distributed to employees.

Even with this right, some documents are considered confidential, and employers should not
allow employees to view anything that would be considered an invasion of privacy (e.g.,
reference letters, and investigative notes). Before granting access to personnel files, the
payroll professional should check all applicable state laws and their own company’s written
policy.

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Chapter 1: The Need for Payroll and Personnel Records: 1-13 Payroll Accounting System
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-13 Payroll Accounting System

A payroll accounting system
(procedures and methods related to the LO 5
disbursement of pay to employees.)
embodies all those procedures and Identify the payroll register and the
methods related to the disbursement of employee’s earnings record.
pay to employees. A typical payroll
accounting system includes the
procedures shown in Figure 1.8. The nature of the payroll records depends to a great extent
on the size of the workforce and the degree to which the recordkeeping is automated. This
course describes and illustrates manual payroll accounting systems. Appendix A describes a
computerized payroll accounting system using Excel. In most payroll systems—manual or
automated—the payroll register and the employee’s earnings record are the two basic
records that are utilized.

Figure 1.8
Procedures in a Payroll Accounting System

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Chapter 1: The Need for Payroll and Personnel Records: 1-13a Payroll Register
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-13a Payroll Register

The payroll register (multicolumn form used to assemble and summarize the data needed
at the end of each payroll period. It lists all employees who earned remuneration, the
amount of remuneration, the deductions, and the net amount paid.) is a multicolumn form
used to assemble and summarize the data needed at the end of each payroll period. It
provides a detailed listing of a company’s complete payroll for that particular pay period.
Thus, the payroll register lists all the employees who earned remuneration, the amount of
remuneration, the deductions, and the net amount paid. The information provided in the
payroll register is used primarily to meet the requirements of the Fair Labor Standards Act.
However, the register also provides information for recording the payroll entries and for
preparing reports required by other federal, state, and local laws. Figure 1.9 shows one form
of payroll register. Another form, used in the Continuing Payroll Problem at the end of
Chapters 2, 3, 4, 5 and 6, is shown in the fold-out at the back of this book.

Figure 1.9
Payroll Register

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Chapter 1: The Need for Payroll and Personnel Records: 1-13b Employee’s Earnings Record
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-13b Employee’s Earnings Record

In addition to the information contained in the payroll register, businesses must provide
more complete information about the accumulated earnings of each employee. For that
reason, it is necessary to keep a separate payroll record on each employee—the
employee’s earnings record (payroll record for each employee that is used to provide
complete information about the accumulated earnings of each employee.) . Each payday,
after the information has been recorded in the payroll register, the information for each
employee is transferred, or posted, to the employee’s earnings record. The employee’s
earnings record provides the information needed to prepare periodic reports required by the
withholding tax laws, the FICA tax law, and state unemployment or disability laws.
Employers also use the employee’s earnings record in preparing Form W-2, Wage and Tax
Statement (form used by the employer to report the amount of wages paid each worker in
the course of the trade or business of the employer.) . This form shows the amount of wages
paid each worker in the course of the trade or business of the employer. Figure 1.10 shows
an example of the employee’s earnings record. Chapter 6 presents a more detailed
discussion of the preparation and use of the payroll register and the earnings record.

Figure 1.10
Employee’s Earnings Record

On the Job

The retention requirements imposed on employers by various government agencies

set a limit of seven years on payroll registers and eight years on employees’
earnings records.

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Chapter 1: The Need for Payroll and Personnel Records: 1-13c Paycheck
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-13c Paycheck

When employees are paid by check, a check is written for each worker, using as the amount
of net pay that figure appearing in the Net Paid column of the payroll register. Most
paychecks, such as that depicted in Figure 1.11, carry a stub, or voucher, that shows the
earnings and deductions. Paying workers in cash, by check, by means of electronic transfer,
or by pay cards is discussed in Chapter 6.

Figure 1.11
Paycheck with Stub Showing Current and Year-to-Date Earnings and
Deductions

Many states (but not the FLSA) have laws that affect the frequency of wage payments. In
Connecticut, for example, employees must be paid on a weekly basis unless the labor
commission has approved an exception.

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Chapter 1: The Need for Payroll and Personnel Records: 1-13d Outsourcing Payroll
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-13d Outsourcing Payroll

With the increased need for up-to-the-minute information concerning changes in payroll tax
laws, the trend toward outsourcing payroll operations has grown stronger. This is especially
true with small to midsize companies. Many businesses have found that processing payroll
by using an outside payroll company is more cost effective than doing the processing in-
house. Other benefits realized are increased quality, improved efficiency, and a quicker
release time, all of which enable the company to concentrate on its other operations. It also
protects the company against an unexpected loss of payroll personnel. However, there are
also disadvantages—need for more lead time, less flexibility, and increased costs.

On the Job

Surveys have found that 50% of mid-market companies (those with 500–4,999
employees) outsource their payrolls.

Basically, the payroll operations at the company’s site need only deal with the entry of new
employee information and the number of hours worked by each employee. This information
is sent to the payroll processing company electronically. The input is then processed by the
outside firm. Once the processing is completed, the output package (paychecks, payroll,
and management reports) is returned to the company.

These third-party payroll arrangements can range from just the cutting of paychecks and
filing of tax returns to handling all aspects of employment from the hiring through the firing
process.

Leading companies in the industry, such as ADP, will custom-make a comprehensive

and integrated program that will meet the needs of each individual business at a cost that
many businesses find affordable.

When outsourcing payroll, in order to reduce the risk of unpaid payroll taxes, the following
steps should be followed:

Hire only bonded service bureaus.

Do not allow the service bureau to sign tax returns.

Do not allow tax correspondence to be sent to the service bureau.

Request regular IRS transcripts of the company accounts.

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Chapter 1: The Need for Payroll and Personnel Records: 1-14 Chapter Review
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

1-14 Chapter Review

1-14a Key Terms

applicable large employers—ALEs (employers with 50 or more full-time employees

during the previous year.)

application form (personnel record that gives the applicant an opportunity to provide
information about personal qualifications, training, and experience.)

change in payroll rate form (document that notifies the proper departments of a change
in the employee’s rate of remuneration.)

disability benefit laws (provide benefits to employees absent from work because of
illness, accident, or death.)

employee history record (continuous record of the relationship between the employer
and the employee including employee’s progress, attendance, promotions, performance
appraisals, and salary increases.)

employee’s earnings record (payroll record for each employee that is used to provide
complete information about the accumulated earnings of each employee.)

executive orders (official documents through which the president of the United States
manages the operations of the federal government.)

fair employment practices (laws that deal with discrimination on the basis of age, race,
color, religion, gender, or national origin as a condition of employment.)

Form I-9, Employment Eligibility Verification (Verification form that lists the
documents an employee can choose to furnish to the employer; they identify the
employee and verify authorization to work in the United States.)

Form W-2, Wage and Tax Statement (form used by the employer to report the amount
of wages paid each worker in the course of the trade or business of the employer.)

hiring notice (form that is sent to the Payroll Department so that new employees are
properly added to the payroll.)

human resources system (procedures and methods related to recruiting, selecting,

orienting, training, and terminating personnel.)

income tax (levy on the earnings of most employees that is deducted from their gross
pay.)

investigative consumer report (study done by a consumer reporting agency on a job

applicant or current employee concerning the individual’s character, general reputation,
and mode of living.)

payroll accounting system (procedures and methods related to the disbursement of

pay to employees.)

payroll register (multicolumn form used to assemble and summarize the data needed at
the end of each payroll period. It lists all employees who earned remuneration, the
amount of remuneration, the deductions, and the net amount paid.)

pre-hire inquiries (questions asked in the employment interview and on application

forms, résumés of experience or education required of an applicant, and any kind of
written testing.)

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reference inquiry form (document used by the employer to check the references that an
applicant gives on a job application.)

requisition for personnel (document submitted to the Human Resources Department

asking for additional or replacement employees.)

small employers (employers with fewer than 50 full-time equivalent employees with
average annual wages of less than $50,000.)

vesting (the process of conveying to employees the right to share in a retirement fund if
they are terminated before the normal retirement age.)

workers’ compensation insurance (protection provided to employees and their

dependents against losses due to injury or death incurred during employment.)

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Chapter 1: The Need for Payroll and Personnel Records: 1-14b Key Points Summary
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

Chapter Review
1-14b Key Points Summary

LO1 Identify the various laws that affect employers in their payroll operations.
Problem Sets A & B: N/A

Key Points

Fair Labor Standards Act—minimum wage and overtime.

Federal Insurance Contributions Act—social security taxes on

employers and employees.

Income Tax Withholding Laws—deductions from employees’ pays for

federal and state income taxes.

Unemployment Tax Acts—federal tax on employers to pay

administrative costs and state tax on employers to cover benefits.

LO2 Examine the recordkeeping requirements of these laws. Problem Sets A &
B: N/A

Key Points

No specific forms are mandated, but information to be collected and

retention periods are.

Fair employment laws on the federal and state levels deal with
discrimination on the basis of age, race, color, religion, sex, or national
origin.

Laws requiring verification of employment eligibility of new hires.

LO3 Describe the employment procedures generally followed in a Human

Resources Department. Problem Sets A & B: N/A

Key Points

From the request for a new employee to applications and interviews, to

administering tests, to checking references, to notifying payroll.

LO4 Identify the various personnel records used by businesses and the type of
information shown on each form. Problem Sets A & B: N/A

Key Points

Application form is used by most companies to get personal information,

educational background, experience records, and references on each
applicant.

Order forms that may be used—hiring notice, history record, change in

payroll note.

LO5 Identify the payroll register and the employee’s earnings record. Problem
Sets A & B: N/A

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Key Points

Payroll register is a list of all employees for each pay period showing
their gross pay, deductions, and net pay.

Employee’s earnings record is a separate record for each employee

showing the same information as the payroll register; used to prepare
W-2s.

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Chapter 1: The Need for Payroll and Personnel Records: 1-14c Matching Quiz
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

Chapter Review
1-14c Matching Quiz

1. Employee’s earnings A. Also known as the Federal

record Wage and Hour Law

2. Payroll register B. Record used in preparing

3. Executive orders employee’s W-2

4. Fair Labor Standards C. Protection against losses due to

Act work-related injuries

5. Immigration Reform and D. Multicolumn form used to

Control Act summarize data needed each
6. Unemployment pay date
insurance taxes
E. Highest-paid 10% of workforce
7. Vesting can be exempted

8. Workers’ compensation F. Antidiscrimination orders for

insurance employers with contracts
9. Family and Medical involving federal funds
Leave Act
G. Applicable large employers
10. Affordable Care Act (ALEs)

H. Form I-9 to be completed by all

new employees

I. Levied by both federal and state

governments

J. Conveys to employees the right

to share in a retirement fund

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Chapter 1: The Need for Payroll and Personnel Records: 1-14d Questions for Review
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

Chapter Review
1-14d Questions for Review

1. Which act sets the minimum wage, and what is the current wage rate?

2. Under the FLSA, what information concerning employees’ wages earned must
be maintained by the employer?

3. Who pays the social security taxes that are levied by the Federal Insurance
Contributions Act?

4. How are the funds used which are provided by FUTA and SUTA?

5. What types of unfair employment practices are prohibited by the Civil Rights
Act of 1964 as amended?

6. What is the purpose of the Age Discrimination in Employment Act (ADEA)?

7. Are there any exceptions to the protection afforded older workers by the Age
Discrimination in Employment Act?

8. Who is covered by the Walsh-Healey Public Contracts Act?

9. Under the Family and Medical Leave Act, what is the maximum number of
weeks of unpaid leave that a covered employer is required to offer an
employee whose spouse is seriously ill?

10. What is the primary purpose of the Employee Retirement Income Security Act
(ERISA)?

11. Explain the concept of vesting.

12. Under ERISA, if requested in writing, what information must the administrator
of the pension fund supply to the participants?

13. Under the Affordable Care Act, which employers are required to provide
insurance coverage for all full-time employees and their dependents?

14. Summarize the procedure that may be followed by the Human Resources
Department in hiring new employees.

15. What information is commonly provided by a jobseeker on the application for

employment form?

16. What is the significance of the Civil Rights Act of 1964 and the Age
Discrimination in Employment Act in the employer’s use of pre-hire inquiries?

17. What obligations are imposed upon the employer by the Fair Credit Reporting
Act of 1968?

18. What procedures are usually included in a typical payroll accounting system?

19. What two basic records are generated in most payroll accounting systems?

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20. What uses are made of the information shown in the employee’s earnings
record?

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Chapter 1: The Need for Payroll and Personnel Records: 1-14e Questions for Discussion
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

Chapter Review
1-14e Questions for Discussion

1. What personnel records would you suggest for a small retailer with three
employees?

2. What kind of problem can be encountered when requesting references from

previous employers of job applicants?

3. In staffing their offices, some firms encourage in-house referrals

(recommendations of their present employees). What are some possible
objections to this practice as a means of obtaining job applicants? What
advantages may be realized by the firm that uses in-house referrals?

4. The main office of a large bank has an annual turnover of 500 office workers.
As an employment officer of this bank, discuss the sources you would use in
obtaining replacement employees.

5. Among the questions asked on the application for employment form of Horner
Company are the following:

a. What is the name of your church, and what religious holidays do you
observe?

b. Where is your birthplace?

c. Are you a citizen of the United States?

d. What foreign languages can you read, write, or speak fluently?

In view of federal and state civil rights laws, do you believe that Horner
Company is acting legally or illegally in asking each of the questions listed
above?

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Chapter 1: The Need for Payroll and Personnel Records: 1-14f Case Problem
Book Title: Payroll Accounting
Printed By: Jose Ramirez (jramirez224@[Link])
© 2025 Cengage Learning, Inc., Cengage Learning, Inc.

Chapter Review
1-14f Case Problem

C1.

Paychecks Kept Coming

LO 3 - Describe the employment procedures generally followed in a Human

Resources Department.

Ken, a salaried employee, was terminated from his company in April of this year.
Business had been slow since the beginning of the year, and each of the
operating plants had laid off workers.

Ken’s dismissal was processed through the Human Resources Department, but
the information was not relayed to the corporate payroll office.

As had been the policy, checks for workers at remote sites were mailed to the
employees. The mailing of Ken’s checks continued for the next four weekly
paydays. It wasn’t until the monthly payroll reports were sent to Ken’s supervisor
that the error was detected.

Ken refused to return the four extra checks. What actions should the company
take?

[Link] 1/1

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