compliant payroll for highly regulated industries

How to Run Compliant Payroll for Highly Regulated Industries

Maintaining compliant payroll for highly regulated industries presents unique challenges. Learn key compliance requirements, payroll mistakes, and how to achieve compliance.

Shannon Hodgen
Written by Shannon Hodgen
June 7, 2024
Contents
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Key takeaways

  1. Payroll compliance involves adhering to the local, state, federal, or global regulations in your industry on how to pay your employees.
  2. Highly regulated industries impose stringent payroll requirements on employers, and noncompliance often yields significant penalties.
  3. Staying current on compliance regulations in your industry and automating your payroll process can help you avoid legal and financial penalties.

Payroll compliance is crucial to an organization’s financial and reputational integrity. If you err in how and when you pay your workers, even unintentionally, you risk severe consequences. You may face legal liability, financial penalties, damage to your brand’s reputation, and more.

In highly regulated industries, payroll compliance is even more complex and presents unique risks. An agile payroll compliance program can help you remain compliant and build trust with your stakeholders, regulators, customers, and employees. It can also strengthen your brand reputation.

Below, we will guide you through how to maintain payroll for highly regulated industries.

Understanding payroll compliance in highly regulated industries

Payroll compliance is the practice of adhering to government regulations on how to pay your employees. Paying workers is one of the most regulated entrepreneurial functions in the business landscape. Depending on where your business is located, you will usually be subject to federal, state, and local legal guidelines. Your compliance may even be regulated at the global level.

Companies that operate in highly regulated sectors face more stringent payroll regulations. Governments impose strict laws on highly regulated industries to protect consumers, shareholders, workers, and other stakeholders from harm. Left unregulated, these markets pose significant risks to the public. Common highly-regulated industries across the globe include:

  • Nuclear energy
  • Organic food production
  • Pharmaceuticals
  • Information technology (IT)
  • Alcohol and tobacco
  • Healthcare
  • Finance and banking
  • Automotive manufacturing

Companies in these industries must often navigate comprehensive and rapidly shifting employment laws. They must conduct frequent audits, achieve tax compliance, create safe work environments, and maintain compliance across the following key areas:

  • Hiring and firing employees
  • Local labor laws
  • Income tax systems
  • Social security systems
  • Reporting requirements
  • Foreign personnel
  • Leave entitlements

In some cases, tightly regulated markets possess the most punitive noncompliance penalties. In the UK, employers who fail to pay a worker the National Minimum Wage can be charged back pay at 200% of the amount owed. The UK tax authority also publishes a list of penalized employers.

China’s Security Law of the PRC imposes similar penalties on employers who fail to pay a worker’s monthly social insurance premium. Late or missed payments are charged a 0.05% interest per day after the due date and carry a possible penalty of 100 to 300% of the overdue or underpaid amount.

See also: Improve Enterprise Payroll In 6 Easy Steps With Deel

Our product helps companies comply with those regulations, and we have spent a lot of resources on researching and operationalizing and productizing all elements of compliance. So when it comes to hiring, managing, off-boarding, providing benefits, all the elements of the HR life cycle, Deel ensures compliance.

Dan Westgarth, COO, Deel

Key compliance requirements

To avoid noncompliance penalties, employers must meet their jurisdiction's and industry's payroll requirements. Let's look at how these regulations differ across different highly regulated industries and what laws you should know about as an employer:

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Healthcare

One reason healthcare payroll regulations are complex is that they depend on employee classification. Wage, employment, tax, and overtime requirements vary significantly depending on whether employees work full-time, part-time, per diem, or on contract.

Healthcare payroll regulations are also subject to healthcare-specific acts. For example—if you’re in the US, some key laws that may affect how you pay employees in the healthcare industry include:

  • HIPAA: This federal law requires employers to meet national standards designed to shield Protected Health Information (PHI) from being disclosed without consent
  • The Equal Pay Act (EPA) prohibits wage discrimination in the workplace
  • The Federal Insurance Contribution Act (FICA) prescribed the social security and Medicare taxes you must withhold from your employee’s wages
  • The Fair Labor Standards Act (FLSA) regulates overtime, minimum wage, recordkeeping, and child labor standards in the US. Under the FLSA, you must maintain payroll and staff records for at least three years.

Different countries impose their own payroll regulations on employers in the industry. Learn more about global payroll laws and how they impact compliance.

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Pharmaceutical industry

Like the healthcare industry, the pharmaceutical sector is highly regulated. In addition to the laws mentioned above, manufacturers must comply with Good Manufacturing Practices (GMP). The GMP system tracks production, ensuring pharmaceuticals adhere to quality standards. In terms of payroll and employee management, you must track the following regulations:

  • Export and import control
  • Intellectual property protection 
  • Drug approval and registration 
  • Clinical trials
  • Anti-bribery and corruption laws 

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Finance and banking

In the US, employers in the finance and banking sectors must adhere to the IRS Employer's Tax Guide and other tax laws, FUTA (US), FICA (US), the Equal Pay Act (EPA), and the Davis-Bacon Act. The Davis-Bacon Act guides the payment of staff involved in public works projects. 

Internationally, you may be subject to:

If you are based in the US, you must also follow The Sarbanes-Oxley Act of 2002 (SOX). The US government passed this federal act in 2022 in response to high-profile financial scandals. Consisting of 11 titles, it requires employers to record and report accurate financial information that may impact investor sentiment. It also covers paid time off (PTO) and other payroll requirements.

💡Deel keeps you compliant across 150+ jurisdictions. Whether you hire remotely or are based in different countries, stay ahead of all the payroll regulations that impact your business with Deel’s global Compliance Hub

Anything that pertains to payroll compliance comes into play; [in Australia] there are hundreds and hundreds of awards that dictate employment for the hospitality industry, and that’s just one example... And then you’ve got these different variations in every country.

Shannon Karaka, Country leader for ANZ, Deel (via hrleader.com.au)

Actionable steps to ensure payroll compliance

To achieve payroll compliance, you must adhere to a wide range of regulations on employment conditions, data protection, social insurance, and more. You must also maintain accurate records, pay the right taxes, pay your employees on time, and stay updated on regulation changes.

If this seems like a lot of work, it is because maintaining payroll compliance is a complex process. In the following sections, we break it down into four actionable steps to help you stay on track: 

Step 1: Conduct regular audits

Regular internal payroll audits can help you authenticate payroll data. With a thorough audit, you can identify discrepancies or errors in your payroll records and update them before they cause compliance problems. To conduct an internal payroll audit:

  1. Set a schedule for how often you will audit your records. Performing an audit after every pay period is the best practice, but you can audit monthly, quarterly, annually, etc.
  2. Update employee data so only active employees receive pay. Check that their pay matches the agreement indicated in their offer letter.
  3. Cross-check the number of work hours your employees put in during the work period against the attendance data, total earnings, and pay rates.
  4. Verify all overtime pay, commissions, tips, bonuses, reimbursements, and other atypical or variable employee payments of the pay period.
  5. Correct the payroll deductions and employment taxes.
  6. Document all direct deposit requests and cross-check your payroll records against bank statements.
  7. Review recent payroll regulation changes and adjust your payroll processes.
  8. Share payroll documents with stakeholders.

If you are auditing payroll for the first time, hire a trained payroll expert. An outside auditor offers fresh eyes and may pick up errors your untrained eyes could miss.

💡Do you own or run a global business? Find out how to maintain payroll compliance across all your locations by downloading Deel’s Global Payroll Compliance Checklist.


Step 2: Stay updated on regulatory changes

Payroll compliance regulations in highly regulated industries are dynamic. Often, compliance teams spend more time scanning regulatory changes than implementing compliance policies. This is by design because missing new regulations can invalidate your payroll processes.

How do you keep up with ever-changing regulations? Industry webinars, seminars, and conferences are a great place to start. Experts on these platforms often discuss the latest regulatory changes and how they may impact your business. You may also learn new tips for managing payroll compliance. Deel offers helpful webinars, guides, infographics, and other resources to keep you informed on payroll law. 

💡Deel’s Compliance Hub provides comprehensive continuous compliance. As employment and wage laws change, the system actively monitors, flags, and updates your payroll policy. Request a demo today or reach out to talk to an expert.

Alternatively, turn to your payroll software provider. Some providers offer automated monitoring and update you on the latest regulations in your industry. For example, Deel’s Compliance Monitor scans regulatory changes across 150 countries and summarizes them in simple language.

See also: How To Control Payroll Costs As An Enterprise

Staying on top of compliance when you’re only operating in a single country can be hard, but factor in many more countries and the advent of things like remote work, and it becomes next to impossible. The challenge is that compliance is not static and is continually changing.

Aaron Goldsmid, Head of Product, Deel (via SHRM)

Step 3: Implement robust payroll systems

While important, conducting regular audits and tracking regulatory changes can take a lot of time. One key way to achieve compliance is to automate your payroll processes. This means lifting the burden from your employees and spreadsheets and adopting a centralized payroll system.

Automated payroll software can help you save time and eliminate human error from your payroll processes. When searching for a software provider, prioritize the following features: 

  • Automated payments to help you pay government agencies and employees on time
  • Regulatory monitor to help you remain current on payroll regulations
  • Strong security systems to protect employee information
  • Global capabilities to help you manage payroll for your entire team
  • Document-upload platform to help you file hire reports, tax forms, and other documents
  • Integrated platform to help you streamline HR and compliance with payroll

Step 4: Train your team

Just as you need to stay updated on payroll regulation changes, so does your team. Schedule regular seminars and training sessions for your payroll team to help your employees upskill, keep up with payroll technology, and understand regulatory requirements.

Additionally, create a comprehensive payroll policy and train your employees (all) on your company's payroll processes. Ensure everyone understands how salaries, bonuses, hourly rates, and overtime pay work and how they can calculate their wages. This will help them identify and inform you of any salary mistakes when you deliver their paychecks.

Consider the following resources for training your team:

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Common payroll compliance mistakes and how to avoid them

With the large volumes of data and ever-changing regulations, it is easy to make payroll mistakes. A 2022 report shows that companies make about 15 payroll errors per pay period on average.

These mistakes, which include misclassification and inaccurate payroll reporting, can be costly—it helps to understand and avoid them. Common payroll compliance that companies make include:

Misclassifying employees and exemptions

Worker classification determines whether you should withhold taxes from a worker's wages. Typically, you withhold taxes from an employee but not a contractor, who self-taxes.

If you misclassify a worker and mistakenly exempt them from federal income tax or charge them when they should not be charged, government agencies could go after you for back taxes. In the US, always submit Form SS-8 to the IRS if you need clarification on a worker's tax status.

💡Use Deel’s Misclassification assessment to classify workers. This assessment combines award-winning research with AI and has an estimated accuracy of over 90%.

Offering unequal pay

Under the US Equal Pay Act, you must pay male and female workers equal compensation for equal work in the same workplace. Employees who believe your payroll breaks this regulation can sue you or file a complaint with the Equal Opportunity Commission.

Keeping inaccurate records

Payroll and employment records inform many processes. In most US jurisdictions, for instance, workers’ compensation insurance providers audit payroll policies annually to determine what premiums they will charge a business. Inaccurate records can raise your premiums and cause other noncompliance issues.

Leveraging technology for payroll compliance

Even with thorough recordkeeping, data can get lost or misrepresented when entered manually. The ultimate protection against payroll mistakes is thus to leverage payroll service technology. 

Automating and streamlining your payroll operations saves time and allows for scalability. With a cutting-edge payroll solution like Deel, you can also:

  • Consolidate your payroll operations across different countries or states
  • Generate accurate and timely payroll reports you can share with stakeholders, regulators, etc.
  • Sync employee details during onboarding to avoid entering the same data multiple times
  • Monitor regulatory changes and update your payroll processes automatically
  • And more
The intangible value is using Deel to handle all the compliance aspects of hiring and operating payroll processes around the world, it has saved Telin considerable time compared to if we handled it ourselves.

Doni Adriansyah, CFO and Risk Manager, Telin

Achieve continuous payroll compliance with Deel

Paying your workers accurately and on time is one of the most fundamental business functions. When you operate in a highly regulated industry, maintaining payroll compliance is all the more crucial. The requirements are more stringent, and the penalties for noncompliance are more punitive.

The easiest and most effective way to remain compliant in a highly regulated industry is to entrust your payroll processes to a payroll provider. 

At Deel, our dedicated compliance hub, integrated HR software platform, and other payroll software tools are designed to monitor, scan, and update your payroll programs to keep you fully compliant. Book a demo and try Deel Global Payroll today for unmatched compliance.

Disclaimer: This content is for informational purposes only and should not be considered legal or tax advice. Always consult payroll specialists or local legal counsel to ensure payroll compliance in your region.

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