Your Favorite Payroll Software Might Not Be Prop. 206 Compliant

Thanks to Proposition 206, passed by voters in November and formally known as The Fair Wages and Healthy Families Act, Arizona’s minimum wage increased from $8.05 to $10 per hour at the beginning of this year. The minimum wage will continue to increase incrementally, to $10.50 per hour next year, $11 per hour in 2019 and, ultimately, to $12 per hour in 2020 after which it may be adjusted annually based on cost of living changes. Businesses employing workers who earn tips (like servers) can still be paid a full $3 less than the minimum hourly wage, but that is only so long as they report that their gratuities put them over the minimum wage threshold. In addition to these new payment requirements, business owners have been trying to figure out the realities of Prop. 206’s new requirements to provide paid sick time. Small businesses employing fewer than 15 workers must let workers earn at least 24 paid sick leave hours per year while larger organizations must provide at least 40 hours per year.

If you are a business owner, chances are you have already thought long and hard about the logistics of how you will comply with these new requirements in terms of managing your budget, schedule, and team. But are you sabotaging yourself by using the wrong payroll software? If the paychecks generated for your employees do not fulfill reporting requirements, you may be violating conditions of Prop. 206. Read on for more information and steps to take to make sure you are complying.

Prop. 206 and Payroll Software

If you use a software like Quickbooks Payroll to manage your payroll, it probably is not set up to provide all of the critical information you need to comply with Prop. 206. The good news is, you may be able to set it up in such a way that you will be compliant. But before you can get to that, there are some things that you need to consider if you have not already.

Initial considerations

First of all, how will you distribute paid sick leave? Will employees earn it each pay period (for example, one hour of leave for every 30 hours worked, depending on your business size and requirements)? Will they get the full amount they are entitled to frontloaded at the beginning of the year? While the law requires that unused hours roll over to the next year, employers do have the option of buying unused hours from the employee. Would doing so benefit your business? Will your accrual year run concurrently with the calendar year of from July-June? Will you offer the minimum amount required by law? Will you allow employees to borrow PST against future accruals? How long will employees need to be working before they are eligible to earn sick time? Once you have answered all of these questions, you will be prepared to actually tie up the loose ends of making sure that your payroll software is compliant with Prop. 206. If you are stuck on this step and could use some guidance, feel free to reach out. While you should have started giving your employees their paid leave July 1, we can still assess the situation and help you pivot if necessary.

Paid sick time versus vacation

Another item you should give some deep thought is that if your company offers paid vacation time, will you track that time in the same bucket as paid sick leave? It can be a heck of a lot easier than trying to keep them separated and so long as you are providing at least the minimum number of hours to employees, you are legally in the okay.

However, imagine this scenario: An employee uses all of their PTO to go on vacation. When they get back, they get sick and request time off. You deny the request because, hey, they are all out of paid time off. Now you may be subverting Prop. 206 and liable.

Payroll software setup

In addition to other employee records you should be keeping, you have a new record keeping requirement under Prop. 206. When employees receive their paychecks, they must also receive documentation (either on their paystub or on an attached document) that outlines how much sick time they have accrued, how much they have used and how much they have been paid for their sick leave. You could also fulfill this requirement by making the information available to employees on an online portal. If you are using a mainstream payroll software like Quickbooks Payroll, it is not set up to do these things for you by default. While some will have the ability to accommodate Prop. 206 requirements, some other mainstream payroll softwares have not adapted in time (call us to ask about your specific software).

If your employees are all salaried, it will be a fairly straightforward process. If you are using Quickbooks Payroll, you will set up the sick time parameters to automatically accrue each pay period, or by selected the “Each year” option in the “Hours are Accrued” window of the sick time setup screen on Quickbooks, for example. If your employees are paid hourly, ideally you will already have the payroll software synced with your time-tracking software. Otherwise, someone will obviously need to manually input hours for the teams’ paychecks each pay period.

Does this all sound overwhelming? It really doesn’t need to be. If you have any questions about the proper way to use your payroll software, best practices for record keeping, establishing compliant paid sick time policies or even if you are wondering if you could benefit from outsourcing this entire piece of your administration, reach out to us. It’s our job to know the ins and outs of these situations and we are committed to finding the solution that will most benefit you and your company.