Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.
Question: Our restaurant was prohibited from serving customers in-house during the Covid-19 outbreak, but we were allowed to fill takeout orders. We want to retain our wait staff by having them work reduced hours on a rotating basis while continuing to pay them for regular scheduled hours. Do the hours and wages paid for time not worked count for purposes of the FLSA overtime computations?
Answer: Based on the federal programs related to Covid-19, it seems the federal government wants employers to continue to pay employees if possible.
The Fair Labor Standards Act does not require the employer to include pay for certain hours that are not worked for purposes of computing overtime compensation. The law also does not require that those paid hours count as hours worked for purposes of determining when the employee is entitled to overtime compensation.
Under Title 29 of the Code of Federal Regulations, the regular rate of pay is not deemed to include payments for occasional periods when no work is performed, such as for vacations, holidays, illnesses, or the failure of the employer to provide sufficient work.
The phrase “similar cause” includes jury service, reporting to a draft board, attending a funeral of a family member, and the inability to reach the workplace because of inclement weather conditions. However, only nonroutine absences that are infrequent, sporadic, or unpredictable are included in the category of “other similar causes.”
Although the FLSA does not require that these hours of paid time off count as time worked, the employer is allowed to count the hours as time worked, whether by custom or contract, for purposes of determining overtime hours.
While your proposed payment plan was made because of the restaurant’s inability to provide sufficient work, this provision is limited to occasional periods. There also is the issue of a reduction in hours without a corresponding reduction in pay, which suggests that the full weekly pay for reduced hours implies that the regular rate of pay should be the total pay for the workweek, divided by the number of actual hours worked. This would result in a determination that the regular rate of pay is higher than the stated hourly rate.
If the reduced schedule is a short-term accommodation that stems from the shutdown, the rules may apply and the pay and hours for the time off need not be counted in the regular rate of pay or in the number of hours worked to calculate overtime.
However, if the reduced schedule becomes routine, the pay and hours for the time not worked are included in hours worked and the regular rate of pay. If the none of the employees has hours worked plus paid hours not worked in excess of 40 hours for the workweek, no overtime compensation is required.
Question: An employee changed residence in mid-2019 to North Carolina from Florida. The human resources department was notified of the move, but payroll did not learn of the change until April 2020 after the employee asked to correct the address on her 2019 Form W-2. No North Carolina tax was withheld for 2019 or during the first quarter of 2020. How do we handle this?
Answer: The employer can find ways to minimize some penalties, but correcting Form W-2, Wage and Tax Statement, is not one of them, However, the employer may reissue the W-2 employee copy.
The employer is legally responsible for withholding the correct amount of tax. The employer was timely notified of the new address and should have been aware of a change in work location.
The human resources department should have requested a North Carolina withholding certificate or at least notified the payroll department of the change after the employee provided notice of the relocation. The employee became subject to North Carolina tax at the time residency was established in the state.
From the employer’s perspective, the most important task is to mitigate penalties for failing to withhold tax for 2019 and 2020. Like the Internal Revenue Service, North Carolina requires employers to withhold tax from wages paid to employees. The employer is required to withhold an amount based on the employee’s withholding certificate or at the single rate with no withholding allowances if the employee did not provide a valid certificate.
If the employee is working in North Carolina, the employer likely has nexus and is subject to North Carolina wage and hour laws. The employer remains liable for the required amount unless the employee pays the tax. Even then, the employer may still be liable for penalties for failing to deposit the tax on time. The employee may also be subject to penalties for failing to pay timely or sufficient estimated tax payments.
The employer may find it best to enable the employee to easily pay the 2019 taxes. Otherwise, North Carolina may collect the unwithheld and unpaid taxes from the employer. The employer would then have to recover the taxes as a wage overpayment or gross up the taxes paid by the employer and include that amount in the employee’s 2020 wages.
For 2020, the employer should determine the amount of taxes that should have been withheld, based on not having a valid withholding certificate from the employee. That amount should be deposited as soon as possible to minimize penalties.
If the employer cannot recover that amount from the employee, the payment should be treated as a wage overpayment in 2020 for the quarter that it was paid and recovered under overpayment recovery rules.
Employer-paid taxes that cannot be recovered from the employee by the end of the North Carolina reporting period should be grossed up and included in the employee’s wages.
The employer also could provide the employee with a W-2c, Corrected Wage and Tax Statements, that adds an amount for 2019 North Carolina wages. However, because this is a state-only change, Copy A of the W-2c should not be filed with the Social Security Administration. Additionally, the W-2c should not be filed with North Carolina because the employer did not provide an original W-2 for the employee with North Carolina.
For tax return purposes, the employee generally uses a part-year resident allocation form to file with the North Carolina income tax return. Reissuing the W-2 employee copy may help the employee in determining and supporting the allocation. The employer should not file the reissued W-2 to either the IRS or North Carolina.
By Patrick Haggerty
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