Top 5 payroll and HR issues facing employers today

By Leah Davis, CPA

Keeping up with the ever-evolving state and federal employment regulations is a full-time endeavor (just ask your Human Resources department). And it’s not getting any easier. The continued rise of remote work, work flexibility, and creative compensation strategies have made compliance even more complicated, creating payroll and HR issues for employers across nearly every industry—and even for very small businesses.

These payroll and HR issues are not novel or even new; however, they can be especially confusing given evolving workforce trends and, if not addressed, costly.

To help you stay in compliance, here’s my take on five of the most pressing payroll and HR issues facing employers today.

1. Multi-state tax and HR compliance

The boom of remote work over the last 5 years means that even very small employers may be subject to multiple states’ employment and payroll tax regulations. Complying can be complicated, especially given the lack of consistency from state to state.

The key thing to remember: the regulations typically follow where the employee is performing the work, not where the business offices are located.

For example, if a Minnesota company has a remote employee who lives and works from a home office in California, the employer must be aware of and in compliance with all California payroll and employment regulations for that employee, just as if they had an office there.

This also holds true for employees who work in two or more states, which is not uncommon for employers who operate near a state border.

For example, if an employee of a St. Paul, Minnesota-based business lives in Hudson, Wisconsin, and works from home two days a week, this employee is now a multi-state employee—to whom both Minnesota and Wisconsin employment regulations and payroll taxes would apply.

Another development complicating this issue is the recent changes to paid family leave in a growing number of states, like the broad Minnesota Paid Leave program that will become effective in 2026. Each state may have different rules for required time off, employer-provided disability insurance, and/or paid family leave that employers need to comply with if they have employees working in those states.

My take on navigating this issue: Multi-state compliance goes beyond payroll taxes—it’s important to keep the full scope of employment regulations on your radar. Leveraging technology to automate certain payroll and HR tasks is critical to compliance and taking proactive measures to stay on top of changing regulations is critical. Also, be sure you know who you can go to as a resource, so you can get your questions answered when things change.

2. Misclassification of employees

Regulatory agencies have been saying for years that one of the top items on their audit “hit list” is the misclassification of employees—as independent contractors and exempt employees.

Keep in mind there is a limited scope of workers who are actually independent contractors. If a worker feels and works like an employee, they probably are, especially if the employer has any significant control over their work or provides the tools and resources to do the job.

When it comes to classifying employees as exempt vs. non-exempt for overtime purposes, both state and federal agencies intend for employers to default to classifying employees as entitled to overtime (i.e., non-exempt) unless they can meet a set of specific and rigorous requirements related to job responsibilities and authority, often referred to as the white-collar exemptions.

Remember: It doesn’t matter if the employee prefers to be paid on a salaried (exempt) basis or if it’s easier for both parties, employees cannot be classified as exempt unless they meet one of these exemptions.

My take on navigating this issue: Best practice is to assume a worker is an employee (not an independent contractor) who is non-exempt (eligible for overtime) unless their true day-to-day job duties—and not only their job description—can meet the exemption criteria.

3. Recognition of overtime

The way we work now is so fluid; work happens in and out of the office. This is a huge benefit to many employees, but issues can arise when employers have non-exempt employees (eligible for overtime) working in this free-flowing way.

How do you truly know when these employees are working? How can you be sure they’ve captured and reported all hours worked so you can ensure compliance with overtime regulations?

This continues to be a challenge for employers, especially since, per state and federal regulations, it’s the employer’s job to ensure compliance with overtime laws, even if the employee is responsible for timekeeping.

For example, if an employer knows that a non-exempt employee often responds to emails in the evening, but the employee isn’t reporting this time on their timesheet, it’s still the employer’s responsibility to pay for ALL hours worked. This often requires further discussion and training with employees to make sure they’re capturing and reporting all time. What’s more, the employee must be paid for these worked hours—even if they weren’t approved (or even specifically told not) to work overtime. Once the time is worked, it must be paid.

My take on navigating this issue: Educating yourself on overtime regulations can go a long way toward keeping you out of trouble with employees and regulatory agencies. State and federal overtime rules can appear, on the surface, to be relatively simple. When applying them to the real-world workplace, however, it’s important to recognize and manage the complexity and nuance of compliance.

4. Travel time, qualified expense reimbursements, and per diem payments

It’s easy to underestimate the compliance challenges of correctly reporting and paying for travel time, expense reimbursements and per diem payments—and errors can be costly.

The tricky thing about these payments is, often, the tax and payroll treatment of them depends on a set of specific facts, based on the unique situation and/or for each employee.

For instance, travel time for non-exempt employees can be recorded differently depending on whether the travel is overnight or even based on what day of the week the travel begins, which can change for each event.

Also, qualified non-taxable per diem payments are unique to the specific geographic area to which the employee is traveling (very different between NYC and Omaha!).

Finally, ensuring that you maintain a qualified (pre-tax) expense reimbursement program is critical to avoid tax penalties and restatements. For more information on expense reimbursement plans, check out this article.

The bottom line is that it’s complicated.

To get it right, employers need to keep track of where their employees are traveling as well as what documentation is needed for expense reimbursements. Employers should also have a policy for these payments that they consistently follow and communicate to employees.

My take on navigating this issue: Be as consistent as you can but realize that there will be situations in which the facts are different enough to warrant a different action. Applying a one-size-fits-all approach to make administration easier will not be an effective defense if your plan or practices are challenged.

5. Affordable Care Act and 401(k) compliance

Time and time again, employers struggle to recognize when they’re required to comply with the Affordable Care Act (ACA).

Per the ACA, employers that meet the 50 or more full-time equivalent employee threshold (based on a 30-hour workweek) must offer an eligible health care plan that meets minimum essential coverage standards and is considered affordable for employees, per IRS standards. This plan must be offered to any employee who works, on average, more than 30 hours a week.

Compliance with the ACA also requires that employers provide eligible employees with an annual Form 1095, version C or B, depending on whether the plan is fully or self-insured.

ACA compliance can be especially complicated, however, for business owners who own multiple smaller companies. Under IRS control group guidelines, if there’s enough common ownership amongst the related companies, the group could be deemed an applicable large employer (ALE)—and considered one company for the purposes of the ACA full-time equivalent employee count.

If the ACA 50 employee threshold is met by totaling full-time equivalent employees in say, three separate companies, all three would be considered an ALE, regulated by the ACA, and subject to its requirements. Unrelated to ACA, these control group rules can also trigger certain 401(k) audit and even health insurance plan renewal requirements.

My take on navigating this issue: If you hold ownership in multiple companies, it’s important to be able to answer this question: Are you part of a control group? Be sure you understand how combined head counts could impact your compliance with certain regulations.

Get support for your payroll and HR compliance

It can be easy to put off addressing these issues. Unfortunately, doing so can have significant consequences, including fines, penalties, and the risk of litigation.

It’s wise to designate someone within your organization as the person responsible for staying ahead of these issues and in compliance. Even if this person doesn’t know how to address an issue, they should be able to look for red flags and know who to call when they have questions.

If you’re feeling overwhelmed by these issues, Abdo can help. Our advisors can guide you through the compliance process and shed light on your next steps. We understand these matters can be complicated—we’re here to answer any questions you have.

If you’d like to spend less time worrying about your organization’s HR and payroll compliance, contact us today.