What is the most common payroll compliance mistake you still see in companies with 200+ employees, and why does it keep happening despite automation?

The biggest payroll mistake I see? Data gaps when payroll, HR, and accounting systems don't sync up. Even with good automation, if your systems aren't talking to each other, you'll miss an employee's status change or a new tax rule. You need to map out how data moves between systems first and check those connections regularly. Automation can't fix a broken foundation.

Remote workers often create problems with regard to how to manage multi-state tax nexus effectively for them. Many companies (200+ workers) are not able to register payroll tax with the state in which their employee resides because they can't register in every state where all employees live. Automation may help manage this issue, but it requires employees to update their address manually. When an employee moves without reporting it, the company will start accumulating large amounts of payroll taxes and penalties. This phenomenon continues to occur because there is no way for the software to determine where an employee is physically located until the employee inputs their physical address. The financial exposure for this issue does not show up until a company is audited.

When companies grow fast, they stop checking the small, local tax changes, assuming the software has it covered. Big mistake. Automation is great for repetitive work, but it misses the nuances. The best solution is just having a human look over the quarterly reports. A quick scan catches what the system doesn't.

Even with good automation, it's easy to miss changes to local tax rules. Our own system once skipped a new city tax we should have been paying. Now we have someone on the team manually check for regional updates every month. It's a simple step, but it saves us from big problems later.

The most common mistake is running HR and payroll on separate systems, which leaves employee records out of sync and creates compliance risk. It persists because teams automate pay runs but still move data between tools by hand, so updates and corrections get missed. After we combined HR and payroll on BrightPay, real-time syncing and inconsistency alerts removed manual transfers, cut discrepancies, and eliminated compliance issues.

Companies with more than 200 employees often make the same payroll compliance mistake: classifying workers as independent contractors when they should be classified as employees. Automated payroll systems still make this mistake because classifying payroll workers involves many rules, and automation processes the information they receive without verifying their legal status. Businesses may neglect their responsibilities and updates on an annual basis, and this mistake worsens over time when systems replace thoughtful evaluation. This is why classifying employees and updating your systems should be an ongoing process.

Incorrect payroll deductions are the most common compliance issue we still see in companies with 200+ employees. As benefits scale, each employee ends up with a unique mix of health plans, garnishments, tax jurisdictions, reimbursements, and voluntary deductions. Automation calculates amounts, but it does not validate eligibility changes, mid-cycle updates, or manual overrides. Errors persist because deductions are managed across HR, benefits providers, payroll, and finance without a single source of truth. Person-by-person tracking breaks down at scale, and small errors compound quietly until audits or employee disputes surface the issue. Albert Richer, Founder, WhatAreTheBest.com

I still think worker misclassification is the most common error, namely misclassifying non-exempt employees as exempt or hiring contractors like employees. In the case of going more than 200 employees deep, the complexity entering through different job types and laws in several states means it is just as simple for the wrong status to get checked off during onboarding. This continues because with automation comes the law of "garbage in, garbage out." Even though software can do math just fine, it lacks the ability to read between the lines of a job posting or understand legal nuances. If human entered incorrect status, the system will seamlessly calculate an invalid payperiod without raising any errors.

Now, the most frequent mistake I find is something like worker misclassification a.k.a., calling people "exempt" from overtime when what they actually do is work as "non-exempt." Roles can change overnight in companies of 200+. Managers may be depending on antiquated job descriptions that no longer pass the Department of Labor's stringent tests. This is the case because, after all, automation only works with the set of data it has received. So if an HR manager accidentally marks someone as exempt when onboarding them, and the system is programmed to spit out comp without OT, it will merrilly chug away doing that never realizing that it was breaking the law.

The most common payroll compliance mistake I still see is misclassifying employees versus contractors. Even big companies with loads of employees and fancy automation tools get this wrong. The problem is, the decision is made way upstream, not in the payroll software. Automation can do the numbers just fine, but it can't tell what's going on in the real world can it tell if someone is actually an employee or a contractor? No way. Teams move fast, roles get blurred, and the law is always playing catch-up with what's actually happening in the workplace. So when payroll compliance fails even with all that fancy tech, it's almost always a process problem, not a tech one. The compliance breaks down because the human decisions aren't being looked at with the same level of detail as the financials.

As a managing partner at a recruitment firm, we manage the hiring of high level leadership talent for clients. When we go through a company's details for candidate sourcing there is one common payroll compliance mistake that I often notice. Companies often end up classifying workers incorrectly. This is especially common between employers and gig workers or contractors. Even with automation, which can still calculate wages properly, it does not interpret how functions work on a day to day basis. This mistake is still common because companies rely heavily on titles rather than proper job functions. It leads to the mishandling of taxes and legal obligations.

Far more common is employee misclassification and especially the characterization of workers as dependent contractors. Even if it were automated the reason this happens is because software can carry out the math of accounting for payroll but not calculated what's legal when it comes to your workers status. It requires the kind of subjective human judgment about how much control a company has over an individual's work that is becoming ever more difficult in the remote world. Automation also gets pinned down when the role of a contractor changes over time, otherwise known as "scope creep." It's the same marital system, still processing the same payments, but legally speaking you've gone from being one type of party to an employee. Without a manual review, the program doesn't know that the working relationship has become illegal.

Many huge corporations misclassified employees. They might mistakenly misclassify an employee as a contractor. Software can't solve for this because it doesn't see the real work. It follows only those rules that humans type in, and often cannot share data with other company systems. In addition, state laws change frequently. The automation only works if the human settings are correct.

A frequent problem is that HRIS and payroll engines do not sync with each other. At this level of business, most companies use HRIS and payroll engines independently of each other. Whenever there is a change in an employee's status or department, HR updates this. Unfortunately, HR may fail to pass this information to payroll, so payroll will not adjust pay accordingly. With the presence of automated processes, management may feel that they do not need to inspect manually for errors and will then be unaware for an extended time of any incorrect pay rates. The most significant contributor to compliance failure continues to be the digital disconnect of these two systems.

Misclassification of workers as independent contractors is one of the greatest mistakes I observe. Once companies grow beyond two hundred employees, pressure to reduce benefit expenses frequently leads businesses to use more and more 1099 contractors. Although automation can accurately handle the payment process, it does not determine whether the worker qualifies for the designation of employee, according to state law. As states continue to update and tighten worker classification laws, this error occurs on a regular basis due to the focus of organizations on getting projects completed more quickly than on properly vetting the worker classification according to the relevant laws. Eventually, such a mistake may lead to costly lawsuits and very large IRS fines.

Every large company should calculate their regular rate of pay when determining overtime pay (as required by federal law). However, many companies do this incorrectly; overtime does not only include an employee's base hourly rate; it also includes bonuses (non-discretionary), commissions, and differentials (shift changes) that employees may receive. Automatic calculations may omit these additional components unless the software has been configured for each state's regulations. As a result, the entire company's workforce is underpaid systematically when it comes to overtime pay. Companies will continue to repeat the same mistake, as the initial setup never reflects new compensation structures.

An ongoing trend is to mis-tax fringe benefits/non-monetized perks. Large-sized companies (those with 200 or more employees) usually give their employees, per their policies, wellness stipends, gift cards, reimbursement for educational expenses, etc. When fringe benefits are automated, they are more often than not considered just a business expense instead of taxable income paid to an employee, and as a result, total compensation reported to the Internal Revenue Service has been underreported. The reason why this practice continues is that many of the "perks" are handled by different departments than payroll; as a result, the taxable benefits do not always appear on a single point of reporting.

A major issue that many companies are experiencing is the failure to take into account international tax treaties related to remote workers who live outside the U.S. Companies of all sizes, up to and including Fortune 500, are now hiring remote workers from around the world as part of their cost-cutting strategies. Many automation tools are still programmed to use U.S.-based tax regulations, which results in a "hidden" tax liability for the remote employee. It is also a violation of the worker's home country's labor laws. This phenomenon is because companies are growing at a faster rate than their legal departments can research new jurisdictions. Global payroll requires an additional level of human expertise that technology cannot replace.

The application of the state-mandated leave laws is inconsistent. Companies with numerous employees (large companies) located in various areas find it difficult to manage tracking sick time and Family Leave Laws on an employee-by-employee basis. Automation normally uses a generic policy that doesn't comply with the laws in every state and results in employees not being able to access legally required leave. This results in employee claims and lawsuits. Because of the rapid changes to state leave laws (legislation changes for every state at least once a month) and the associated systems that have to update their software to maintain compliance, the situation continues to be an issue.

Some companies do not track "non-productive" time for their hourly employees; this includes moments spent in required training, traveling between work sites, and preparing to do work. Automated clock systems capture only a small fraction of the non-productive time. Over time, this has resulted in a significant amount of wage and hour violations. In addition, it continues to occur because managers continue to believe that the software automatically captures any and all compensable time. If there are no clear policies for tracking compensable time and no manual oversight of the data, the data will continue to be fundamentally incorrect.