Federal, state, and local agencies require businesses to maintain employee documents and records. Failing to comply can result in hefty fines, not to mention the headaches that come with inaccurate recordkeeping. That's why business owners should know which documents they should keep and how long they must store them.
[Read more: Tax Record Retention: Your Guide to Keeping Tax Documents]
Employee record retention requirements
Not only do state and federal agencies require that businesses retain employee records, but you're required to keep them for a certain period of time. Let's look at the federal requirements:
- I-9s: You must have an I-9 on file for each person you hire for up to three years after the date of hire or one year after their employment ends, whichever is longer.
- W-4s: You must have W-4s on file for each employee for at least four years.
- Family Medical Leave Act (FMLA) records: You must keep accurate FMLA records for each employee for three years.
- Occupational Safety and Health and Administration (OSHA) records: You must keep OSHA records for five years following the calendar year they cover.
- Health Insurance Portability and Accountability Act (HIPAA) records: You must keep HIPAA records on file for at least six years after the day they were created or from the date when they were last in effect, whichever is longer.
- Payroll records: You must keep employee payroll records for at least three years.
In addition to the above federal requirements, you also have state recordkeeping requirements you must comply with. You can visit your state's department of labor website to see what they are.
[Read more: What Is an Annual Report, and How Do You File It?]
Legal penalties for noncompliance in record retention
Failing to maintain proper employee records can result in fines being levied against your business, lawsuits, and even criminal charges. Here are some of the financial and legal consequences of improper recordkeeping:
- Fines: Federal agencies, like OSHA and the U.S. Department of Labor, can impose hefty fines for failing to maintain accurate employee records. And improper payroll or tax records could result in penalties, back taxes, and interest charges from the IRS.
- Lawsuits: Failing to maintain accurate employment records opens you up to lawsuits from your current and former employees. You may also be ordered to pay back wages, overtime, and benefits to your employees.
- Loss of contracts or licenses: Failing to maintain employee records could cause you to lose government contracts or state licenses, especially if you operate in a heavily regulated industry like healthcare.
- Criminal charges: In extreme cases, business owners can have criminal charges filed against them.
In addition to the above federal requirements, you also have state recordkeeping requirements you must comply with.
Best practices for digitizing employee records
Digitizing employee records is the best way to ensure that your records are accurate, up to date, and easy to access. Plus, digitizing your records gives you more control over who can access them, so you can keep sensitive information safe.
If you're interested in digitizing your employment records, the first step is to find software that's easy to use and complies with data protection regulations. Look for a program that makes it easy to scan and upload documents. You also want software that allows you to assign access rights so your employee records don't end up in the wrong hands.
[Read more: How to File Payroll Taxes: Everything You Need to Know]
How to implement an effective record retention schedule
The first step to setting up an effective record retention schedule is to understand the various state and federal requirements that apply to your industry. It's a good idea to develop a checklist of all the various record requirements and dates so you never forget anything.
You should also have a system in place for how to securely dispose of employee records once they're past their retention date. It could involve shredding or securely deleting files from your system. Come up with a timeline for regularly purging outdated records — for example, you could do it once a month or quarterly.
Finally, make sure you have a filing system so your documents are always organized. That way, you can quickly access the records you need in the event of an audit.
This article was originally written by Jessica Elliott.
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