Prior Period Adjustment

In business, payroll is one of the primary factors that impact employees. One mistake in payroll could lead to costly mistakes that can have a ripple effect on the company. If left unremedied, payroll mistakes can lead to costly penalties and employee dissatisfaction. In payroll, timing and accuracy of information are key. Does it have to be error-free each pay period? Yes; that is the goal that payroll administrators and employers must achieve. While the objective is a smooth payroll process every single time, what can be done if there’s been a mistake? 

What is the meaning of a Prior Period Adjustment (PPA)? 

A Prior Period Adjustment or PPA refers to a correction that is made to rectify a reported time, pay or classification on a previous payroll run. This means that a payroll error has already been committed and an employer or payroll administrator needs to make the necessary correction through a PPA.  

When is it necessary to make a Prior Period Adjustment (PPA)?

A Prior Period Adjustment (PPA) is necessary when something has been overlooked such as a timesheet error. Each mistake can hurt an employee’s wages and benefits. According to the Fair Labor Standards Act (FLSA), there are protections and benefits that specific employees are entitled to that include minimum wage regulations and overtime pay. Consequently, all employee information must be accurate so that they are not deprived of any protection and benefit due to them. 

What are some examples of situations that require a Prior Period Adjustment (PPA)?

Here are some situations that merit prompt Prior Period Adjustment (PPA): 

• Incorrect classification of employees. For instance, let’s say a payroll administrator inputs the wrong employee classification. Instead of classifying an employee as “non-exempt,” the payroll admin classified him as “exempt.” What can happen? 

As per FLSA standards, all non-exempt employees are entitled to overtime pay. Employers should pay them not less than time-and-a-half (1.5x the employee’s normal hourly wage) if they worked over 40 hours in a single workweek. 

In this scenario, if the employee was incorrectly classified as being an exempt employee, the result is that the employee will not be paid for overtime hours. 

• Errors in the timesheet or logged hours. For example, an employee may have overlooked clocking in after a break or maybe a system error occurred which did not record employees’ work hours correctly. This can result in wages being smaller than what is due for the pay period. 

How long before a payroll admin or employer can make a Prior Period Adjustment (PPA)?

While the exact timeframe to make payroll adjustment can vary from state to state, payroll administrators and employers must act immediately upon learning about any payroll mistake. If you act as soon as possible, you can avoid penalties and prevent the mistake from becoming worse. Not only that, correcting mistakes as soon as you can show employees that you are a fair employer and that you value their hard work. 

If you need to carry out a PPA, you can do so through any of the following:

• Immediately canceling the payroll with errors, making the needed adjustments, and then processing payroll again. 
• Running an additional manual payroll for only those employees that were affected by the mistake.
• Making the necessary adjustments for the next payroll cycle to get everything back on track. 

What are some tips to prevent the need for a Prior Period Adjustment (PPA)?

To avoid payroll mistakes and having to carry out a PPA, there are strategies that employers and payroll admins can do. First, always be updated on laws and policies regarding payroll. Remember that rules can be updated and amended that can affect how employees are paid. Be in the know at all times to save your company from payroll errors. Next, equip your company with the right payroll software for your needs. It is a good idea to invest in payroll software to avoid manual errors. 

Furthermore, remind employees to check and double-check timesheets accordingly. Doing so before the timecard deadline is best so they can check everything unhurriedly. Finally, if you have payroll software, you can key reports before actual payroll processing. This will help you check all the information and catch mistakes before they happen.