Payroll Records & Employee Files: What to Keep and How Long to Keep Them

Managing payroll records and employee files can be one of the more daunting and complicated aspects of running a business. From ensuring you have all the proper documentation to staying on top of federal requirements for storage and information disposal, countless hours are spent every year wrestling through it all, with the added stress of hefty fines and possible legal consequences hanging over your business! Read on to learn some of the basics for storing and maintaining your confidential employee files and some keys to success with long-term storage solutions. 

The Importance of Payroll and Employee File Organization

There are a few reasons why it’s essential to maintain an organized collection of payroll and personnel files in some way, shape, or form. Firstly, federal law requires that some of this documentation be kept for a specific period, and some individual states have additional record-keeping requirements. In addition, these records serve as evidence of an employee’s performance and can be relied on for promotional or disciplinary action. Finally, keeping an organized storage system for your employees’ information will help make every part of their interaction with your company smoother and more secure, from the first interview to their last day.   

What Do Payroll Records and Employee Files Include? 

Payroll records and employee personnel files encompass almost every piece of employee information that you collect as an employer. Federal and state laws, such as EEOC (Equal Employment Opportunity Commission) and the FLSA (Fair Labor Standards Act), establish that keeping some of the following types of documentation is mandatory; others are optional but highly recommended. Retaining these optional files may not be required by law, but they can help streamline your employee management processes in the long run.  

General Employee Information 

General employee information can be summarized as any basic information about an employee that you might need access to during their time with your company. This typically includes an employee’s full name, address, educational background, certifications, and date of birth. Emergency contact information would also fall under this category.  

Job Application and Onboarding Paperwork 

This information is collected at the start of the hiring process through the completion of that employee’s onboarding. While not usually required by law, most employers keep copies of submitted job applications, resumes, interview notes, and any agreements made prior to formally extending a job offer. It’s also common to retain records of signed acknowledgments from a new employee, such as those made for an employee handbook or other policies. 

Employment-Related Agreements 

While employment-related agreements can overlap with onboarding paperwork, such as offer letters, NDAs, non-competition agreements, and union contracts, they can be made at any point in an employee’s career with your company, so it’s critical to keep tabs on them alongside their employment records. If an employee’s promotion entitles them to a company credit card or vehicle, for example, a copy of that newly signed agreement should be kept with their file.  

Performance and Disciplinary Records 

This refers to any documented performance reviews, employee self-assessments, promotion records, or certifications and awards an employee may have earned while working with your organization. Conversely, disciplinary records should also be kept, including any recorded performance issues, disciplinary actions, formal complaints, or demotions. Not only does keeping track of an employee’s performance help you make better decisions regarding their effectiveness and continued growth, but it also makes handling yearly reviews and ongoing issues much more straightforward. 

Payroll and Compensation Files 

Payroll files are another crucial type of documentation to manage and maintain throughout an employee’s time with your company. While keeping a record of an employee’s total salary and compensation package can be considered optional, keeping and tracking an employee’s W-2, payroll records, timecards, and beneficiary forms is mandatory.

While some personal information will be present in these documents, such as a name and an address, any documentation with confidential information, such as social security numbers, bank information, or medical records, should be kept separate.  

Confidential Files Should Be Kept Separate (i.e., Medical Records) 

Certain employee records, particularly those with sensitive or confidential information such as medical records or social security numbers, should be kept securely in a separate file only accessible by members of your organization that need the information for business purposes. These files, especially those pertaining to medical information and medical leave, often have legal mandates for confidential storage. 

How Long Should I Keep Payroll Records and Employee Files? 

The time employers are required to keep certain records depends on state, local, and federal laws. In general, businesses must keep a copy of most of their employee documentation for several years in case of any pay or termination disputes down the line. These are relatively reasonable times, and maintaining personnel records for this period is simple with a reliable file storage system.  

Payroll Records: 3 Years 

At a minimum, the FSLA dictates that you keep your payroll records for three years. This includes all the relevant information in your employee’s records, such as hours worked, pay rates, benefits, and more. As an employer, you can elect to keep these records for longer, but you must at least meet the minimum required time. 

Employee Tax Documents: 4 Years 

Tax documentation can be tricky since it can overlap with payroll, but tax-specific forms like W-2s and W-4s must be kept for a minimum of 4 years after those taxes are due or paid. As with payroll records, you can opt to keep these employee records longer than the law requires you to, so long as you meet the minimum duration. 

Research Requirements in Your State 

The Fair Labor Standards Act mandates how employers maintain and store certain records for their employees at a federal level, but some states and local governments have additional regulations you must follow if you operate a business in those areas. Research the federal, state, and local requirements relevant to your business in order to ensure full compliance or risk costly fines and legal trouble.

In addition to FSLA requirements, you will also want to consider Equal Employment Opportunity Commission requirements, which may have different compliance regulations beyond what FSLA outlines. For more information on how these regulations impact your business, contact our professional team at Horizon Payroll today!

How to Properly Store Payroll Records and Employee Files 

Determining the best method for storing and maintaining your business’s employee personnel files and payroll records will come down to a few factors, but arguably the most important one is the size of your business. How many people do you employ? Is it feasible to store physical documentation for that many employees?

While some small businesses can use physical file storage for documents, most organizations in the modern age use some form of digital record management. Digital storage solutions offer security and efficiency unmatched by traditional document storage methods.  

Physical File Storage Requires Folders, Cabinets, and Keys 

Keeping your employee files in a physical on-site location demands extra time, equipment, and administrative processes, all for little benefit. Consider a digital record management system to keep track of your employee files and payroll records. If it’s absolutely not an option, use a deliberate and organized physical file storage solution. Make sure there’s a space set aside expressly for this purpose, and invest in folders, lockable cabinets, and a key-logging system for additional security.  

Keep Physical Files in a Secure Location with Limited Access 

Digital storage solutions have passcodes, administrative blocks, and other secure methods to ensure that only those who need personnel data can access it. In a physical storage system, the best way to keep confidential records secure is to store them in a separate area with limited access, such as a keyed door or a secured administrative area. Keep track of who has access to this area, including who has been issued keys. 

Digital Records Require Encryption and Permissions 

If you’ve opted for a digital records storage solution, a similar principle of thought applies: the information, however it’s stored, should be secured and only accessible by those who have a need for professional purposes. Ensure that whatever digital filing system you integrate with your business offers encryption and selectable permissions so you can control who has access to this sensitive data. 

Have a Professional Set-Up a Secure Digital Storage Solution 

When it comes to managing employee files, compliance with security requirements for confidential information is essential to avoid fines or legal trouble. Work with a reputable and trusted professional to set up and maintain a fully secure digital storage solution to ensure your employee data is safe.  

Other Best Practices for Payroll and Employee Files

Besides maintaining secure, properly stored, and organized payroll and employee files, there are a few other best practices you can use to avoid wasting time, bogging yourself down in paperwork, or losing a critical document that you’re mandated by law to keep.  

Go Through Records Annually 

The key to any organized filing system is ensuring that your documentation is up to date with your current business situation. You’re only required to keep employee records for a set amount of time depending on the document type, so set aside time every year to go through your files, eliminate what you don’t need, verify that what you do need is present, and reorganize as necessary. 

Make an Organizational Code for Files 

This practice makes the most significant difference for larger companies with lots of data to keep track of, but it’s still a good idea to implement even for smaller businesses with fewer employees. Creating “tags” for different types of files – such as health documentation, timecards, W-2s, and so on– will help your team quickly locate critical documents and determine if any needed forms are missing from an employee’s file.   

Horizon is a Trusted Partner for Payroll, HR, and More 

Horizon Payroll has been helping businesses of every size save time and money with our industry-leading Payroll, HR, and Employee Management services for more than two decades. Avoid the stress of untangling complicated federal guidelines and local regulations with the help of a trusted payroll management partner.  

Contact Us Today for More Information 

Contact us today to discover more about how Horizon’s top-rated payroll management services can benefit your business and free up your team to focus on what's important!