Written by Phil Vivirito
Bond Beebe
P: 301.272.6090 E:  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Over the next few weeks, Phil Vivirito, Bond Beebe’s Director of Payroll and Compliance Auditing, will explain several fundamental payroll auditing principles.  This week he reviews the best practices for finding and analyzing unreported employees.

A population test determines if all eligible employees are being reported by identifying all the employees on the payroll and accounting for everyone.  If you have a year-to-date non-departmentalized payroll or W-2s, you can compare either to the Fund’s contribution reports.

Any employee on this payroll and not reported would prompt analysis to determine why they were not reported.  The simplest way would be to ask the employer; you will want job classifications and may need to look at personnel files.  You can also substantiate this information by checking wage rates to determine if the unreported employees are not at the prevailing wage rates in the collective bargaining agreement.  If the employer informs you that these employees are covered by another plan, ask for proof, such as that plan’s contribution reports.  You will also need to use some common sense; the employer’s explanation of unreported employees may not fit with the type of work being performed (e.g., too few truck drivers for a trucking company or more office people than electrical workers in an electrical contractor).

If I have any doubt about whether or not the employee is doing covered work, I will include the employee as an audit finding until the employer can prove otherwise.  I have had many instances in which an employer could not tell me an employee’s job function.  I always take the position that an employer must know what every employee does.  Otherwise, why hire that person?

Outside of the payroll records (W-2s, payroll journals, time cards, and quarterly reports), there are other ways to find unreported employees.  You also should be able to look at cash disbursement journals, the general ledger, 1099s (and the 1096), and temporary labor agency invoices.  Any names that appear in the cash disbursement or general ledger should be questioned and investigated.  The same is true for individuals who are issued 1099s.  If the employer is using a temp agency to obtain individuals to perform covered work, the invoices from the agency will list the individuals and their hours.  In certain instances in construction trade audits, you may even find a disproportion in the amount of materials to labor, and that an employer is hiding covered employees.

With a little extra research, unreported employees can be found and properly analyzed during the payroll audit process.

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