Legal Basis of Employee Records Retention

The Legal Basis for Employee Records Retention

Good record keeping is absolutely essential for the success of any business. Except in a few cases, the law does not require a business to keep records in any specific format. However, some records are required by law, and the length of time such records must be retained is specified by law.

The term “records” includes both hard-copy papers as well as electronic records. It includes anything that is used to prove that a transaction has occurred, as well as anything that supports other records that are required by law.

The general rule of thumb for how long to keep records is: A record must be retained as long as it may be needed to support any form, document, record, or submission required by law. Certain records must be retained for a specific period of time, so any supporting documentation must be kept for the same period of time. For instance, income tax returns must be retained for a minimum of 4 years from the date the return is due or the date it was filed, so any records of receipts, purchases, expenses, etc. that are the basis of the financial records used to prepare those returns must be retained for the same period of time.

What Federal Laws Affect Payroll Records Retention?

There are a number of different laws that affect how long certain payroll records must be retained. Some of the federal laws that affect a business are listed below. Most of these laws specify what records must be retained, as well as how long the records must be kept.

Fair Labor Standards Act (FLSA) Federal Wage-Hour Law – This primarily covers employee and payroll records. Most records covered by FLSA must be kept for either 2 or 3 years. This covers all payroll and timekeeping records.

For instance, the Code of Federal Regulations (29 CFR 516.6) states that the following records must be kept for 2 years:

Basic employment and earnings records supporting the dates for each employee’s hours of work.
Order, shipping, and billing records showing customer orders, shipping and delivery records, and customer billings.
Records of additions to or deductions from employees’ wages, including wage assignments and garnishments.

On the other hand, all basic employee information and records of employee earnings must be retained for 3 years. (29 CFR 516.5)

Internal Revenue Code (IRC) – The general rule established by the IRC is that all records must be retained for a minimum of 4 years after the due date of the tax, or the date the tax was paid, if later. So all payroll tax returns (such as Forms 941, 940, copy D of Form W-2) must be retained for 4 years. (See page 6 of IRS Publication 15, Employer’s Tax Guide.)

For a company’s payroll records this is one year more than required by the FLSA. The difference is that the FLSA covers the actual records of the employees’ earnings, whereas the IRC covers the reporting of the employees’ earnings. This would mean that the payroll records for 2000 could have been destroyed January 1, 2004, 3 years after that last date of entry. However, the Form W-2s for 2000 could not be destroyed until February 1, 2005, 4 years after their due date, and the Forms 941 and 940 could not be destroyed until May 1, 2005, 4 years after their due date.

However, to protect itself a business should retain all payroll records and returns for at least 4 years. The point to remember is that a record must be retained as long as it may be needed to support any form, document, record, or submission required by law. Payroll earnings records support the tax returns, so they should be retained for the same period of time.

What Other Employee-Related Records Must Be Retained?

Civil Rights Act of 1964 (Title VII) – Any records that affect the hiring, employment, or termination of an employee must be kept at least one year from the date a decision was made or the date of the personnel action to which they relate, whichever is later. This includes documents used to determine whether or not to hire an individual as an employee. So all resumes, job applications, etc., must be retained for a period of one year after a position has been filled. If a business is sued by an employee, terminated employee, or an individual who was not hired, then the records must be retained for one year after the final disposition of the charge or suit.

Americans with Disabilities Act of 1990 (ADA) – The provisions for record retention under ADA are the same as those under Title VII.

Age Discrimination in Employment Act of 1967 (ADEA) – The provisions for record retention under ADEA are the same as those under Title VII. ADEA also contains provisions for the retention of employee records for a period of 3 years after the individual’s employment has been terminated.

Immigration Reform and Control Act (IRCA) – This act affects the retention period of Form I-9 for each employee. The IRCA also specifies that Forms I-9 should not be retained with personnel files.

An employee’s Form I-9 must be kept for at least 3 years from the date of hire or 1 year from the date of termination, whichever is longer. At the end of each year the I-9 Forms for terminated employees that have expired can be destroyed.

Every Business Should Have a Records Retention Policy

As can be seen from the above discussion, record retention requirements vary. Therefore, it is prudent for every business to set a policy that outlines what records must be retained, how they should be retained, how long they must be retained, and when they can be destroyed. By doing so a business can meet all federal requirements.