The Small Business Guide to Employee Records

If you’re thinking about tossing out that personnel file on the employee who quit last week, hold off. The U.S. Equal Employment Opportunity Commission (EEOC) requires you to keep all employee records for a year. And if you terminate someone, you must keep the employee’s personnel records for a year from the termination date.

Companies collect and maintain massive amounts of information via employee records. Therefore, small businesses must be meticulous about maintaining employment documents and have a sound recordkeeping system that helps them compliant with employment laws and tax requirements.  Fees, fines and lawsuit settlements for noncompliance can be steep, especially for small businesses. For companies facing a lawsuit, carefully kept and updated employee records can be the difference between winning and losing a court battle.

Federal government agencies, including the EEOC and Occupational Safety and Health Administration (OSHA) under the U.S. Department of Labor (DOL), and the IRS, have their own recordkeeping rules and guidelines. The types of information you will need to keep are those which cover employee identification information, income withholdings, and workplace injury reports.

Also, since some states have specific recordkeeping rules or guidelines, employers should know what their state’s requirements are before proceeding.

Employment and Personnel Records: 1, 3, or 6 Years

The U.S. Equal Employment Opportunity Commission (EEOC) requires companies to keep employment records for one year. Employee identification data includes the employee’s full name, Social Security number, address and ZIP code, birth date, gender, and occupation.

Employment documents: 1 Year

• A copy of the employee’s application, including a resume, transcripts, and other supporting documents.
• A signed and updated copy of the W-4 form showing federal tax withholding.
• A copy of any forms showing the employee’s authorization of pay deductions, including benefits and special donations (i.e., United Way).
• Records showing changes and the reasons for changes in the employee’s status, such as pay rates, promotions, demotions, terminations, etc.
• Disciplinary actions, with dates, reasons, and other details.
• Performance appraisals.

Employment documents: 3 Years

• Vacation time
• Sick time
• Other attendance information

Some states require unused accrued time off to be paid out to employees upon termination; therefore, it’s important to maintain this information during an employee’s tenure.

Benefits plan documents: 6 Years

The Employee Retirement Income Security Act of 1974 (ERISA) requires all records to be kept for six years. Section 107 of ERISA states: “All records pertaining to agency filings or to participant or beneficiary disclosures must be retained and kept available for examination for at least six years after the filing date.” However, the DOL’s stand is that benefits can be kept for as long as necessary.

Payroll documentation: 2 or 3 years

The Fair Labor Standards Act (FLSA) requires payroll records to be kept for three years. Records are retained primarily for nonexempt, or hourly, employees. Recordkeeping rules for exempt, or salaried, workers are more complex and may require consultation with an attorney.

The FLSA sets the federal minimum wage, overtime pay rate and the youth employment standards. The U.S. Department of Labor’s enforces the FLSA, which is administered by the DOL’s Wage and Hour Division. The Equal Pay Act and Age Discrimination in Employment Act (ADEA) also cover payroll recordkeeping requirements.

Payroll records include employee identification data (full name, Social Security number, address and ZIP code, birth date, gender, and occupation).

3 years

• When an employee’s workweek begins, including the time and day of the week.
• Daily hours worked.
• Total hours worked each workweek.
• The basis on which employee’s wages are paid (e.g., “$9 per hour”, “$440 a week”, “piecework”).
• Regular hourly pay rate.
• Total daily or weekly straight-time earnings.  
• Total overtime earnings for the workweek.
• Total wages paid each pay period.
• Date of payment and the pay period covered by the payment.
• Collective bargaining agreements.
• Sales and purchase records.

2 years

• Wage-calculation bases.
• Time cards and piece work tickets.
• Wage-rate tables (e.g., $9/hour, $440 a week, etc.).
• Work and time schedules.
• Additions to or deductions from wages.

Tax records: 3, 6, 7 years or indefinitely

According to the IRS, small businesses should keep documents based on the type of record. The agency recommends keeping records that support an income item, deduction or credit that appears on your tax return until that tax return’s period of limitation is up.

3 years

• Keep records for three years, unless you: 1) failed to report income that should be reported and it’s more than 25% of the gross income on your return; 2) don’t file a return; or 3) file a fraudulent return.
• Keep records for three years from the date you filed your original return, or two years from the date you paid the tax (whichever comes later), if you file a claim for credit or refund after your return is filed.

4 years

• Keep employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever comes later.

6 years

• Keep records for 6 years if you don’t report income you should report, and it’s more than 25% of the gross income on your return.

7 years

• Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.

Indefinitely

• Keep records indefinitely if you do not file a return.
• Keep records indefinitely if you file a fraudulent return.

Injury reports

The Occupational Safety and Health Administration (OSHA) requires employers with 10 or more workers to retain employee records of serious work-related illnesses and injuries. However, minor Injuries requiring only first-aid are exempt.

Employers must keep illness and injury records for at least five years. April through February, each employer must post a summary of the illnesses or injuries it recorded from the previous year, which could extend the retention time.

Serious illnesses or injuries include:

• Work-related fatalities.
• Work-related injuries or illnesses that cause loss of consciousness, missed work days, work restrictions or job transfers.
• Work-related injury or illnesses requiring medical treatment other than first aid.
• Work-related diagnosed cases of cancer, irreversible chronic diseases, cracks or fractures to bones or teeth, and punctured eardrums.

OSHA has special reporting requirements and recordkeeping forms for work-related incidents involving hearing loss, injuries from needlesticks and tuberculosis.

Extended recordkeeping

Some employee records are worth keeping past their required retention dates. Examples are documentation that could trigger lawsuits, such as disciplinary actions, terminations, demotions, performance appraisals, and leave or time off disputes.  Extended recordkeeping could lower your liability risk if the information is ever challenged by enforcement agencies or in court.