“How To” Series: Testing for Vacation

Posting by Phil Vivirito

In this series, I will explain several fundamental payroll auditing principles.  This post discusses guidelines for for effective vacation testing, including preliminary questions, testing methods, and handling unique vacation contribution scenarios.

When performing payroll audits, employee vacations of course must be considered.  When contributions are based on hours paid, or when the Collective Bargaining Agreement (CBA) states specifically that contributions are required for vacation, the payroll auditor must test vacations.

Prior to going out into the field and even prior to contacting the employer, the auditor can conduct a quick test on the contribution reports provided by the Fund for the audit.  If the auditor notices a reduction in hours reported for employees in the summer months or months with major holidays, it should be a red flag.  The auditor should also check the months prior and subsequent to these months to see if any had a spike in hours; the employer may be reporting vacation time prior to, or after, the time the employee took vacation.

The auditor should now ask the employer specific questions regarding vacation – either when he contacts the employer to schedule the audit or upon arrival at the audit.  There are two questions the auditor must ask the employer; the answers to these questions will dictate the course of action for the auditor:

  1. When is vacation paid to employees? The employer may state that vacation is paid the pay period prior or after the employee’s vacation or it may be paid in the period the employee is on vacation.  It may be paid on the employee’s anniversary date with the company, or on a date stated in the CBA.
  2. When is vacation being reported – when taken or when paid? The employer may answer that it is reported when taken, that it is reported when paid to the employee, or that it does not report vacation time.

Next, the auditor should make sure he knows the Fund’s rules regarding the reporting of vacation.  Does the Fund require vacation to be reported when paid to an employee or used by the employee, or is the Fund ambivalent on how vacation is to be reported?

The combination of answers from the above questions will help the auditor determine potential problems with vacation contributions and what, if any, additional information will be required from the employer.  For example, if the employer pays vacation to an employee on her anniversary date and the Fund requires vacation to be reported when taken by the employee, the auditor should ask the employer for a vacation schedule.  If one is not available, then the auditor will have to look for time not worked for that employee.  The auditor will have to assume that in a month in which the employee did not receive pay for a week that the employee was on vacation; if that week is not being reported then it would be a finding.

It is important for an auditor to be aware of how to handle the various situations that may arise with vacations.  If there is a 40 hour per week cap and the employer pays the employee regular pay of 40 hours plus vacation pay of 40 hours in that week, the employer should be reporting 80 hours.  The entire amount can be reported in that week, or the 40 regular hours may be reported for the work week and the 40 vacation hours may be reported in the week the vacation is used.  The employer cannot just cap the entire amount at 40; in doing so the vacation hours would be omitted.  The employer may issue vacation checks to employees based on a 40 hour week, but only show dollar amounts on payroll and not hours, and therefore not report the vacation.  Vacation paid to an employee at termination should be reported.  There may also be vacation paid to an employee who is on leave; that vacation should be reported.

The key in effectively testing vacations is knowledge of the Fund rules and good communication with the employer.  With the key information in hand, the auditor should be specific and deliberate in testing a sample of employees.

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