Preauditing Employee Salaries and Wages

Having turned the corner on the Great Recession, the Town of FingersCrossing recently hired a few new employees. The finance office begins to process the first payroll since the new employees began working for the town. It is also the first payroll for the town’s newly-promoted finance officer, Connie Scientious. Connie has diligently reviewed the statutes that govern her work. She also regularly reads Coates’ Canons blog posts () and other relevant reference materials. As she reviews the payroll for approval, she asks her staff members to check to make sure that the new employee contracts were properly preaudited. Her staff members inform her that there are no employee contracts because these are “at-will” employees. The manager verbally hired each new employee and then sent a personnel action form (PAF) to the finance department directing staff members to add each new employee (and his/her salary or wage) to the payroll system. Connie balks at this. She distinctly remembers reading that she cannot approve any disbursement of public funds unless the contract or agreement authorizing the obligation was properly preaudited. Staff members tell her that the town has never provided a new employee with a written contract and has never preaudited a new employee’s salary. They believe that she must be misinterpreting the statute. Is she? It may come as a surprise to many units, but Connie is not misinterpreting the requirements of G.S. 159-28(a), at least as that statute has been interpreted by the North Carolina Court of Appeals. This issue has been discussed in previous posts, see here, here, and here. This post applies the analysis to employment agreements.

Preaudit Statute

G.S. 159-28(a),  commonly referred to as the preaudit statute, requires a finance officer, or a deputy finance officer that is specifically appointed by the board, to take certain steps before a unit may incur an obligation. Specifically, the statute is triggered whenever

• a unit enters into contract, lease, or other agreement, or places an order for goods or services (collectively contract), that is accounted for in the budget ordinance or a project ordinance; AND
• the unit is obligated to pay money by the terms of the contract; AND
• if the obligation is accounted for in the budget ordinance, the unit anticipates paying at least some of the money in the fiscal year in which the contract is entered into.

For example, a unit incurs an obligation, triggering the preaudit statute, when it places an order for office supplies if the unit expects to pay for the supplies (or a portion of the supplies) during the fiscal year in which they were ordered. Likewise, a unit incurs an obligation that requires a preaudit if it enters into a contract with a local landscaping company in July to mow the unit’s parks as needed during the fiscal year in exchange for a fixed fee per mow. A unit also incurs an obligation, triggering the preaudit statute, when it hires an employee and expects to pay the employee all or a portion of the employee’s salary or wages during the fiscal year in which the employee is hired. When a unit hires an employee it enters into a contractual agreement with that employee whereby the unit agrees to pay the employee in exchange for the employee performing the duties of the position. This is true even if the employee is classified as an employee at-will. (In many ways an employee -at-will agreement is a type of contingent contract.) In fact, the nature of the employment status (part-time, full-time, permanent, temporary, exempt, non-exempt, salaried, hourly, at-will, fixed-term, etc.) is irrelevant. If the unit enters into an agreement whereby it agrees to pay money to an employee during the current fiscal year, in exchange for the employee performing the duties of the position, the preaudit statute applies.   The preaudit statute also applies to any change in pay (increase or decrease in salary or wages) of an existing employee.

Preaudit Requirements

If the preaudit statute applies, G.S. 159-28(a) (as interpreted by the NC Court of Appeals) requires that before a unit may incur an obligation, the unit’s finance officer or a deputy finance officer (appointed by the board) must:

1. Check to see if there is an appropriation in the budget ordinance, or a project ordinance, for the amount that is expected to be paid this fiscal year;
2. Check to see if sufficient funds remain in the appropriation to cover the amount that is expected to be paid this fiscal year;
3. Put the contract in writing; AND
4.  Affix (and sign) a preaudit certificate to the “writing” that evidences contract.

The preaudit certificate must state that “[t]his instrument has been preaudited in the manner required by the Local Government Budget and Fiscal Control Act.” (A preaudit certificate is not required on a contract approved by the Local Government Commission.)

Application of Preaudit Requirement to New Hires

As detailed above, a preaudit is required any time a unit hires a new employee and expects to pay that employee during the current fiscal year. Before a new employee is hired,* the finance officer or a deputy finance officer must:

1.  Make sure there is a budget appropriation or project ordinance appropriation to cover the amount of salary or wages expected to be paid this fiscal year;
2.  Make sure that sufficient funds remain in the appropriation to cover the amount of the salary or wages expected to be paid this fiscal year;
3.  Affix (and sign) a preaudit certificate to a “writing” that evidences the employee agreement.

*If the new hire will be an at-will employee, it may be legally permissible to perform this process after a verbal offer of employment is made but before the employee begins work. There is no case law directly addressing this issue. In order for the finance officer or a deputy finance officer to affix and sign a preaudit certificate, there must be a “writing” that evidences or memorializes the employment agreement. This writing can take several different forms. Formal Contracts Some units generate formal contractual agreements, at least for some employees such as managers and department heads. The contractual agreements will specify salary and benefits and may include other provisions such as allowances, bonuses, advances, and even golden parachutes. These formal agreements will satisfy the preaudit statute if they include a signed preaudit certificate. Units do not typically prepare formal employment contracts for most at-will employees, though. For these employees a unit may need to rely on other written documents to satisfy the preaudit requirement, such as offer letters or personnel action forms.    Offer Letters Some units prepare an offer letter that communicates to the potential employee the terms of employment, including salary or hourly rate. An offer letter typically is signed by the new hire to indicate acceptance of the employment terms. The offer letter likely satisfies the preaudit requirement if it includes a signed preaudit certificate. Personnel Action Forms (PAF) Many units generate an internal document that includes salary (or hourly rate) and position information about a new employee. The PAF typically provides authorization to enter the employee into the payroll system. The PAF also likely satisfies the preaudit requirement if it includes the signed preaudit certificate. The employee is entitled to a copy of the preaudited PAF. Other “Writings” There may be other types of employment processing documents that will satisfy the preaudit requirement. The key is that the writing: (1) evidence the obligation of the unit to pay money to the employee during the current fiscal year in exchange for performing the duties of the position; and (2) include a signed preaudit certificate. If a unit creates a new employee agreement document for purposes of complying with the preaudit requirement, it should consult with its local attorney and human resources manager to determine the appropriate language.

Application of Preaudit Requirement to Salary or Wage Changes

A preaudit also is required any time a unit makes a change to an employee’s salary or wage. The same process must be performed by the finance officer or a deputy finance officer when there is a salary or wage change as when there is a new hire. The difference will be the nature of the “writing.” In this case it is likely sufficient to include a signed preaudit certificate on the personnel change form that authorizes the change in salary or wage. Alternatively, a unit could create a separate document that evidences its new obligation to the employee and includes a signed preaudit certificate. An employee is entitled to a copy of the preaudited document.

Disbursement Requirement for Payroll

Note that G.S. 159-28(d) requires a unit to perform a disbursement process before actually issuing paychecks or authorizing direct deposits. The disbursement process is separate from the preaudit process (which is required by G.S. 159-28(a)). Although the processes appear similar, they are not interchangeable. The statute envisions that most obligations will be subject to both the preaudit and the disbursement processes. The disbursement process requires that before a unit actually disburses public funds (including payroll), the finance officer or a deputy finance officer must:

1.  Verify that the amount is due and owing
2.  Make sure that there is (still) an appropriation authorizing the expenditure
3.  Make sure sufficient funds remain in the appropriation to pay the amount due
4.  Include a signed, disbursement certificate on the face of the check or draft* that states “[t]his disbursement has been approved as required by the Local Government Budget and Fiscal Control Act.”

*A disbursement certificate is not required on payroll checks or drafts on an imprest account if the check or draft depositing the funds in the imprest account includes a signed disbursement certificate.