Employers Should Familiarize Themselves with Wage and Hour Audits

Earlier this year, the U.S. Department of Labor (DOL) announced a new final rule on the minimum annual salary threshold that partly determines whether employees are exempt from overtime pay. Under the final rule, the threshold increased on July 1 from a $35,568 annual salary amount to $43,888. It will rise again to $58,656 on January 1, 2025. The threshold will then be updated every three years beginning on July 1, 2027.

For employers, this significant change brought about an intense renewed focus on the age-old “exempt vs. nonexempt” quandary. It also reinforced the importance of complying with other provisions of the Fair Labor Standards Act (FLSA), including those governing minimum wage requirements, recordkeeping rules and child labor standards.

How can you ensure your organization is on the right side of the law? One comprehensive way is to voluntarily conduct regular or occasional “wage and hour” audits. If that sounds like a hassle, bear in mind that FLSA compliance failures could lead to a team of government auditors showing up at your door to do the job for you. 

Key features

Wage and hour audits methodically review key features of an employer’s compensation and labor practices, including:

• Employee classification (employees must be properly designated as exempt or nonexempt under the current FLSA rules),
• Payroll records (employees must be paid at least the current minimum wage, overtime pay needs to be correctly calculated and remitted, and records must be sufficiently detailed and securely maintained),
• Timekeeping methods (regular work hours and overtime must be accurately tracked, and “off-the-clock work” shouldn’t be happening),
• Rest and meal breaks (employees must receive mandated breaks), and
• Wage deductions (all must comply with applicable laws).

While scrutinizing these and other aspects of payroll administration, audits need to account for not only federal requirements but also state and local laws. Some states and municipalities impose much stricter rules than the widely known federal ones.

Simple reason 

Dedicating time and resources to wage and hour audits may seem burdensome. However, as mentioned, there’s a simple reason to do so: All it takes to trigger an involuntary audit of your organization is one disgruntled employee filing a complaint with a regulatory body.

At the federal level, the DOL’s Wage and Hour Division is charged with enforcing the FLSA and conducting audits in response to complaints. The agency may also audit an employer as part of a routine or targeted investigation. In addition, every U.S. state has its own labor department or agency with an online reporting system set up to allow employees to file complaints about alleged compensation and overtime violations.

Whether state or federal, auditors tend to take an “employee advocate” perspective when responding to complaints. In other words, while conducting the audit, they’ll likely be on the complainant’s side, not yours. The process can be lengthy, expensive and disruptive. Worst of all, if you’re found liable for violations, your organization may be on the hook for back wages, overtime pay and even penalties.

Knock on the door 

The bottom line is it’s usually less expensive and stressful for employers to audit their own payroll practices regularly, or at least occasionally, than to risk that proverbial knock on the door.

How often you should conduct internal audits and who should do the work will depend, at least in part, on the size of your organization and the complexity of its payroll. Larger employers may be able to train and dedicate staff for this purpose; smaller ones can engage third-party auditors or consultants. Contact us for more information or assistance.

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