Surviving a Wage and Hour Audit

So you've prepared as best you can for a wage and hour audit. Or maybe you haven't prepared at all. Either way, don't panic! You'll feel a bit more comfortable if you know what to expect, and how to manage the process.

• The investigator will ask questions about what the company does, and who makes decisions. He or she will ask for a Federal Tax ID number, annual dollar volume of business, structure of the business and other information in order to verify coverage of the Federal Fair Labor Standards Act (FLSA). The investigator will then ask to see the I-9's, payroll and employee records.

• One person (preferably an employee with some authority) should be assigned to work with the investigator. That person should keep a list of all records examined, all questions asked, and all employees or other persons interviewed by the investigator. The investigator should be advised that this employee is being assigned as the designated point of contact during the course of the investigation and that in seeking company records or making inquiries about them, the investigator is to work exclusively through this employee only.

• Provide the investigator with a private office or other area that is reasonably separated from other employees, especially those employees who have access to office records.

• Escort the investigator about the premises as needed. Don't allow him or her to wander about freely.

• Allow the investigator to examine all payroll and time records for the most recent two-year period. When time records are requested, bring in no more than two or three weeks of time records at one time. All time records for terminated employees should be pulled and kept separately from current employees' time cards, and only supplied if requested.

• You are not required to permit employee interviews on company time or on the company premises. However, the investigator has a right to interview employees about work performed, hours worked and pay received. We recommend that you allow them to do this on company time and on company premises rather than making them do this at the employee's home after work. The investigator should be advised that when he or she wants to speak to any employees, each employee will be brought to the investigator individually, upon request, by the person you've designated to work with the investigator.

• At the conclusion of the investigation, the investigator will discuss any violations (if there are any) and will ask for the company's position with respect to future compliance and the payment of back wages on the basis of the violations found. You can (and should) defer a response in order to review this with your legal counsel.
  

We recommend referencing the Wage and Hour Division's Fact Sheet on employee visits for further details.

Last tip: make sure that your I-9 records are up to date and the forms are certified properly. This is checked in the routine audits that are conducted. Keep your I-9s for all employees in a separate file so that it is easy to provide these to the auditor.

Authored by Dave Waldorf

Preparing for Wage and Hour Audits

Recordkeeping. Compliance. Audits. These aren't a few of your favorite things. But the reality is that the U.S. Department of Labor's Wage and Hour Division has stepped up its enforcement of the wage and hour laws under the Fair Labor Standards Act (FLSA). The number of FLSA cases filed each year has nearly tripled since 1997.

What do you need to do? Get ready!

Review all of your jobs for proper classification as exempt or nonexempt under the law. Many employers have reorganized their operations and modified jobs in response to the decline in business over the past year. This may change the classification of the job. If the classification changes from exempt to nonexempt, you need to record hours worked and pay overtime premiums as required. This could also happen if pay rates are reduced as cost cutting measures, dropping an exempt employee's pay below the required threshold for exempt classification. Be aware that employees must be paid at least the state and/or federal minimum wage ($7.25 per hour), whichever is higher.

It's critical to determine correct status of the job, and it's not always clear cut. Check out this DOL Fairpay Presentation for guidance. Exempt employees must be paid on a salaried basis (exceptions: computer professionals, outside sales workers, certain professions). Any deductions made from an exempt employees pay must comply with the Safe Harbor policy under the FLSA.

Review timekeeping practices (these practices apply to nonexempt employees) to ensure compliance with the regulatory requirements.

Timekeeping records

• Maintain for two years
• Capture start and stop times and total daily hours worked
• Ensure that supervisors review and approve time cards

Timekeeping practices

• Discourage clocking in ahead of start times.
• Check to see if employees are docked for lateness and if so, that you are complying with the rounding rules under the regulations.
• Require employees to clock in and out for lunch and other breaks.
• Review your lunch break practices. Make sure employees are off duty during the lunch break, and that the lunch break is at least one-half hour. If the break time is paid, it does not have to be counted towards time worked as long as there is a written understanding with employees to exclude the time from overtime calculations.
• Rest periods less than 20 minutes should be paid.
• In certain instances, activities performed before or after the formal "shift" or work period, is compensable (for example, time for donning and cleaning protective clothing for the job).
• Travel time practices must comply with the Portal to Portal Act. Factors such as when the travel time takes place, whether it is overnight travel or not, whether the employee is a passenger or driver, all affect whether the travel time is paid time or not. If it is paid time, it could also be overtime (if all time worked plus travel time exceeds 40 hours for the work week).
• Are employees allowed or required to work at home? If so, make sure that all time worked is recorded (and paid) for nonexempt employees.
• Review compensatory time practices (applicable to public/government employers) for compliance with regulations.
  
  See the following DOL fact sheets:
  Hours Worked under the FLSA
  
  State and Local Governments under the FLSA

Verify Overtime calculations

• Regular rate of pay calculation - You must include non-discretionary bonuses, shift differentials, commissions in the calculation of regular rate of pay, which is then used to compute the overtime premium. Also, if the employee is paid at two or more rates of pay in a pay period, this is averaged in the regular rate of pay based on the number of hours worked at each rate of pay. Retroactive pay increases must also be taken into account.
• All "hours worked" must be included in the calculation, including off premises work.
• The calculation of overtime is to be done on a weekly basis, using one of the allowable methods under the regulations (e.g. standard over 40 hours/week method, fluctuating work week method).
  
  See DOL Overtime Pay for more details regarding overtime pay requirements under federal and state regulations.

Review practices for payroll recordkeeping and keep payroll records for at least three years.

For all employees:

• Employees full name and SSN
• Address including zip code
• Birth date (if less than 19)
• Gender
• Occupation (job title)

For nonexempt employees only:

• Employees full name and SSN
• Time and day of the week when the workweek begins
• Hours worked each day
• Total hours worked each workweek
• Employee's regular hourly pay rate and the basis for pay (hourly, weekly, piece rate, incentive)
• Total daily or weekly straight-time earnings
• Total weekly overtime earnings
• Additions to or deductions from pay
• Total wages paid each pay period
• Date of payment of wages and the pay period covered by the payment

Need more information? See Recordkeeping Requirements under the FLSA for more details.

Now that you're prepared, stay tuned for my next installment: What to do if you receive notice of an audit.

Authored by Dave Waldorf