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Tuesday, December 1, 2009

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

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