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Paul Zimmerman
pzimmerman@mrllp.com
310.299.5500

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Wage And Hour Audits: A Preparedness Primer for Employers

Being an employer is no easy feat. Between the imposition of business regulations at the local, state and federal levels, legal obligations that differ from state-to-state, and ever-changing demands of employees and customers alike, the job of an employer is a challenge, to say the least.

Federal and state wage and hour laws are an area particularly rife with potential pitfalls for employers. These rules vary by jurisdiction, but typically provide employees the legal right to compensation if their employers fail to pay the minimum wage or overtime earnings, require work to be conducted “off the clock,” overlook meal and/or rest breaks during the workday, or misclassify employees as independent contractors or as being otherwise exempt from wage and hour requirements.

When employers violate wage and hour laws, the financial implications can be severe. This is especially true to the extent workers may be able to litigate alleged violations of state and federal labor laws through wage and hour class action lawsuits or other collective actions.

Consequently, companies across industries should do all they can to ensure compliance with applicable wage and hour laws—this so as to avoid the possibility of legal exposure. They can do so by conducting comprehensive wage and hour audits.

The Wage and Hour Audit

A wage and hour audit consists of an inspection and review of a company’s wage-and-hour practices and policies. Such audits are prophylactic when a company evaluates itself to reduce litigation risk; other times, audits are conducted by a governmental agency like the Department of Labor, in which case a company can be fined or penalized for any wage-and-hour violations that are discovered.

When a company takes it upon itself to order a wage and hour audit, special attention is paid to whether the business is compliant with respect to federal and state laws, and if so, to what degree. Typically, such a self-imposed audit is performed by legal counsel to the extent the process requires a comprehensive understanding of the wage and hour landscape. Also, retaining a legal professional to handle an internal audit will help preserve the attorney-client and work product privileges.

More stress-inducing are wage and hour audits ordered and conducted by the government. As a rule, these inspections are more involved than company-mandated examinations, and they frequently take on an adversarial tone given that they oftentimes result in fines and penalties for any violations of prevailing law. Of note, the government’s decision to come knocking on an employer’s door is not usually a random one. Rather, an agency like the DOL chooses to investigate a company’s wage and hour practices after receiving a tip to do so, or when the business was previously audited and cited for wage and hour violations.

What’s a Company to Do When Confronted With a Wage and Hour Audit?

A company’s approach to a wage and hour audit will depend upon whether it is compelled by management or the government. In the event of a governmental audit, it is important for a company to determine—and, if possible, to narrow—the scope of review in an attempt to limit the chances of turning over documentation that could evidence other potentially unlawful practices that may not even have been a blip on the given agency’s radar screen.

Whatever the case may be, a wage and hour audit involves an examination all of the following:

1. Pay and Time Records

Auditors will surely scrutinize how employee time is recorded, whether employees track their own hours, if all compensable time worked by non-exempt employees is captured, and the accuracy of timekeeping systems. In addition, examiners will likely look into a company’s auto-deduction policy for meal breaks and if meal periods are otherwise compliant with the given jurisdiction’s wage and hour laws. In terms of the latter, the inquiry may be more exhaustive in certain states. For instance in California, an investigator would need to analyze meal periods to determine if employees who miss them receive a premium paid according to the regular rate of pay (and not the employee’s hourly wage rate).

2. Wage and Hour Policies

A wage and hour audit will also delve into a company’s policies as they relate to timekeeping, payment of wages (including overtime), employer deductions, compliance with applicable rounding rules, vacation and sick pay, meal and rest periods, and the prohibition of “off-the-clock” work (and whether there is a procedure in place to record “off-the-clock” efforts if and when they occur). Of course, all of these policies should be included in a company’s employee handbook.

3. Employee Classification and Exempt Status

An examination of a company’s compliance with wage and hour laws will also include an assessment as to whether the employer has correctly classified its employees as exempt or non-exempt for purposes of overtime pay. Likewise, auditors will work to determine if individuals classified as independent contractors actually qualify as such. To do so, relevant federal and state law should be applied. California businesses, especially, must closely scrutinize worker classification since the enactment of AB 5 and its stringent presumption against independent contractor classification.

4. Other Miscellaneous Items

In addition to all of the foregoing, a wage and hour audit should cover (1) whether previously identified violations have been corrected; (2) the propriety of employer internship programs (most likely applying the “primary beneficiary” test); (3) compliance with any child labor restrictions; (4) the proper display of government-mandated posters and notices; and (5) confirmation of compliance with both state and federal laws.

A Call to Action for Employers

Without question, it is in every company’s best interest to abide by all applicable wage and hour laws and to avoid government scrutiny where possible. Toward that end, consultation with experienced legal counsel adept at wage and hour audits is highly recommended.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.