Running a business is complicated enough. Having to deal with wage and hour violations only makes your ability to grow your business even more difficult.

The majority of businesses in the U.S. are subject to the rules and regulations set by the Fair Labor Standards Act (FLSA). These rules establish standards for minimum wage, overtime pay, recordkeeping, and youth employment compliance.

While these rules are designed to protect employees, it’s not always easy for employers to keep track of and apply these rules. It’s very easy for a simple, honest mistake to lead to an FLSA violation, which is why businesses should take the time and effort to conduct internal audits to identify any potential issues.

Why Should Businesses Conduct Internal Wage And Hour Audits?

The biggest reason to complete internal wage and hour reviews is quite simple – FLSA noncompliance is expensive. Violations can range from $1,000 to $10,000 each. In addition, FLSA violations could end up costing businesses in a couple of other ways. 

According to the U.S. Department of Labor (DOL), the Wage and Hour Division took more than 24,700 compliance actions against businesses in 2021. Those actions led to more than 190,000 workers earning more than $230 million in back wages. This results in non-compliant companies owing an average of $1,211.70 in back wages for affected employees.

In addition to back wages, financial penalties make FLSA violations even more costly for a business. The DOL will fine any company that willfully or repeatedly violates minimum wage or overtime pay requirements. These penalties include civil fines up to $1,000 for each violation.

Repeated violations can also make a business a common target for future audits. The DOL chooses targets for wage and hour audits as part of an overall initiative or because individuals have filed complaints against a specific business. By failing an audit, the DOL has reason to check in on your business in the future for additional violations.

An FLSA Audit Checklist

A thorough FLSA audit includes multiple steps. Each of these steps is designed to provide a comprehensive overview of who is covered by the FLSA as well as, the different factors that can lead to violations.

1. Review employee classifications
2. Review regular and overtime pay calculations
3. Review records and policies

Employee classifications

The first step of auditing your wage and hour practices is to examine the exemption status for all your employees. It’s essential to properly classify each employee to determine their exact employment status and whether or not they’re eligible for overtime.

Employers conducting an audit should create a list that includes every employee. The safest way to start is to assume that every employee is eligible for overtime until proven otherwise. This employee list should include the following information to help employers determine overtime exemption status:

• Job titles
• Job descriptions
• Salary information

Once armed with this information, employers can perform a trio of tests to determine whether employees qualify as exempt or not. If an employee passes all three tests, employers can assume that they are exempt from overtime pay.

• The salary basis test – Exempt employees must be paid a predetermined, fixed salary that cannot be reduced.
• The salary level test – Exempt employees must meet the minimum salary threshold of $35,568, which equates to $684 per week.
• The duties test – Employees must primarily perform a list of set duties established by the DOL.

The easiest way to determine exemption status is whether an employee is a blue-collar worker or not. Blue collar workers are eligible for overtime, regardless of their salary. Non-salary employees are also eligible for overtime.

When it comes to “white-collar exemptions,” employers will need to review each employee’s title, job description, and current duties. The DOL lists five separate groups as exempt from overtime pay, which are explained in-depth in our post on navigating white-collar exemptions. If a white collar employee’s duties align with any of the following groups and pass the salary tests, they are exempt.

• Executive
• Administrative
• Professional
• Computer
• Outside sales

Pay calculations

Once you’ve successfully separated exempt and non-exempt employees, it’s time to review your pay practices to ensure that everyone is being compensated properly. This phase involves confirming the use of proper pay practices and calculations.

• Ensure all hourly workers are being paid at least $7.25 per hour (or more, depending on your city/state).
• Confirm that all employees who earned overtime were paid at least one and one-half times their regular pay rate after 40 hours of work in a workweek.
• Double check to see if there are any employees who work in two different positions at differing rates that require special pay calculations and timekeeping practices.

Records and policies

An internal audit is a good time to review your company’s timekeeping policies. The FLSA requires employers to maintain a variety of records pertaining to their employees’ wages and hours. As such, your audit should confirm that your business records the following information and that all recorded information is accurate:

• Employees’ personal information which includes, name, home address, occupation, sex, and birth date if under 19 years of age.
• Hour and day when workweek begins.
• Total hours worked each workday and each workweek.
• Total daily or weekly straight-time earnings.
• Regular hourly pay rate for any week when overtime is worked.
• Total overtime pay for the workweek.
• Deductions from or additions to wages.
• Total wages paid each pay period.
• Date of payment and pay period covered.

How Often Should I Conduct FLSA Audits?

In general, it’s best to perform wage and hour audits at least once a year. For example, some organizations plan a regular internal audit timed with either the beginning or end of their fiscal or calendar year.

Another option is to conduct ongoing reviews throughout the year. This process involves more regular check-ins for compliance concerns, such as employee classifications or overtime calculations for new employees. Employers can also combine a comprehensive yearly audit with quarterly inspections to be as proactive as possible about FLSA violations.

Stacey Larotonda, Vice President of Client Services at GMS, emphasizes, “FLSA self-audits should be done by every business on a consistent basis. It’s an easy way to make sure you aren’t hit with a significant fine should the Department of Labor want to audit you. Spending a little time on the front end can save you lots of money in the long run.”

Protect Your Business From FLSA Violations

A simple timekeeping mistake is all it takes to land your company in trouble with the DOL. Internal FLSA audits are one tool that employers can use to protect their business from misclassification, timekeeping errors, and other challenges. However, sometimes business owners can use some additional support.

Simply put, most business owners don’t have the time to handle every tedious administrative task. GMS partners with businesses to help them simplify their core business functions. GMS provides your business with experts and a comprehensive web-based payroll solution to help you save time and protect your business against FLSA violations, wage and hour laws, and other costly issues. Our experts help business owners with:

• Contractor vs. employee status
• Recordkeeping
• Overtime exemptions
• Child labor

Ready to streamline your payroll process and other HR tasks? Contact us now about how GMS can make your business a safer place.