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A 30-Minute FLSA Audit Can Save Employers Money and Trouble

May 8, 2019
Compliance failure can spell big trouble even when unintended, attorney warns.

Recent events have brought the Fair Labor Standards Act back into the headlines, and those stories should serve as a fresh reminder to employers of their obligation to comply with federal minimum wage and overtime pay regulations.

Enacted in 1938 and amended many times over the years, the FLSA deals with subjects ranging from child labor laws to the Family Medical Leave Act. However, its biggest areas of jurisdiction involve enforcement of the federal minimum wage and overtime standards. These apply to employees engaged in interstate commerce or employed by a firm engaged in the production of goods for commerce.

Enforcement is handled by the Wage and Hour Division of the U.S. Department of Labor (DOL). For any business being found in violation can be expensive. In Fiscal Year 2018, DOL brought 10,071 minimum wage charges against employers, collecting $32,377,444 in back pay for employees, and 11,018 overtime cases, collecting $194,203,854 that was due workers.

In addition, the maximum civil penalty for repeated and willful violations of the FLSA’s minimum wage and overtime provisions is $2,014—per employee. Because of this, employer liability can quickly become substantial if noncompliant pay practices affect large numbers of workers.

When an employer is found to have violated federal wage and hour laws, there is a good chance it also has been in violation of similar state statutes. It doesn’t end there. Tort lawyers and labor unions look for these kinds of violations to target employers for litigation and union organizing. On top of that, most legal assaults on independent contractor status are keyed to claims that the contractors were actually employees who come under jurisdiction of the FLSA and thus are due back minimum wages.

The law and its many changes are difficult to keep up with if you are not a legal specialist used to dealing with such matters (and not much easier if you are). DOL currently is working towards a revamp and refiguring of overtime standards in a rulemaking it is expected to adopt next year. If adopted, the maximum salary level where overtime can apply will increase from $455 per week ($23,660 annually) to $679 per week ($35,308 annually).

DOL also recently proposed changes in how employers go about figuring an employee’s regular rate of pay (RROP), which is used to help calculate whether an employee is exempt from overtime regulations, including compensation other than base pay.

The 30-Minute Audit

Keeping track of the FLSA’s rules and regulation changes is notoriously difficult for both small businesses and large companies with sophisticated human resources and legal teams, notes attorney Martin Luff of law firm Vinson & Elkins. The law keeps shifting, job duties evolve and how things work in practice don’t always match your policies, he warns. “If your business hasn’t looked recently at its wage and hour practices, use our quick checklist to perform a high-level, 30-minute desk audit to identify some of the most common blind spots that might need further review.”

The Vinson & Elkins checklist consists of answering five main questions:

1. Non-employed workforce. Does your business engage significant numbers of individuals as consultants or contractors? Has a legal analysis been done to confirm that they have been appropriately classified as non-employees?

2. Exempt classifications. When is the last time your organization looked at the different positions it treats as exempt and verified which exemptions apply and the factual bases on which it is relying for those exemptions? Do you have up-to-date job descriptions for the exempt positions?

If this hasn’t been done recently, look again at the various exempt positions, focusing particularly on the ones that might be close calls—for example, administrative exemptions that rely on the individual having “discretion and independent judgment” on “matters of significance.”

You also should make sure that your payroll department is only making permissible deductions (such as deductions for personal absences of a day or more) from exempt employees’ pay.

3. Time recording. When did you last look at how non-exempt employees record their time? Are the rules for clocking-in and clocking-out being followed? Has anyone recently reviewed your organization’s policy regarding when employees should clock in and out for meal and rest breaks and confirmed that those comply with FLSA requirements?

Also, take a look at how many overtime hours are being worked by your employees—if it’s a significant number, then the potential liability for non-compliance is higher, Luff points out.

4. Regular rate of pay calculations. In addition to their hourly wages, do you pay your non-exempt employees anything else, such as bonuses, commission, or allowances? If so, in most cases those amounts should be included in the RROP for overtime calculations.

5. State laws. Even if you feel comfortable that your business complies with the FLSA, have you stopped to think about any potential differences under state law? In many cases, compliance with the federal law gets you all the way, but some states (California being the example most commonly cited) have different rules that need to be followed.

“If you read through the points above and feel like you are in good shape, then that’s great news. But stay vigilant and keep checking these points regularly,” Luff advises. But if you read through these points and think your business might have blind spots, it’s time to follow up.

“Training and regular review will help guard against your business tripping up,” he stresses, adding, “Work with your in-house or outside counsel to make sure that any further investigations and discussions are privileged.”

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