Rise in Wage and Hour Audits: What Employers Should Know
Introduction
Calendar year 2024 is expected to be a busy one for federal wage and hour investigators, according to the US Department of Labor and first quarter observations of legal and human resources professionals across the country. The following is intended to serve as general guidance regarding the wage and hour audit process and provide an overview of some of the more commonly missed compliance items, which can result in penalties if violations are found. Penalties can be enforced for violations going back two years, and up to three years if the noncompliance was found to be willful.
Background
The United States Department of Labor - Wage and Hour Division (“DOL WHD” or “WHD”) is the federal agency that enforces the Fair Labor Standards Act (“FLSA”). Specifically, an audit from WHD is intended to confirm that employers adhere to the FLSA requirements, including paying minimum wage and overtime, keeping accurate records, and complying with child labor laws. These audits may be brought without notice and at random, though certain “low wage, high violation” industries including food service, construction, healthcare, and agriculture, may be more likely to be subject to a WHD audit[1].
Why is There an Expected Increase in Wage and Hour Audits for 2024?
An expected increase in the amount of wage and hour audits in 2024 stems from the DOL’s significant budget increase. In total, the DOL’s discretionary budget was boosted to $15.1 billion, an 11% increase from the previous year. A key motivation for increasing the budget was to improve enforcement of DOL regulations. Between 2016 and 2020, DOL worker protection agencies lost approximately 15% of their staff, which affected the DOL’s ability to conduct investigations and perform audits. As a result, the increase in the budget aims to enable the DOL to perform more enforcement and regulatory work, including wage and hour audits.[2]
Common Wage and Hour Mistakes
The following are common wage and hour mistakes which may put employers at risk for findings of violations and assessment of penalties. Such penalties may include backpay and liquidated damages in an amount equal to the assessed backpay penalty (effectively creating a double damages penalty). If an audit proceeds to litigation, attorneys’ fees and personal exposure based on individual liability can accrue as well.
- Improper Classification: Employers are required to pay all non-exempt employees overtime pay and minimum wage. As a result, proper classification of exempt employees is critical. A determination that an employee is exempt requires an evaluation of both the employee’s job duties and their total compensation.
- Job Duties Test: Employees who primarily perform executive, administrative, professional, computer-related, or outside sales duties may be properly classified as exempt, but only if they fulfill specific duties associated with the job. During a WHD audit, an investigator may observe an employee who is classified as exempt to ensure that all aspects of the applicable duties test are met. If the investigator observes that the employee’s actual duties do not align with regulatory duties test, a violation may be found, and penalties may be assessed.
- Compensation Test: To be properly classified as exempt, an employee must be paid in accordance with applicable regulations. Certain FLSA exempt employees must be paid at least $684 per week[3], and that amount must not be subject to reduction because of variations in the quality or quantity of the employee’s work. Deductions may only be made from an exempt employee’s pay for a very narrow set of reasons set forth in the regulations. Any improper deductions can result in a finding that the employee was not paid on a salary basis, and therefore misclassified as exempt. Similarly, outside sales and computer-related positions must be compensated in accordance with applicable wage and hour regulations, and failure to pay these employees properly can result in a finding of misclassification.
- Independent Contractors: Companies that engage independent contractors to perform labor may also face penalties for violations if the contract laborers are found to be employees as a matter of law and are not compensated in accordance with the FLSA. Whether a worker is a contractor or an employee under the FLSA is a fact-specific question which depends on the economic realities of the relationship. The legal test for independent contractor classification was recently updated by the DOL this year[4] and will almost certainly be a focal point for wage and hour auditors this year.
- Improper Deductions from Non-Exempt Employees’ Pay: Deductions from wages may violate FLSA requirements if they reduce the wages of a non-exempt employee below the minimum rate or overtime pay due under the FLSA.
- Failure to Maintain Records: Employers are required to maintain specific records relating to each of their non-exempt employees[5], and the failure to maintain said records is a violation.
- Child Labor Violations: The FLSA dictates the number of hours of work for minors, when working hours may occur, and the types of activities which 14-17 year-olds can perform. Additionally, the FLSA’s youth minimum wage provision allows employers to pay a subminimum wage to minor employees for their first 90 consecutive calendar days of employment. After the first 90 consecutive days, employers must pay the federal minimum wage. Strict adherence to the FLSA’s requirements for child labor is a must, and several of the nuances surrounding child labor can be easy to miss.
- Regular Rate Issues: The FLSA requires employers to pay non-exempt employees overtime pay at one-and-one-half times their “regular rate” for overtime hours worked. This regular rate may be more complex than the employee’s normal hourly rate. It can be easy to inadvertently miscalculate the regular rate, which is determined by dividing all compensation received during a workweek by the number of hours worked during such workweek, subject to certain regulatory exceptions.
Ways to Prepare for a Wage and Hour Audit
Because a wage and hour audit can be announced or unannounced, proper preparation for the auditor’s review is key. Employers can stay prepared for a wage and hour audit by reviewing the company’s time tracking procedures to ensure the recorded time worked by employees is accurate. Additionally, employers should always make sure that all required labor law posters are updated, visible, and posted in common areas.
Once an employer becomes aware that there is going to be a WHD audit, the employer should immediately collect wage records. The collection and organization of these records allows the employer to find any missing or misfiled records before the auditor arrives. Employers should also prepare for the initial management interview during the audit. Preparation for the interview includes:
- Knowledge regarding and an ability to communicate how overtime is paid, time is recorded, and whether any automatic deductions exist;
- Familiarity with all job titles and duties in the company;
- Ability to explain which employee roles are exempt from overtime and the reason for those exemptions; and
- Familiarity with FLSA and related employment laws.
Koley Jessen’s Labor & Employment attorneys have a depth of experience handling and understanding the complexities associated with WHD audits, and we have a wealth of resources to help businesses prepare for an audit or fine-tune their existing payroll and HR policies and practices. We encourage you to contact a member of the practice group to discuss any of the topics addressed in this article.
Special thanks to KJ Summer Associate Marin Coughlin for assisting in the research and preparation of this update.
[1] https://www.dol.gov/agencies/whd/data/charts/low-wage-high-violation-industries
[2] Fiscal Year 2024 – Department of Labor Budget in Brief, 3.
[3] Subject to change pending the release of a new wage and hour rulemaking, expected to come out later this year.
[4] https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking
[5] The following is a listing of the basic records that an employer must maintain: employee's full name and social security number; address, including zip code; birth date, if younger than 19; sex and occupation; time and day of week when employee's workweek begins; hours worked each day and total hours worked each workweek; basis on which employee's wages are paid; regular hourly pay rate; total daily or weekly straight-time earnings; total overtime earnings for the workweek; all additions to or deductions from the employee's wages; total wages paid each pay period; and date of payment and the pay period covered by the payment.
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