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Is It Time for a Wage and Hour Audit? The Answer Is Yes.


Can your business shake a judgment of thousands of dollars in back wages, liquidated damages, and attorneys’ fees as a result of a Department of Labor audit or a lawsuit filed by employees alleging misclassification under the Fair Labor Standards Act (the "FLSA")? In May 2019, Steak ‘N Shake was ordered to pay $7.7 million in total damages after a jury found the company misclassified managers as exempt and therefore failed to pay overtime to 286 managers in the St. Louis market.

In the case, the Steak ‘N Shake managers regularly worked in excess of 40 hours in a single workweek, while they also performed many duties typically considered non-exempt, including washing dishes, cooking, cleaning, waiting tables, and running the cash register. Although their positions were titled "manager," the reality was that the duties of these "managers" contained little to no managerial responsibilities.

2018 saw a record increase in the number of wage and hour lawsuits filed against employers, and lawsuits like the one involving Steak ‘N Shake’s misclassification of its managers serve as a cautionary example to employers that wage and hour violations can quite possibly be the largest exposure item for an employer. As Steak ‘N Shake’s example illustrates, employers should conduct an internal wage and hour audit to reduce exposure for class and collective action lawsuits under the FLSA and applicable state wage and hour laws. An internal audit can help an employer uncover and correct any sources of risk before it turns into a wage claim.

During an FLSA audit, an employer typically reviews its policies and practices with the help of legal counsel to ensure that the following two primary focuses of the FLSA are being complied with: (1) all covered employees are paid at least the minimum wage and (2) all covered employees receive one and one-half times their regular rate of pay for all hours worked in excess of forty hours in a single workweek. As such, a internal wage and hour audit should generally include a detailed review of several items, including (i) exempt employee classifications; (ii) overtime and regular rate of pay calculations; (iii) timekeeping record, policies, and procedures; (iv) independent contractor classifications; and (v) any state law issues. Before conducting an audit, the employer should be committed to acting upon the results of the audit if any sources of risk are uncovered, which could include reclassifying certain positions or workers, changing duties of certain positions, or providing back pay.

An important consideration to any audit is the "good faith" defense to FLSA’s liquidated damages (also known as "double damages") provision. In a FLSA wage and hour lawsuit, if a worker is successful on their claims, they can not only recover unpaid wages, but also an award of liquidated damages equal to the amount the employee is owed in unpaid wages. If the employer can establish that a violation of the FLSA was in good faith and that there were reasonable grounds for believing the act or omission was not a violation of the FLSA, liquidated damages will not be imposed. Accordingly, a wage and hour audit, when done properly with legal counsel, provides employers the opportunity to receive legal advice and direction regarding wage and hour laws and regulations, which may then provide the employer with a good faith defense in subsequent litigation.

Another benefit to including legal counsel in an audit is the potential application of attorney-client or work-product privileges to the documents prepared as part of an internal FLSA audit. Attorney-client privilege applies to communications made between a client and legal counsel for the purpose of seeking legal advice, while the attorney work product doctrine protects information prepared by or for an attorney in preparation for litigation. Employers who utilize an internal human resources department or an external human resources consultant instead of legal counsel to conduct an FLSA audit likely will not be able to take advantage of these privileges.

Because the number of lawsuits continue to rise and wage and hour matters continue to result in extreme costs for employers, the best time for a wage and hour audit is now. For questions related to compliance with the Fair Labor Standards Act, state wage and hour laws, or other employment law matters, please contact a member of the Koley Jessen Employment, Labor and Benefits Practice Group.

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