The Importance of Internal Wage and Hour Audits

Wage and hour class and collective action claims remain some of the most common employment claims. In a regulatory environment where the federal Department of Labor (DOL) is operating with diminished resources, it is likely that private litigation in the wage and hour space will continue to rise. 

As employers who have faced these types of claims know, once litigation is filed, the cost of wage and hour mistakes adds up quickly, given the imposition of liquidated damages and attorneys’ fee awards. All employers would thus be wise to review their pay practices for potential risk.

The obvious place to begin such a review is with the pay practices for non-exempt employees. Common risk areas for non-exempt employee pay are:

1. Time Keeping Practices. Are employees required to punch in and punch out? If they change their clothes or need specialized protective clothing or equipment, are they punching in prior to changing? Where are the time clocks located in relation to employees’ work stations? One key to a thorough internal wage and hour audit is to run through and test the practices of employees when arriving and departing from the work site. Is there any working time (meetings, shift reports, etc.) that takes place before or after an employee shift that is not captured? All of these issues carry potential risk.
2. Non-Discretionary Bonuses. Non-discretionary bonuses to non-exempt employees are another area of risk for employers. Such bonuses are often infrequent and are seen as separate from the regular hourly pay and overtime process. However, in most circumstances they must be included in the regular rate calculation to determine the proper overtime premium. A key piece of information is the time period that the bonus covers. After the recalculation for the regular rate for that time period is complete, a “lookback” overtime payment must be made.
3. Other Regular Rate Calculation Issues. Common mistakes include failure to consider shift differentials, intra-week changes in hourly rate, and any other non-standard pay in the regular rate.  
4. Breaks. An internal review should also consider employee breaks. Are employees punching out for breaks? Are breaks automatically deducted from hours worked? If so, is there a process to correct the deduction when breaks are missed? Multistate employers should also be sure to consult specific break requirements for the states in which non-exempt employees work. States can vary greatly, from not requiring breaks at all to requiring specific paid or unpaid breaks for certain blocks of time worked.

Once a review of non-exempt employee time and pay practices is complete, employers are not done.

A key element of an internal wage and hour review is to remember that wage and hour claims could affect not only a company’s non-exempt employees but also exempt employees and contractors. 

Misclassification claims are a frequent element of wage and hour litigation. As part of a thorough wage and hour audit, employers should review all exempt positions to confirm they are properly categorized. While job duties are top of mind for this review, employers should not forget that salary threshold is also a key element of exemption from overtime. Many states have set salary thresholds that are higher than the federal requirement, which must also be taken into account. With respect to job duties, a good internal audit will look not only at job descriptions but also gain an understanding of what employees’ job duties actually are in reality. A job description that appears compliant for an exempt role will not save an employer from liability if the actual job duties are different. 

With respect to independent contractors, a review has the added complication that there are often competing and changing standards for contractor status. Employers must familiarize themselves not only with the standard used by the DOL and any applicable judicial tests but also understand whether there are additional requirements on a state level.

In sum, the wage and hour space is fraught with complicated requirements and risk. Regular audits are an essential tool to help employers avoid costly liability in collective and class action litigation.