Employers Should Be Prepared for a DOL Wage and Hour Audit

Many employers had to make fast changes to their business models in response to the COVID-19 pandemic. They may have transitioned employees to remote work, reassigned job duties, hired contractors and made other decisions that impact pay and work arrangements. In light of these changes, businesses should ensure they are prepared for a wage and hour audit.

Tom Gies, an attorney with Crowell & Moring in Washington, D.C., said employers should review their wage and hour practices to ensure continued compliance as roles evolve.

At the federal level, the U.S. Department of Labor's (DOL's) Wage and Hour Division enforces a number of employment laws, including the Fair Labor Standards Act (FLSA), and the department's investigators can audit employers for violations.

Employers should be ready to quickly respond, as DOL investigators may, but are not required to, provide employers with advance notice of a visit. "The investigator has sufficient latitude to initiate unannounced investigations in many cases in order to directly observe normal business operations and develop factual information quickly," according to the department.

"Don't wait until the investigator comes knocking at your door," said J. Hagood Tighe, an attorney with Fisher Phillips in Columbia, S.C. "Take the opportunity now to internally audit your pay practices to ensure employees are being paid properly."

Review Practices for Compliance

"Compliance with applicable federal and state wage and hour laws should remain a top priority for employers," said Steven Pockrass, an attorney with Ogletree Deakins in Indianapolis.

Under the FLSA, employees must be paid at least $7.25 an hour and 1 1/2 times their regular rate of pay for all hours worked beyond 40 in a workweek, unless they fall under an exemption. Employers should note that the FLSA sets the minimum requirements and that many states have higher minimum wages and more-generous rules for paying overtime premiums.

DOL investigators will gather data on wages, hours and other employment conditions to determine if a business is complying with federal law, and they may recommend changes in employment practices when violations are found.

During investigations, Pockrass said, the DOL always looks for errors with respect to how overtime is calculated, so it is important that employers calculate overtime properly. Common errors include failing to consider shift premiums and various types of bonuses as part of the overtime calculations, he noted.

"The DOL also will ask about meal breaks during its investigations," Pockrass added. If meal breaks are unpaid, they should be uninterrupted and last at least 30 minutes. Nonexempt employees should not perform work during their unpaid meal breaks or anytime they are off the clock, he said.

Tighe suggested that employers double-check to ensure nonexempt employees are paid for all time worked. "Be sure overtime calculations, unpaid lunch breaks, paid rest breaks and general record keeping are all properly handled," he said.

Employers also should ensure that exempt employees are properly classified and not subject to impermissible deductions. Employees may be exempt from the FLSA's overtime provisions if they meet specific criteria under the executive, professional, administrative and outside sales exemptions.

Businesses should continue to pay close attention to jobs that are "on the bubble," Gies said. He noted that an entry-level bookkeeper may clearly be a nonexempt employee and a chief financial officer may clearly be an exempt executive, but some jobs in between the two will be closer calls.

Periodically reassess those roles and their job duties to ensure workers are properly classified, Gies suggested.

Tighe said businesses also should scrutinize their use of independent contractors. The DOL currently evaluates worker classification under an established multifactor test, though President Joe Biden has advocated for a more stringent standard.

What to Expect from the DOL

The DOL's Wage and Hour Division doesn't usually disclose the reason for an investigation, but many audits are prompted by worker complaints, which the department keeps confidential. 

Additionally, businesses in certain industries, such as agriculture, food service, hospitality, janitorial services, and others that typically employ low-wage earners, may be targeted for investigation.

When investigators make a worksite visit, they will identify themselves and present official credentials to the employer, according to the DOL. "The investigator will explain the investigation process and the types of records required during the review."

Among other steps, investigators may review payroll and time records, privately interview employees to verify employer records, and meet with the employer to discuss the outcome of the investigation and any actions that must be taken to correct violations. For example, an investigator may ask the employer to calculate and pay back wages.

"Employers may be represented by their accountants or attorneys at any point during this process," the DOL said. The employer also may present additional facts for the investigator to consider if violations are discovered.

[Want to learn more about wage and hour compliance? Join us at the SHRM Annual Conference & Expo 2021, taking place Sept. 9-12 in Las Vegas and virtually.]

Tips for Employers

When conducting an internal audit of wage and hour practices, Tighe recommended that employers involve their labor and employment counsel so that the results are privileged.

Employers should have strong policies and training programs in place to ensure compliance with applicable wage and hour laws, Pockrass said. "Such policies should require nonexempt employees to record all time worked and should prohibit supervisors and managers from pressuring or coercing employees not to record all of their time."

He recommended that employers create a mechanism and procedures so that time-entry errors can be corrected and the reasons for the corrections can be properly documented.

Employees may be disciplined if they work more hours than scheduled, work during a meal break or otherwise work off the clock, Pockrass said, but employees still need to be paid for the time they worked.