The Benefits of a Proactive Wage and Hour Audit: A Consultant’s Perspective

Worried about labor law compliance? A wage and hour audit can help. This guide explains the process of a wage and hour audit, its importance, and how it promotes compliance.

Key Takeaways

• Proactive wage and hour audits are used to identify compliance issues and avoid costly litigation.
• Understanding and adhering to wage and hour laws, such as employee classification and overtime pay, is essential to prevent administrative errors and potential fines.
• Engaging experts in the audit process can enhance compliance efforts and demonstrate a commitment to fair labor practices, benefiting employee satisfaction and organizational reputation.

Introduction–Understanding Wage and Hour Compliance

Wage and hour compliance entails an understanding of federal, state, and local laws.  Typically there is emphasis on employee classification, overtime pay, meal/rest periods, minimum wage, PTO pay policies, and record-keeping requirements. Employers are required to adhere to each of these standards, and failure to do so can result in wage and hour violations. Misclassification of employees—whether exempt employees vs. nonexempt employees or employees vs. independent contractors—is a particularly costly error and one to avoid.

Many organizations struggle with compliance due to evolving legislation, differing jurisdictional standards, and/or insufficient training for HR personnel and managers. For example, the definition of overtime as well as the calculation of overtime pay can vary significantly between jurisdictions. Intentional or not, this complexity often leads alleged unpaid wages, interest, and/or statutory penalties, to go along with litigation defense costs.  Understanding the intricacies of wage and hour laws and taking proactive measures can significantly reduce the risk of violations and litigation.

In the ever-evolving landscape of labor laws, employers who are vigilant can avoid costly and reputation-damaging wage and hour litigation. Particularly under California’s reformed PAGA law, preventative wage and hour audits can suggest that the employer is taking reasonable steps to address potential non-compliance.  A proactive approach can also show employees and stakeholders that the organization values fairness and transparency in its day-to-day operations.  Conversely, employers who do not take a preventative approach can face significant financial, legal, and reputational risks. 

This guide offers a consultant’s perspective on wage and hour audits, the process involved, and steps to reduce risks and ensure compliance.

What is a Proactive Wage and Hour Audit?

A proactive wage and hour audit generally focuses on two categories: (i) operating practices and procedures, and (ii) historical time and pay data. Each of these steps plays a crucial role in identifying and addressing potential compliance issues. Oftentimes, an outside consultant is retained to review these materials. The following subsections delve into each step of the audit process in detail, offering practical tips and insights to help employers conduct effective wage and hour audits.

The Process of a Wage and Hour Audit

The process of a wage and hour audit aims to confirm correct payroll practices and compliance with labor regulations. Conducting an audit involves several steps, each designed to identify and address potential compliance issues.

Review Written Policies

The first step in the audit process is reviewing written policies. The goal of this step is (i) to assess whether the company’s policy documents are/are not aligned with the current labor laws, (ii) to reduce misunderstandings, and (iii) to evaluate whether employees are aware of expectations and responsibilities. Specific areas to review include but are not limited to the following topics:

• • Attendance and tardy policies
  • Meal and rest period policies
  • Time rounding and auto-deducting of meal periods
  • Non-discretionary bonuses and the calculation of premium pay
  • PTO pay

Updating company policies regularly to reflect changes in labor laws is vital. Clear reporting procedures in company policies can also prevent misunderstandings and disputes, fostering a more transparent and equitable workplace. Thoroughly reviewing and updating written policies reduces the risk of wage and hour violations and fosters a more compliant and fair work environment.

Analyze Time and Pay Records

Another crucial step in the audit process is analyzing time and pay records. Typically, the purpose of this step includes an evaluation of the following interrelated practices:

• • Whether the organization accurately tracks compensable time
  • Whether meal periods are accurately recorded
  • Whether the regular rate of pay is properly applied to premium pay

Ensuring that records are retained for the legally required duration and are accessible when needed is essential. Evaluating the reliability of time-tracking systems helps ensure that compensable time is being recorded. Employers should not assume that timekeeping and payroll vendors’ software settings comply with the law, as liability falls on the employer. It is also important to assess potential claims for compensable time off-the-clock and identify gaps or inconsistencies in historical records that could invite legal scrutiny. Thoroughly analyzing time and pay records reduces the risk of wage and hour violations and can create more internal processes.

Engage an Outside Expert

There are several potential advantages to retaining an outside expert:

• • First, an outside expert can identify areas that might lead to litigation
  • Second, an outside expert may be able to build some automated (or near automated) systems for identifying potential non-compliance on a recurring basis
  • Third, retaining an outside consultant expert can send a signal to employees and regulators that the employer is genuinely committed to implementing best practices.

Summary

In summary, wage and hour litigation poses significant financial and reputational risks for employers.  A thorough audit can reduce these risks by a significant margin. Understanding wage and hour laws, getting out in front of potential conflicts, and engaging experts can help identify and address potential compliance issues before they escalate. By taking these steps, employers can demonstrate a commitment to fair labor practices and create a more transparent and equitable workplace.

Frequently Asked Questions

What is the main goal of a proactive wage and hour audit?

The main goal of a proactive wage and hour audit is to identify and address potential non-compliance issues, helping employers mitigate the risk of litigation before problems arise. This ensures a more compliant and harmonious work environment.

How often should employers conduct wage and hour audits?

The short answer is that it depends.  Annual or even quarterly audits can enhance compliance with labor laws and allow the employer to address any potential issues proactively. Regular audits help maintain fair practices and protect both the organization and its employees.

What are some common issues that wage and hour audits uncover?

Wage and hour audits typically uncover misclassification of employees, discrepancies in time and pay records, deficient meal periods, inadequate pay practices, and/or outdated or non-compliant written policies. Addressing these issues promptly is crucial to ensure compliance and avoid potential penalties.

Why is it valuable to engage an outside consultant in the audit process?

Engaging an expert or consultant in the audit process is crucial for gaining objective insights and expertise in compliance matters, which helps identify gaps and implement effective solutions. Their specialized knowledge ensures a thorough and accurate audit outcome.

How can proactive audits benefit employee satisfaction?

Proactive audits enhance employee satisfaction by promoting fair labor practices and fostering a culture of transparency and equity, ultimately building trust and loyalty among employees.  What an employer’s leaders don’t know can hurt them.