They can do so by conducting comprehensive wage and hour audits. Such audits are prophylactic when a company evaluates itself to reduce litigation risk; other times, audits are conducted by a governmental agency like the Department of Labor, in which case a company can be fined or penalized for any wage-and-hour violations that are discovered. When a company takes it upon itself to order a wage and hour audit, special attention is paid to whether the business is compliant with respect to federal and state laws, and if so, to what degree.
Typically, such a self-imposed audit is performed by legal counsel to the extent the process requires a comprehensive understanding of the wage and hour landscape.
Also, retaining a legal professional to handle an internal audit will help preserve the attorney-client and work product privileges. More stress-inducing are wage and hour audits ordered and conducted by the government. As a rule, these inspections are more involved than company-mandated examinations, and they frequently take on an adversarial tone given that they oftentimes result in fines and penalties for any violations of prevailing law. Auditors will surely scrutinize how employee time is recorded, whether employees track their own hours, if all compensable time worked by non-exempt employees is captured, and the accuracy of timekeeping systems.
In terms of the latter, the inquiry may be more exhaustive in certain states. Likewise, auditors will work to determine if individuals classified as independent contractors actually qualify as such. To do so, relevant federal and state law should be applied.
California businesses, especially, must closely scrutinize worker classification since the enactment of AB 5 and its stringent presumption against independent contractor classification. Toward that end, consultation with experienced legal counsel adept at wage and hour audits is highly recommended. This blog post is not offered, and should not be relied on, as legal advice.
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Confirm the employer has a safe harbor policy and procedures to address improper salary deductions. If an employer has made improper deductions from salaries, it will not jeopardize employee exemptions so long as the employer clearly communicates a policy that prohibits improper deductions and provides a complaint mechanism; reimburses employees for improper deductions; makes a good-faith commitment to comply in the future; and does not willfully continue to make improper deductions.
Primary beneficiary test. The primary beneficiary test is flexible, and no single factor is determinative. Accordingly, whether an intern or student is an employee under federal law necessarily depends on the unique circumstances of each case. The test considers the following seven non-exhaustive factors to weigh and balance: The extent to which the intern and the employer clearly understand that there is no expectation of compensation.
Any promise of compensation, express or implied, suggests that the intern is an employee and vice versa. In particular: Confirm that the employer includes all applicable payments in calculating the regular rate and overtime pay e.
Confirm that deductions for the benefit or convenience of the employer e. Consider whether special requirements for overtime pay apply e. Employers that participate in the PAID program to resolve non-compliant overtime and minimum wage practices will not be subject to civil penalties or liquidated damages under the FLSA. Compensatory time. Determine whether the employer provides compensatory time to non-exempt employees in lieu of overtime. Note the following: Only public employers i.
Private sector employers must pay overtime when employees work more than forty hours in a week. Evaluate the propriety of the deductions that the employer makes.
For example, California prohibits employers from deducting from wages unless done so under certain circumstances set forth in Cal. If the state does permit wage deductions and permits them for the benefit or convenience of the employer e. Compensable time. Confirm that the employer pays the employees for such time.
However, the rounding policy must permit both upward and downward rounding. Further, the rounding policy must be neutral in practice i. In some cases, a facially neutral rounding policy may violate the FLSA if attendance and disciplinary policies result in employees regularly clocking in and out during particular timeframes such that rounding favors the employer over the long term.
Rounding problems can be spotted by analyzing samples of timekeeping records and determining whether there is a net neutral result on average. An audit should confirm that all employees are receiving the required minimum wage. For large employers, the main issue is complying with the growing patchwork of state and local laws with higher minimum rates. Further, an audit should explore whether employees with relatively low hourly rates are paying for any work-related expenses either out-of-pocket or through payroll deductions that might push their rates below the minimum.
Special pay arrangements should get special attention in the audit. Examples include day rates, piece rates, fee basis, fluctuating workweek method for overtime pay, commissions, bonuses, comp time, and tip credits. Such practices are frequent targets in litigation and can easily run afoul of federal and state regulations.
Likewise, use of unpaid interns and volunteers should be examined carefully. The audit should involve review of written policies on pay and timekeeping for legal compliance and best practices.
Such a provision can effectively rescue exempt status from improper deductions — if drafted properly and enforced. It also may be helpful to review wage payment notices required under state law, mandatory workplace posters, and, if applicable, contracts and plans governing commissions and bonuses. An audit should also verify that time and pay records include sufficient detail and are being kept for the necessary amount of time under federal and state law.
Measures should be taken to protect attorney-client privilege during the audit. Otherwise, any adverse findings may be discoverable in later litigation. Counsel should have a central role in directing and conducting the audit, as opposed to human resources or non-legal consultants.
An initial memorandum can summarize the anticipated audit process and make clear that it is being conducted to provide legal advice or in anticipation of litigation. The underlying payroll, timekeeping, and other records are not privileged and do not become so because of the audit. However, communications and analysis of such records should all be marked as privileged and kept confidential among need-to-know company contacts.
If a lawsuit is eventually filed regarding the pay practices reviewed in the privileged audit, the company and its counsel must decide a whether to assert a good faith defense, which an employee may argue results in waiver of privilege over the audit, and b whether to preemptively waive privilege over the audit and use it to establish the good faith defenses.
The answer to these questions will likely depend on the analysis provided during the audit or in a final audit report and whether the company took any remedial measures as a result of the audit.
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