How to limit liability under wage audits

The Wage and Hour Division of the Department of Labor is tasked with ensuring that employers comply with the Fair Labor Standards Act. The FLSA regulates minimum wage, overtime pay, equal pay and child labor. An employer found in violation of the FLSA may be obligated to make payment for back wages and liquidated damages equal to the amount of back wages. Civil penalties may also be assessed for child labor violations and for repeat and/or willful violations of minimum wage or overtime requirements. Furthermore, willful violators may face criminal penalties including fines and imprisonment. In fiscal year 2011, the WHD recovered more than $224.8 million in back wages from employers, putting its five-year cumulative back wage collection total at nearly $1 billion. Additionally, the WHD collected millions more in civil money penalties.

WHD audits materialize in a variety of ways. An audit may be initiated by complaints from current or former employees, competitors, unions or trade associations. The WHD routinely conducts industry-specific audits, typically targeting low-wage industries. An employer may also be chosen for audit by meeting criteria leading the WHD to believe it is a potential FLSA violator, or completely at random. Although a WHD investigator may give an employer notice of an upcoming audit, there is no requirement that the investigator do so. An investigator may arrive at a business to initiate an audit covering years of activity, unannounced. As a result, it is best to proactively limit one's exposure to potential FLSA violations long before being contacted by a WHD investigator. Preventative planning can greatly reduce an employer's potential liability should an audit take place.

By far, the largest contributor to wage and hour violations relates to improper overtime compensation. Taking the following steps will help eliminate the majority of FLSA overtime violations:

Correctly classify employees

Correctly classifying employees as exempt or non-exempt is imperative to ensuring employees are paid correct wages. Under the FLSA, a salary test and a duties test must be met for an employee to qualify as exempt from overtime. Under the salary test, employees must be paid at least $455 per week. Additionally, the employer must pay the employee's salary regardless of the amount of work performed in a particular pay period. Exempt employees must also meet the duties test. A variety of exemptions exist, each having unique elements defined by the FLSA. Common exemptions exist for executive, administrative and professional employees. Make sure employees that are classified as exempt meet the criteria for an exemption. Job titles or descriptions alone are not sufficient to qualify an employee as exempt. Rather, the employee must meet each prong of the applicable exemption test.

Properly calculate overtime payments for hourly wage earners

Non-exempt employees working more than 40 hours within a work week are entitled to compensation at a rate equal to 150 percent of the employee's regular rate of pay (in Nevada employees who are paid a base rate equal to 150 percent of the minimum wage or less per hour may also be entitled to overtime if they work more than eight hours in any workday). An employee's overtime rate of pay is not determined by the hourly wage alone, but is determined by the regular rate of pay, which includes hourly pay rates, commissions, regular bonuses, piecework wages, and other compensation. Make sure all applicable compensation earned during a pay period is considered in establishing the regular rate of pay on which overtime compensation is based.

Pay overtime to salaried employees where applicable

As explained above, salaried employees are not exempt from overtime compensation if they do not meet the criteria for an exemption classification. Non-exempt employees paid a salary are entitled to overtime pay for any hours worked in excess of 40 hours in a workweek.

Compensate employees for off-the-clock work

Employees generally must be paid for all time worked which benefits the employer. Checking and responding to work emails after work hours, pre-shift meetings, and preparing equipment for the workday all constitute activities for which an employee is entitled to compensation. Additionally, under the FLSA, rest periods or breaks of less than 20 minutes must be paid. Lunch breaks of 30 minutes or longer can be unpaid as long as the employee is free to use the time for his or her own purposes. Employers should establish firm guidelines to ensure that non-exempt workers do not perform compensable work outside the employee's work schedule.

Conduct a self audit

Employers should conduct a self audit to identify areas of potential noncompliance with the FLSA. Employers may benefit from consulting counsel to participate in a self audit to identify areas of potential noncompliance. Whenever compliance issues are identified, an action plan should immediately be set in place to remedy violations. Enacting new procedures to ensure future compliance not only reduces an employer's risk of future liability, but may also be helpful to mitigate against additional penalties should a WHD audit be conducted covering the period during which violations took place. Investigators may consider an employer's willingness to make changes resulting in compliance with the FLSA in determining potential fines and penalties.

Although full compliance with the FLSA may be easy for employers to overlook, simple affirmative steps can be taken to significantly reduce, if not altogether eliminate, FLSA violations. For employers hoping to avoid contributing to the hundreds of millions of dollars collected by the WHD each year, the idiom "an ounce of prevention is worth a pound of cure" rings true.

Joshua M. Woodbury is an associate with Woodburn and Wedge practicing in the areas of employment law and civil litigation. Contact him at 775-688-3000 or jwoodbury@woodburnandwedge.com.