Q&A: How To Do an Internal Wage & Hour Audit

Written by Jo McClure, CPP | Dec 14, 2017 1:00:00 PM

Recently, we were asked if we have any recommendations on how to conduct an internal wage and hour audit? As a top PEO in Kansas City and the surrounding areas, we were happy to provide expert HR advice. Here's how to perform an internal wage and hour audit.
First, kudos to you and your organization for considering this practice. Some organizations don’t conduct wage and hour audits because they can be costly and time-consuming.

However, choosing to conduct them shows that you are being proactive and trying to protect your organization from legal and financial liability due to non-compliance with the federal Fair Labor Standards Act (FLSA) and state wage and hour laws. You should conduct these audits periodically, such as at the beginning of your fiscal year, when your organization undergoes restructuring, or when there are significant changes to FLSA regulations and state wage and hour laws.

As general guidelines, when you conduct an internal wage and hour audit, consider the following:

Determine the Nature and Scope of the Audit

Which employees, positions, and issues do you want to review? Which records will you review? For example, job descriptions, payroll records, performance documents? What changes in the law may be driving the audit?

Determine Who in Your Organization Should Lead the Audit

Typically, these audits are led by a senior human resources leader or a senior company manager, though employers may choose to conduct them under the direction or guidance of inside or outside legal counsel for compliance or other legal strategy purposes. If the audit is not conducted under the direction of legal counsel, it’s always a good idea to consult your employment law counsel or tax advisor (depending on the issue) about any legal or compliance questions that may arise during the process.

Identify What You Want To Document About the Audit

At the very least, document the scope, purpose, and results of the audit. As a best practice, you should also document who is conducting the audit, any issues discovered, and the plan for how you will address these issues.

Consider Some of the Common Issues That May Drive Department of Labor (DOL) Audits and Include Them in Your Audit

DOL audits are usually done in response to complaints received about an organization. Some of the common complaints revolve around whether:

Workers are properly classified as either: (1) exempt or nonexempt from overtime, or (2) independent contractors or W-2 employees.
Overtime pay is properly calculated.
Compensable time is accurately captured and recorded.
Employees are given adequate opportunities to take meal and rest breaks.
Employers are complying with scheduling regulations and child labor laws.
Payroll practices meet various requirements.

Keep in mind the DOL can conduct a wage and hour audit at any time and is not required to provide you with notice. Additionally, many factors — internal and external — could cause your organization to suddenly be out of compliance with wage and hour laws. Incorporating periodic internal wage and hour audits into your annual business practice as a precautionary measure may help minimize risks to your organization.

Finally, as employment law experts at Constangy, Brooks, Smith & Prophete, LLP suggest while conducting an internal audit is important, be aware of other legal implications that could arise from the auditing process. If you discover federal or state wage and hour law violations during the audit, you could expose your company to a willful violation of wage and hour laws in subsequent litigation if you do not correct the issues immediately. Consulting with outside legal counsel during your audit process can help mitigate your risks in the event that your wage and hour practices are challenged.

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