Conducting an Internal Wage and Hour Audit: Part 3

February 1, 2022

Photo courtesy of Forester Haynie

This guide addresses wage and hour audits under the federal Fair Labor Standards Act (FLSA),  including preliminary issues private sector employers should consider, common wage and hour  issues to evaluate, options for responding to problems discovered during the audit, and best  practices going forward.  

Responding to Problems Discovered During an Audit and Best Practices Moving Forward 

1. Remitting Back Pay 

2. Ensuring Future Compliance 

3. Best Practices

Responding to Problems Discovered During an Audit 

Once a wage and hour audit is complete, employers should decide how to address potential  compliance issues they discovered, including: 

• Whether to remit back pay to employees who may be owed back wages. 

• How to correct compliance concerns on a going-forward basis, such as how to reclassify employees potentially misclassified as exempt employees or independent contractors. 

• How to effectively communicate changes to employees. 

1. Remitting Back Pay 

Through an audit, an employer may determine that certain employees are entitled to back pay or  benefits if, for example: 

• An employee’s regular rate of pay or overtime pay was not (or may not have been) properly calculated. 

• An employee was not (or may not have been) adequately compensated for all compensable time because: 

• the employee was (or may have been) misclassified as an exempt employee or an independent contractor; or 

• not all working time was recorded. 

The proper course of action depends on the situation.  

Employers that remit back pay and benefits to employees may reduce the risk of a lawsuit, in  certain circumstances, or decrease their damages exposure.  

Employers generally cannot get a waiver of FLSA claims from employees except through settlement  of a private litigation or with DOL oversight, but employers that choose to remit back pay and  benefits should consider asking employees to sign an acknowledgment that they have been paid all  wages and benefits due as of the date of the acknowledgment.  

Determining How Much Back Pay to Remit 

How much back pay employers should remit when an audit uncovers a possible violation is highly fact  specific. 

Employers should consider: 

• Whether any unpaid hours should be paid at the straight or overtime rate. 

• What period should be covered by the back pay. For example, employers may pay back pay for the entire period of the possible violation or for the longest applicable statute of limitations period, such as: 

• two years, the statute of limitations under the FLSA for non-willful violations (29 U.S.C. § 255(a)); 

• three years, the statute of limitations under the FLSA for willful violations (29 U.S.C. § 255(a)); or 

• the statute of limitations period under applicable state law, if longer than that of the FLSA (for example, the statute of limitations under New York’s 

wage and hour law is six years (N.Y. Lab. Law § 198(3))). 

• What taxes and benefit contributions correspond with back pay. 

Determining Who Should Receive Back Pay 

Like the amount of back pay, determining which employees receive back pay is a highly fact-specific  question.  

Employers may be inclined to pay only certain employees, for example: 

• Current employees, because locating former employees can be time 

consuming and costly. 

• Employees in certain positions with the most significant risk of liability. 

However, limiting back pay to only some employees leaves the employer exposed to legal action,  including possible collective or class actions, by employees who may learn about payments made to  others. 

2. Ensuring Future Compliance 

Employers should take steps to remedy any compliance issues going forward,  including, for example: 

• Reclassifying exempt employees as nonexempt or independent 

contractors as employees. 

• Changing an employee’s duties or compensation to satisfy exemption 

requirements. 

• Revising payroll processes to achieve proper wage rate calculations. 

• Implementing safeguards to ensure accurate timekeeping.

To limit liability and concerns among employees, employers should consider: 

• Implementing changes strategically. For example, by: 

• reclassifying an individual position from exempt to nonexempt when a new employee enters the position or when the position changes in a relevant way; 

• reclassifying multiple employees in conjunction with other employment audits or updates (such as including new or updated job descriptions and 

classifications at the same time as distribution of a new employee handbook); 

• restructuring jobs in conjunction with performance reviews (for example, by adding exempt duties or increasing the employee’s ability to exercise discretion and independent judgment); 

• addressing concerns about OTC work with general policy updates (such as addressing timekeeping expectations for work-related smartphone use as part of a general mobile device policy); and 

• addressing multiple wage and hour issues as part of a general employment audit (such as by changing wage and hour policies and procedures along with other policy revisions as part of an organization-wide best practices update). 

• Advising supervisors of any changes in advance and preparing them to answer employee questions. Employers should also provide training and talking points to supervisors when appropriate. 

• Clearly communicating new policies and expectations to employees and providing training.  

3. Best Practices Going Forward 

Employers may reduce the risk of future violations by: 

• Implementing written payroll and compensation policies that: 

• define the workweek and workday; 

• set regularly scheduled paydays in compliance with applicable federal, state, and local law; 

• prohibit improper salary deductions; 

• include overtime policies and procedures; 

• set timekeeping and recordkeeping procedures, including discipline for fraudulent timekeeping; and 

• include a complaint and dispute resolution mechanism for employees who believe they have not received adequate pay (for example, for employees who believe improper deductions have been taken from their pay or who dispute the amount of their overtime pay). 

• Providing training to employees on wage and hour policies, including: 

• training for new hires during orientation; 

• training for newly promoted managers and supervisors; and 

• periodic refresher training. 

• Revising job descriptions to ensure they accurately reflect the job duties and responsibilities of each position. 

• Implementing a program and atmosphere of compliance to encourage employees to accurately record time, including: 

• requiring nonexempt employees to review their timekeeping records each pay period and sign an acknowledgment or otherwise confirm in writing that all hours worked are accurately recorded (for a sample form, see Standard Document, Employee Certification of Hours Worked); 

• requiring all exempt employees to review their respective job descriptions annually and sign an acknowledgment or otherwise confirm in writing that their duties are accurately reflected; and 

• having supervisors and managers monitor employee timekeeping, meal periods and rest breaks, and other wage and hour practices to encourage compliance with the employer’s policies. • Complying with recordkeeping, notice, and posting requirements, including posting the FLSA Minimum Wage Poster and providing tipped employees with the tip credit notice.

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