Five essential steps to prepare for a wage-and-hour audit

Government investigations are on the rise and employers may face major consequences if they’re not in compliance, warns one industry lawyer

Government-initiated wage-and-hour audits are on the rise and employers that aren’t in compliance may face major consequences, warns one leading business lawyer.
“If the employer is not in compliance, then the government is authorized to issue a demand for payment of past wages and/or penalties,” explains Julie Vogelzang, a partner at Duane Morris LLP.
“Under federal law, the DOL is authorized to double any back wages that are deemed to be owed,” she continues. “This is serious business.”
While many of the investigations are triggered by employee complaints, some are conducted as a result of the government’s particular interest in a specific industry or sector, reveals Vogelzang.
“Recently, the DOL has shown interest in the construction, restaurant, hospitality and healthcare industries,” she told HRM. “That said, no industry is insulated from a government audit.”
Once the government enters a workplace, it is not limited in any particular way to which wage-and-hour practices and policies it can review.
Many field agents have a bulleted list of items that they audit, including which workers are eligible for overtime, how overtime is calculated, whether additional compensation awarded to employees is included in the overtime calculations (such as bonuses or commissions), leaves of absence, employment of children, etc. State enforcement agencies will also analyze state-specific issues, such as compliance with meal and rest break laws, paystub rules and final payroll.
To clear up the confusion and put any HR professional’s mind at rest, Vogelzang shared her five essential steps to achieving compliant and minimizing an investigation or, better yet, avoiding one altogether.
Step 1: HR Audit
As everyone who runs a business knows, a myriad of employment rules cannot be covered by an article like this one. However, key items that employers should focus on to ensure legal compliance include policies, practices and training related to meal and rest breaks, overtime, off-the-clock work and leaves of absence/handling employee medical conditions. The human resources team (HR) should set up a schedule for internally auditing the company’s key wage-and-hour practices, which can be done on a rolling basis throughout the year. The goal is to set up a system that is consistent and relatively easy to track.
As one example, the HR team could audit policies and practices in six-month increments. Under this protocol, HR could review policies and practices associated with meal and rest breaks in the first half of the year. The second half of the year could be dedicated to auditing timekeeping and pay policies. The following year, the team could audit overtime practices in the first half of the year and review employee documentation materials (such as meal waivers, acknowledgments, arbitration agreements, orientation materials and handbooks) in the second half of the year. In the next year, the team could review all leave policies, documentation and practices relating to leaves and medical conditions and update each of these items consistent with changing laws.
Regardless of what topics the company chooses to review and when, it should design a quality check process as it relates to these itemsan internal structure that requires reviewing and updating the protocols in place for these key practices. This internal audit should be documented as well so that it can be reviewed and tracked over time. However, in those instances where the company is in non-compliance, it may benefit from engaging legal counsel to assess the issues under the attorney-client privilege so that the analysis and documentation is protected and confidential.
Step 2: Written Acknowledgments Signed by Employees
The second step is to implement written acknowledgments signed by employees who agree that they have complied with company policy. This is likely to particularly helpful for the following items:

  1. acknowledgment that off-the-clock work is prohibited and the employee will not do it;
  2. acknowledgment of meal and rest break policies and that the employee will comply with them;
  3. written meal waivers for those circumstances where they are appropriatenamely, if the employee’s shift will be completed within six hours, they can waive their first meal break. A second meal break can be waived if the first meal was in fact taken and the working time for the day is 12 hours or less;
  4. acknowledgement of a timekeeping policy and the fact that the employee is required to accurately report all time worked; and
  5. signature of receipt and acknowledgement of the handbook, particularly the at-will policy of the company.

These items are separate, stand-alone documents that should be put in the employee’s personnel file. During the audit conducted by the company, personnel files should be reviewed to ensure such key documents are part of the files.
Given the steady rise of class actions, employers should also consider displaying a poster or notice regarding the key policies identified above. Such a measure is easy, inexpensive and could, arguably, limit or cut off a claim by an employee that the employer does not have or follow legally compliant policies. 
Step 3: Button-Up Leave of Absence Protocols
Leaves of absence are a highly challenging area—there has been a dramatic increase in claims brought across the country related to medical conditions and employers’ failure to appropriately provide and document them or make accommodations related to them. Very generally speaking, management and human resources personnel should be aware of the different scenarios that give rise to medical conditions and the multiple and sometimes-overlapping legal obligations associated with each.
For example, an employee injured in the course and scope of performing her or his duties is entitled to relief from the workers’ compensation arena. However, the inquiry does not end there. That same employee may also be entitled to protection under the federal Family and Medical Leave Act (FMLA) or the state corollary to that law. The inquiry does not end there either because even in those situations where the employee or the employer may not be required to follow the dictates of FMLA, the Americans with Disabilities Act (ADA) may impose different and additional obligations on the employer.
Some of these laws, such as FMLA, are highly regulated and companies are required to have technical documentation in place. Other laws, such as the ADA, do not have stringent notice requirements, but the applications and interactive processes required are quite substantial. Companies need to assign one or more employees to obtain particular training and knowledge on how to handle these overlapping laws and should train managers on when to bring issues to the attention of that person.
Step 4: Closely Scrutinize Pay Practices
Increasingly, the federal and state governments are evaluating overtime, timekeeping and pay practices. Nowhere is this more true than in California, where there has been an enormous rise in claims related to pay, particularly under class action laws and California’s Private Attorney General Act (PAGA) that allows one employee to act on behalf of other “aggrieved” employees and to seek penalties and underpaid wages in a representative capacity.
Among the issues to assess is payment of minimum wage (different cities may have their own minimum wage that is higher than the stated or federal minimum wage). For workers paid at or close to minimum wage, the employer should take precautions to ensure not only that minimum wage is paid for every hour worked but also that there are no off-the-clock hours of work that are unpaid—if there are, it is possible that the employee is not paid minimum wage because those unpaid hours could bring the employee below minimum wage.
Another item to evaluate is the calculation of overtime and the formula for recalculating overtime in cases of a bonus/additional compensation. Many employers are unaware that when employees receive certain bonuses, it increases their regular rate of pay. Overtime during the pay period when the bonus is received should thus be calculated from that higher rate. To make this even more complicated, there are different formulas for these calculations under federal and state laws. 
A final issue relates to pay stubs. There has been a dramatic increase in lawsuits against companies that do not comply with pay stub laws. If a pay stub is inaccurate, plaintiffs’ lawyers and the employees they represent can recover hundreds of dollars per pay period, per error. This adds up significantly over time, even for smaller work forces. This is an easy fix that can literally save the company hundreds of thousands of dollars. A sample pay stub can be found at: In particular, it may be worthwhile to ensure that the employer’s full and correct legal name is listed, that employees are provided with the different regular and overtime rates of pay during the pay period and that they are informed of their vacation and sick leave accruals. Companies should also have employees sign acknowledgments that they received their final pay on their last day worked.
Step 5. Correct and Train
This final factor cannot be overemphasized. If a company has a documented pattern of correcting issues of non-compliance and training employees about its policies and practices, the government may be hard-pressed to issue a finding that the employer acted in bad faith or recklessly disregarded the laws. In a recent audit of one of my clients, I shared the company’s audit and training log with the government agent. The agent felt the employer took proactive steps to be compliant and to make sure its employees understood their rights. While some technical violations were uncovered, the effort by the company to “do right” led that agent to issue a finding for minimum penalties.
In sum, instead of taking a defensive, head-in-the-sand posture, companies should have an assertive, proactive and responsible approach to prepare for a wage-and-hour dispute should they ever be challenged.
About the author
Julie A. Vogelzang is an employment and business law attorney with a focus on wage-and-hour compliance and litigation. She has defended large, medium and small companies sued in class actions for alleged wage-and-hour violations, including misclassification and overtime cases, meal and rest break cases, background check cases, pregnancy/child care leave violations and independent contractor status cases.
Disclaimer: This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the author and do not necessarily reflect the views of the author’s law firm or its individual partners.

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