Conducting a Wage and Hour Audit: Eating the Elephant One Bite at a Time

Wage and hour violations are rarely intentional. They typically stem from common missteps such as outdated job descriptions, payroll errors, miscommunication, or genuine confusion about complex federal and state laws and regulations. So, as too many employers know, a wage and hour lawsuit or Department of Labor (DOL) investigation can hit a business out of the blue, often without prior notice. Such actions can cripple even a well-run organization due to stringent laws that impose heavy penalties and encourage collective and other actions with their provisions for recovery of extensive damages, including back wages, liquidated damages, and attorneys' fees.

While many employers understand that a proactive wage and hour audit is the most effective way to reduce exposure to such an action, the prospect of conducting one may seem daunting, even to the most sophisticated HR professional.

The good news is that an audit becomes more manageable when approached with clear objectives and discrete steps. Like eating an elephant, the process is best handled one bite at a time.

With this article, we attempt to provide you with a step-by-step guide to structuring a wage and hour audit in way that simplifies the process while ensuring that your company’s wage and hour risks are properly addressed.

Your First Bite: Break Your Workforce into Manageable Units

Begin by organizing your workforce into logical departments or units. Most organizations already have natural divisions, such as accounting, sales, marketing, customer service, or IT, that provide a practical framework for the audit.

Human Resources should then work closely with the lead director or supervisor of each department or operational unit in your company to identify every position within that unit. The goal is to build a complete inventory of job titles and roles within each unit before proceeding to deeper analysis.

This first "bite" lets you tackle one department at a time and prevents anything from slipping through the cracks.

Your Second Bite: Update Job Descriptions To Reflect Actual Duties

With positions identified, the next step is ensuring that job descriptions accurately reflect the actual tasks employees perform, not what they were hired to do years ago.

Too often companies instruct HR to come up with job descriptions for their workforce. No matter how diligent or experienced your HR Department is, it does not have the time or resources to observe the day-to-day duties of each individual worker. As a result, HR often has to rely on outdated assumptions or generic templates to formulate job descriptions. This burden can result in job descriptions that bear little resemblance to actual duties of a given individual.

Thus, to do this task well, HR requires meaningful input from managers at every level within the department about the positions within their chain of command. Direct supervisors, in particular, have a much better understanding of the teams they work with every day and should have significant input into developing job descriptions.

Pro Tip: Keep in mind that job duties often evolve and change abruptly. New technology can fundamentally reshape a role. Consider an employee once relied upon to analyze complex technical data and exercise independent judgment. If AI tools are introduced to perform the substantive analysis and the employee's role is largely limited to inputting data and transmitting automated reports, the employee's exempt classification may no longer be legally defensible even if the employee’s position or title is unchanged.

Your Third Bite: Identify Clearly Exempt and Non-Exempt Positions

With updated job descriptions in hand, HR should work with management at each level to determine whether each position is exempt or non-exempt under the Fair Labor Standards Act (FLSA). A useful starting assumption is to treat all workers as non-exempt and then work to determine if any of the FLSA exemptions apply to a workers’ position.

At this stage, you should aim to place each position in one of two buckets:

1. Bucket A: Clearly Exempt Positions

These are roles that plainly satisfy a recognized FLSA exemption such as the executive, administrative, or professional exemptions, or because the individual is a highly compensated employee.

Once you identify the positions in Bucket A, the only thing left to do is ensure that they are receiving their full salary, paying close attention that the company is not taking any improper deductions.

2. Bucket B: Clearly Non-Exempt Positions

Bucket B should include the positions that are easily identified as non-exempt, such as manual laborers, customer service representatives, and administrative assistants performing clerical tasks.

Ensuring wage and hour compliance for Bucket B positions involves a more hands-on approach than for exempt positions. Issues such as overtime, minimum wage, and break time/meal breaks are central to the analysis and are common areas of noncompliance.

In practice, an assessment of these issues can be accomplished by:

• Selecting a sample pay period;
• Manually calculating their regular rate and overtime, making sure to incorporate bonuses, commissions, and shift differentials are included.
• Review time records against worker and manager accounts of clock-in/clock-out practices, off-the-clock work, and disputes about overtime.
• Compare the data collected on your worker’s actual practices against written policies and payroll practices.
• Flag any gaps: Highlight discrepancies between your written policies and worker practices as well as any miscalculations of compensable time or overtime.

Overall, your goal is to ensure that your handbook, managers and workers, and payroll systems are all consistent with one other and telling the same story.

Your Fourth Bite: The Hardest Bit to Swallow

The most challenging positions are those that blend exempt and non-exempt duties and do not fit neatly into either category. These "gray area" roles require closer analysis.

For these positions, you may need to review court decisions addressing similar positions to understand how judges have evaluated classification. The DOL also issues opinion letters and fact sheets that can shed light on how the agency interprets particular positions under the FLSA. It is also worth examining how comparable companies in your industry classify similar positions, though industry practice alone does not establish compliance.

Pro Tip: When in doubt, lean toward classifying a gray-area position as non-exempt.

Classifying a position as exempt carries inherent risk, and a practical mitigation measure is to continue tracking hours for these “gray area” exempt workers and ensure they do not regularly exceed 40 hours per week. Documentation of actual hours worked will help limit damages if a misclassification claim later arises.

Final Tip: Trust Your Instincts — and Know When To Call Counsel

If, during the audit, your gut tells you that you may have a misclassification problem on your hands, even one that seems minor, you should consider retaining legal counsel. Engaging an attorney early in the audit process can allow you to cloak audit documents in attorney-client privilege/work product or even allow you to raise a good-faith reliance on counsel defense if a FLSA claim is later filed.

Conclusion

A wage and hour audit is one of the most effective ways to mitigate risk and ensure wage and hour compliance. By dividing the process into manageable steps and addressing each issue one bite at a time, the wage and hour audit elephant becomes not as daunting as it initially seems and is more likely to surface problems before they arise in litigation.