With a wage-and-hour audit, you can ensure your company is in legal compliance. During a full wage-and-hour audit, you’ll look at your company’s employee classifications, overtime pay, minimum wage, and compliance history. While the U.S. Department of Labor handles external wage-and-hour audits, it’s a good idea to conduct internal audits to prevent and remedy compliance issues. 

What Is a Wage-and-Hour Audit? 

A wage-and-hour audit is an opportunity for your company to make sure it’s in compliance with the Fair Labor Standards Act (FLSA) and state wage-and-hour laws. During the audit, you should use the following wage-and-hour checklist to make sure your company is in compliance.

• Any hours worked are accurately tracked and compensated.
• Employees are paid a minimum wage.
• Workers are correctly classified as overtime exempt or nonexempt based on their job description.
• All nonexempt employees are paid for the overtime hours that they work.
• Tax withholdings are calculated correctly.
• Child labor laws are followed appropriately.
• All required employee notices are appropriately displayed.
• Employment records are properly stored and maintained.

During your internal audit, you may also want to do a compensation study. Besides checking to see if your compensation is comparable to other companies, you need to ensure that all of your workers are paid similarly if they have comparable roles, tenure, and talent.

Do I Need a Wage-and-Hour Audit? 

There is no legal requirement to conduct a wage-and-hour audit. However, compliance becomes harder as your small business grows, making audits more important. Once you have 50 to 100 employees, you can’t personally manage or train every employee. You need processes in place to make sure workers are trained, paid, and promoted correctly. 

In a recent Mission to Grow podcast on “HR Roadmap for Growth Series – Getting Serious About Compliance,” Brian Shenker, a principal at Jackson Lewis P.C., discussed the steps involved in conducting a successful audit. “Number one: make sure classifications are good. Also, you’re going to have to start understanding compensation levels and really do compensation studies,” Shenker says. “Are you paying the market rate? These things start becoming bigger issues as you’re growing–more is often expected from employees and applicants of larger companies.”

Typically, the Department of Labor (DOL) conducts wage-and-hour audits after an employee complains. However, audits can occur randomly as well. By regularly performing internal audits, you can prevent employee complaints and solve compliance issues early. Internal audits also prepare you for random DOL audits.

Wage Audit Checklist: How To Perform a Wage Audit

Whether you simply want to audit your payroll or need a full wage-and-hour audit, there are a few things you should consider. Before you conduct an internal audit, use this wage audit checklist to prepare.

Create Goals for Your Wage-and-Hour Audit

The first step is to plan out what you want to accomplish. For instance, a simple pay audit would generally focus on your payroll and compensation equity. A full wage-and-hour audit would review all of your FLSA-related practices.

While each organization is different, most companies share a few common audit objectives. They may want to look for compensation disparities, verify overtime payments, or correct any pay disparities. Likewise, many companies conduct wage-and-hour audits to ensure they won’t have any problems if a DOL audit occurs.

Identify Who Will Handle the Audit

When an audit is performed, it will typically involve staff members from your HR department, leadership team, finance department, and payroll department. If you have a particularly large company or a complex audit, you may also need to hire legal counsel. 

Collect Timekeeping Information and Payroll Data

To conduct your audit, you will need your company’s payroll and timekeeping data. You should also gather your performance management records, job descriptions, and any other information that will help you conduct the audit.

Check Employee Classifications

Once you have your records ready, you should carefully review your employee classifications. Start by going through each position’s job description. The job description should accurately describe the worker’s day-to-day duties. If it has been written correctly, you will be able to use the job description as the basis for whether a job is overtime exempt or not.

Conduct Compensation Studies

Compensation studies are a good way to figure out a competitive wage for each position. While there are different methods, you’ll generally calculate the salary range given for similar roles in your geographic region. Then, you can use this information to tell if you are paying people fairly or not. 

Internally, you should also review how much you pay workers. If there are massive discrepancies between employees who have similar roles and experiences, you may need to adjust the pay. Besides preventing a lawsuit, fair pay supports your employee morale and can improve retention. 

Remedy Discrepancies With the Law

No matter how hard you try to ensure compliance, mistakes will happen. A wage-and-hour audit is your chance to discover discrepancies and fix them. Because there are specific rules about how to fix errors with overtime, minimum wage, I-9, or breaks, it’s important to consult with an HR and payroll professional to figure out the best way to bring your company into legal compliance. 

Create a Corrective Action Plan

Once your wage audit is complete, the next step is preventing future mistakes. This can be done by designing a corrective action plan for your company. This plan should include the objective you want to attain, the steps necessary to attain it, and additional resources you may need to reach your goal. 

Train Managers

After your small business reaches 50 employees, you can’t rely on yourself to oversee everything that is occurring within the business. You have to have solid procedures and well-trained managers to carry out your company’s mission. Once you decide which corrective actions you need, the next step is training your managers on the new policies and procedures.

Get Professional Support

If you aren’t sure about how a wage-and-hour audit works, a professional payroll and HR company can help. You can also consult with your legal counsel to find out more information. While a lawyer isn’t necessarily a requirement at this stage in your business’s growth, having legal and HR assistance can help you avoid messy lawsuits and compliance issues.

Ensure Your Company’s Has Compliant, Competitive Wages 

There are many compliance regulations that go into effect once you have 50 employees. As your company grows, there are simply more employees and moving parts involved. With a wage-and-hour audit, you can ensure your company has competitive, compliant compensation.

To learn more about how to perform an internal wage audit, reach out to our team of small business HR and payroll experts today.