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Six Audit Steps to Avoid FLSA Pitfalls

By Latrice Nicole Lee

The number of collective class actions filed continues to rise year after year. Employers should be vigilant in ensuring compliance with the Fair Labor Standards Act (“FLSA”). With the new Department of Labor (“DOL”) regulations going into effect December 1, 2016, now is an optimal time for employers to review pay classifications and pay practices. Here are six steps to address when conducting an FLSA audit:

1) Employee duties: The first step of the audit is to monitor employee duties and responsibilities. It is important to identify the exact job duties and responsibilities employees actually perform, prior to assessing whether employees are classified and compensated properly.  

2) Job descriptions: The next step of the audit is to review employee job descriptions to match the duties employees are actually performing. Because job responsibilities may change over time, employers should make sure that they regularly monitor and update job descriptions.  

3) Job classification: After job descriptions have been updated, employers should analyze whether employees are properly classified as independent contractors, non-exempt employees, or exempt employees. Misclassification of employees as exempt from overtime pay may subject employers to liability under state law (minimum wage, unemployment insurance, workers’ compensation funds,  and state taxes) and federal law (overtime compensation, benefits, including health insurance or FMLA, and minimum wage). 

4) Compensation review: Effective December 1, 2016, the salary threshold for “white collar” overtime exemption increases from $455 to $913 per week, and the annual compensation requirement for highly compensated employees increases from $100,000 to $134,004 annually. Employers must review exempt employee salaries to ensure compliance with the new regulations. Employers may use non-discretionary bonuses and incentive payments, including commission, to satisfy up to 10% of an exempt employee’s salary, as long as payments are made on a quarterly or more frequent basis. 

5) Record keeping: Next, employers should review whether they are maintaining required time and pay records for employees, including potential overtime. Employers need to put systems in place to track potential time off of the clock such as 1) access to company email, 2) automatic lunch deductions for breaks that employees may not have taken, 3) instant messaging or text messages on company issued cell phones, 4) donning and doffing time or 5) whether an employee has to log into computer systems before clocking in. Employers should retain records for a minimum of three years. 

6) Safe harbor policy: Finally, employers should implement a policy in employee handbooks or manuals clearly prohibiting off-the-clock work by non-exempt employees and improper pay deductions, along with a complaint mechanism, reimbursements for mistakes, and a good faith commitment to comply with all applicable pay laws. It is important to note that the Safe Harbor Provision of the FLSA does not protect employers who willfully violate the statute after employees have complained about pay practices. 

Conducting an audit can be daunting and tedious while leading to many twists and turns. Because many of the regulations may be difficult to interpret, contact the wage and hour attorneys at Polsinelli with any questions.