The Importance of Completing an FLSA Compliance Self-Audit

What is an FLSA audit?

A compliance audit for the FLSA, also known as an FLSA audit, is a review of an organization’s policies, procedures, and documentation in accordance with FLSA rules and regulations. Employers should conduct a self-audit at the beginning or end of each year that covers a broad range of information about payroll processing, employee hours and wages, and exemption status.

Why is an FLSA audit important?

An FLSA audit ensures your business legally complies with FLSA rules and regulations, including minimum wage and overtime laws and recordkeeping standards. Conducting routine FLSA audits is critical for the following reasons:

• FLSA investigations can occur anytime. The Department of Labor’s Wage and Hours Division will conduct an investigation after receiving an FLSA complaint. However, it can conduct investigations on select businesses in certain industries or locations regardless of whether or not a complaint has been filed. Routine FLSA internal audits ensure your business is ready for an investigation at any time. You’ll know your organization conducts all crucial required processes and procedures; plus, you won’t be penalized if an investigation occurs.
• FLSA violations are costly. Whether accidental or intentional, FLSA violations carry hefty penalties and fines that range from $1,000 to $10,000 per incident. Subsequent violations can cost even more. According to a Wage and Hours Division (WHD) report, employers owed more than $164.1 million in FLSA violations in 2023 for situations related to overtime, minimum wage, tips, retaliation and more. Additionally, some FLSA violations may force companies to issue back pay or retro pay and pay for legal proceedings. A thorough review and audit process can potentially save employers from devastating financial repercussions.
• Willful FLSA violations have legal consequences. Beyond hefty monetary penalties, FLSA violations can also lead to criminal prosecution or imprisonment. Establishing routine audit procedures can help businesses avoid this fate by promoting effective employee training and detailed review processes; this ensures all managers and team members fully understand what’s involved in FLSA compliance — and the dire consequences of not complying.
• FLSA audits foster stronger employee relationships. Routine FLSA audits can strengthen your company culture and improve employee well-being and happiness by ensuring fair and equitable systems and processes. Employees shouldn’t have to question whether their legal rights and pay are at risk. Operating with the fair and required labor standards in place ensures all employees are treated well and that new requirements are noted and implemented promptly so operations are not affected.

What is involved in an FLSA audit?

The FLSA governs various employment regulations, so a comprehensive FLSA audit must examine several aspects of your business. Consider the following elements involved in an FLSA audit:

1. Review all current policies and procedures.

Reviewing all current policies and procedures is your first step when preparing an FLSA compliance self-audit. You’ll likely speak to employees and review crucial documentation, including the following:

• Employee handbook
• Onboarding paperwork
• Employment records
• Disciplinary policies and records
• Job descriptions
• Time-keeping policies
• PTO policy

In this step, your goal is to determine if any current practices do not comply with FLSA rules and regulations. Document your findings and begin taking the steps necessary to update areas in need of attention.

2. Understand employment classifications.

You must know how your team members are classified and ensure their classifications are correct — which can be tricky for many small business owners. Understanding classifications is critical because while employees receive the full FLSA protections, contractors do not. Independent contractors are in business for themselves and are not covered.

However, if your business uses a high percentage of independent consultants or contractors who actually function more as employees, you could be in trouble — and face significant penalties — for misclassifying them.

If you’re unsure of the distinction between employees vs. independent contractors, check out the U.S. Department of Labor’s excellent misclassification infographic that breaks down the differences. Essentially, if you have a worker you call an “independent contractor,” but you determine when and how they work for you, they’re probably a misclassified employee.

The DOL’s economic reality test can also help determine whether a worker is an employee or an independent contractor. This test looks at factors like job permanence, investments, skills and degree of control to determine if an employment relationship exists.

If you have current contractor relationships, review them periodically to determine if the scope of their work has changed. Those changes may impact both parties legally and financially.

3. Ensure FLSA recordkeeping compliance.

It’s crucial to ensure that your nonexempt employees record their time in compliance with FLSA regulations. WHD fact sheets are valuable tools to help you determine if your organization is following the proper protocols for counting and tracking hours worked.

Note that if your employee is doing something specifically for you or can’t do something else because they must be available for you, they will likely need to count their time as hours worked.

The process for tracking working hours is regimented and requires employers to maintain the following records on all employees:

• Full name and Social Security number
• Address with ZIP code
• Date of birth, if younger than 19
• Gender
• Occupation
• Day of the week and time when their workweek begins
• Number of hours they work daily
• Total hours worked per workweek
• The basis of employee wage (e.g., “$11 per hour,” “$540 a week,” “piecework”)
• Normal hourly rate
• Weekly or daily total of straight-time earnings
• Total overtime earnings for each workweek
• Any deductions from or additions to the employee’s wages
• Total wages per pay period
• Date of payment and the pay period for which the payment is being made

4. Understand how overtime exemptions work.

Some positions are exempt from overtime earnings. If you’ve hired exempt employees, review their responsibilities and compare them to FLSA regulations regularly to ensure their status hasn’t changed. Have your payroll department verify it only makes allowable deductions from employees’ paychecks.

5. Understand child labor regulations.

The FLSA is the primary regulation that protects children from being exposed to unfair and dangerous working conditions. The federal government carefully oversees all aspects of how employers may employ individuals under 18.

The types of jobs children can work — and the number of hours each week they are allowed to work — vary by age. As a general guideline, 14 is the minimum age for employment, and those under 16 have strict limitations.

The DOL’s extensive child labor resources can guide you if you employ children under 16 and want to ensure compliance with FLSA regulations. [Read related article: 7 Labor Laws You Need to Know]

6. Know all applicable state laws.

If you’ve passed your FLSA self-audit with flying colors, it’s time to consider state laws. Are you paying the minimum wage as dictated by your state government? The DOL provides information on state minimum wage laws. (Note that some cities have higher minimums than even their state government requires.) You can also use the DOL’s state and local government self-assessment tool to ensure compliance or research the finer points of state and local laws.

7. Schedule regular FLSA audits.

After your initial review, address and remedy any issues you pinpoint. If necessary, consult your legal counsel to ensure all your practices and decisions are correct and beyond reproach.

You may currently comply with all FLSA regulations. However, state and federal laws change unpredictably, so schedule time at least once a year to review all factors and ensure you remain in compliance.

Be proactive to avoid FLSA compliance issues

Completing an FLSA compliance self-audit can help avoid costly issues derailing operations. By setting aside regular time to review current processes and procedures, you can ensure your organization operates within all current and incoming FLSA rules and regulations. And while conducting a thorough annual audit takes time, reducing significant risks to your business always pays off.

Casey Conway and Skye Schooley contributed to this article.