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Updated Oct 20, 2023

The Importance of Completing an FLSA Compliance Self-Audit

Find out how FLSA compliance auditing can improve your business.

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Marisa Sanfilippo, Business Strategy Insider and Senior Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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The Fair Labor Standards Act (FLSA) is a federal law created to establish a minimum wage, regulate the number of hours worked each week, determine how overtime is awarded, protect children from unfair working conditions, and require a standard of recordkeeping.

If you fail to comply with FLSA regulations, you could be fined almost $2,000 per employee for minimum wage and overtime penalties. Child labor violations can result in even stiffer penalties per occurrence. Take the time to self-audit regularly to make sure you’re not in violation of any FLSA rules.

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. This audit covers a wide range of information regarding payroll, employee hours and wages, and exemption status.

Why is an FLSA audit important?

An FLSA audit ensures you are maintaining legal compliance with FLSA rules and regulations. FLSA violations, whether accidental or intentional, can carry hefty penalties and fines, ranging from $1,000 to $10,000 each. Willful violations can mean criminal prosecution or imprisonment alongside monetary penalties. Additionally, violating certain FLSA regulations may result in the need to pay for back wages and legal proceedings.

Key TakeawayKey takeaway
An FLSA audit helps you promptly identify and correct any issues with your compliance, thereby avoiding hefty penalties and fines.

What is involved in an FLSA audit?

Since the FLSA governs a variety of employment regulations, a comprehensive FLSA audit will need to examine several aspects of your business.

Contractors and non-employees

This is one of the trickier points for many small business owners. If your business uses a high percentage of independent consultants or contractors who actually function more as employees, you could be in trouble.

Not sure what the difference is? The U.S. Department of Labor (DOL) has a great misclassification infographic that breaks down the distinction between an employee vs. independent contractor. If you have a worker whom you’re claiming as an independent contractor but you determine when and how they work for you, they’re probably an employee.

TipTip
If there is any chance you could be claiming an employee as an independent contractor, review the guidelines at the Wage and Hour Division of the DOL to make sure you are classifying workers correctly.

Recordkeeping

Make sure the way your nonexempt employees record their time complies with the FLSA. To see if your organization is following proper protocol, review when the DOL expects employees to be counting hours worked and how they should track those hours.

If your employee is doing something specifically for you or unable to do something else because they need to be available for you, it’s likely that they need to count their time as hours worked.

The way those hours should be tracked 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
  • Sex
  • 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

Overtime exemptions

Some positions are exempt from overtime earnings. If you have employees who are classified as exempt from earning overtime, review their responsibilities and compare them to FLSA regulations regularly to ensure the employee’s status hasn’t changed. Have your payroll department verify they are only making allowable deductions from employees’ paychecks. [Read related article: What Are Payroll Taxes?]

Did You Know?Did you know
Federal law requires overtime compensation for nonexempt employees at a rate of at least 1.5 times the employee's regular pay rate. Learn more about federal overtime rules.

Child labor

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 the age of 18.

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

The DOL has extensive child labor resources available in case you employ children under the age of 16 and want to ensure your compliance with FLSA regulations. [Related: 7 Labor Laws You Need to Know]

State laws

If you’ve passed your FLSA self-audit with flying colors, it’s time to think about state law. Are you paying the minimum wage as dictated by your state government? You can find information on state minimum wage laws online, but remember, some cities have higher minimums than even their state government requires.

Extra credit

You can also use the DOL’s state and local government self-assessment tool. This is advisable if you think you might be out of compliance or want to check the finer points of the law.

If you are fully compliant with current practices, great! State and federal laws change unpredictably, so take the time each year to ensure you are still in compliance or you could face stiff federal penalties.

On the other hand, if you aren’t sure that you have addressed any of the above issues, do some follow-up work. Consult your legal counsel and make a point to identify and remedy any potential violations.

Skye Schooley contributed to the writing and reporting in this article.

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Marisa Sanfilippo, Business Strategy Insider and Senior Writer
Marisa Sanfilippo is an award-winning advertising and marketing expert who uses her skills and hands-on experience to help a variety of companies — perhaps most notably, finance-focused businesses — attract customers, generate revenue and strengthen their brands. She advises and executes on top marketing strategies and tactics for email and social media marketing, print marketing, events, partnerships and more. Sanfilippo's expertise has been tapped by companies like First Financial Credit Union, McGraw Credit Union, Priority Payments Local and iink Payments. She has hosted webinars and in-person workshops to educate business owners on marketing best practices and works with RevGenius, a group that brings together sales, marketing and customer success professionals to trade tips on B2B go-to-market strategies geared toward scaling SaaS companies.
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