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. 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.

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.

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?]

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.