How to Prepare Your Small Business for a Wage and Hour Audit

The US Department of Labor can initiate a wage and hour audit of your small business at any time. They are often the result of an employee complaint, but if you operate in certain industries that rely on hourly workers, it’s possible an audit can come at any time. Here are some ways to stay ready.

What Is a Wage and Hour Audit? 

The Department of Labor’s Wage and Hour Division (WHD) conducts investigations for a number of reasons, all having to do with enforcement of the laws and assuring an employer’s compliance. One of those reasons may be an official (and confidential) employee complaint, but the WHD doesn’t have to disclose a reason for an audit. The investigator will be looking for violations of the Fair Labor Standards Act (FLSA), which governs most businesses, and concerns laws like:

• Overtime, e.g., improper classification of workers as independent contractors
• Minimum wage, e.g., underpaying workers
• Payroll records, e.g., not keeping them for the required amount of time
• Hours and types of work for minors under 18 years of age

Auditors may investigate all small businesses with hourly workers in a certain region, for example, or target an industry where wages are typically on the lower end, to ensure there is no exploitation or egregious violation of labor laws. 

Each state also has a wage and hour division that can audit companies for violations of state laws above and beyond what the FLSA requires. Every state is different, and your business must be able to provide the required documentation for both federal and state labor laws in a compliance audit.

What Happens During a Wage and Hour Audit?

Since you might not have much advance notice of your company’s audit, it’s important to stay prepared through scrupulous record-keeping. Companies that don’t feel caught off guard by an audit keep organized records. 

The audit may include some of the following actions:

• Examination of records that indicate volume of work, annual income, and type of contracts
• Auditing payroll and timekeeping records to examine wages, overtime, etc.
• Private interviews with certain employees to verify records and work responsibilities, typically at the business location; occasionally by mail or phone

When the investigation is complete, authorities will meet with the business owner to discuss results and any necessary remedies.

How to Stay Prepared for a Wage and Hour Audit

Follow these steps to be prepared for a wage and hour audit.

Use automation

Relying on manual timekeeping often leads to errors, and an audit doesn’t distinguish between intentional or unintentional payroll mistakes. According to SHRM, “DOL investigators will gather data on wages, hours, and other employment conditions to determine if a business is complying with federal law. During investigations, the DOL looks for errors regarding how employers calculate overtime, so employers must calculate overtime properly.”

WorkforceHub provides reliable, automated timekeeping functionality that accounts for all aspects of labor law when calculating wages. Plus, it generates a clear and concise record that’s easily accessible for an audit. Small businesses can benefit from investing in automation tools by freeing up managers and other employees who may be doing several jobs at once. This ensures that payroll is in strict legal compliance and fosters trust with your employees.

Conduct periodic compliance checks

Automation removes many of the headaches of manual calculation, but it can only be as good as the data it uses to generate the payroll. Conduct periodic checks that hourly pay rates, payroll tax rates, etc., are up-to-date and accurate. Make sure any connections to time clock software are working properly. It’s better for you to find errors before an auditor.

Make sure labor law posters are visible

Follow federal and state labor law requirements by ensuring labor law posters and other notices are visible in public workspaces, as required.

Maintain familiarity with each job and its role

Justifying classification is often a significant part of a wage-and-hour audit. To have the best and most professional experience, be prepared by understanding each employee’s classification so you can make changes when they are needed in advance of an official audit. For those who are classified correctly, make sure you can locate signed contracts, invoices, and any other required paperwork to verify independent contractor status. Look over payroll reports to locate trends that may look suspicious to an auditor and note why certain jobs or employees function in your company the way they do. 

Professionalism and organization are your best tools in a wage and hour audit. When you can be prepared in advance with the right reports and necessary payroll information, you can feel confident your company is ready for any questions. WorkforceHub ensures that you have the data to back up your claims and protect your organization and workers from costly issues. Try it for free today.