Beware of the wage and hour investigator

It's business as usual on an otherwise mundane Tuesday afternoon at your office, and you are reviewing your job production schedules. Suddenly, your receptionist tells you a woman in the lobby wants to see you. You greet your visitor, and after a simple "hello," you are presented with a badge from the U.S. Department of Labor (DOL). You just have been introduced to a U.S. wage and hour investigator. Do you know what to do?

The law

Federal wage and hour laws are enforced by DOL's Wage and Hour Division pursuant to the Federal Labor Standards Act (FLSA). With regulations governing the payment of overtime wages, more companies are finding themselves the subjects of wage and hour audits. The construction industry has been a specific area of concern for the Wage and Hour Division.

Your company may be the subject of a wage and hour audit because of a complaint received by DOL from an employee, union or competitor or you were chosen randomly for a routine audit in a particular area. But the law protects the Wage and Hour Division from having to disclose why you are being audited, and you may not receive any warning that you are the subject of a wage and hour audit before the investigator arrives.

Regardless of the reason for the audit, it is important for you to know and understand what the investigator is seeking. It also is important to know and understand practices you can implement immediately so if you are the subject of an audit, you know your books and records will be in accordance with the law.

Understanding the audit

In the initial meeting with the investigator, you usually will be handed a preprinted letter or form from DOL announcing the government's intention to conduct a wage and hour audit of your company and a specific date and time for the audit. The letter will state the investigation will cover a two-year period of payroll and time records, as well as some employee interviews. The letter also will ask that you have certain records available for inspection on the day of the audit and may ask for a list of all employees you classify as exempt for overtime pay purposes.

Although in many instances the investigator will alert an employer before opening an investigation, the Wage and Hour Division does not require an investigator to do so. The investigator has sufficient latitude to initiate unannounced investigations to directly observe typical business operations and develop factual information quickly.

Whatever the reason for the audit, a wage and hour investigator has the right to enter your business and gather records that may be necessary to determine whether you are complying with FLSA. Although the law allows most employers to decline to voluntarily cooperate with an investigator, it will do you little good to be adversarial, confrontational or noncooperative. If you do not voluntarily cooperate with the request for records, DOL can issue an administrative subpoena to compel production of your records. However, if you believe the request for documents contained in the subpoena is too broad or unreasonable, you can question the subpoena's reasonableness through a court petition before facing any penalty for failing to comply.

The best option is to reasonably assist the auditor, which means providing the records requested and making employees available for interviews, as well as providing a private space for the auditor to work.

Preparing for the auditor

Because you probably will not be alerted to a wage and hour audit, it is important to take preventive measures to reduce the risk an auditor will find you in violation of FLSA. It helps to understand what violations are most often discovered by wage and hour investigators.

The most common violations found by investigators conducting an audit of a construction company include misclassifying nonexempt employees as exempt for overtime purposes; misclassifying an employee as an independent contractor; failing to include shift differential or other hourly premiums in the overtime factor; and keeping improper, incomplete or insufficient records.

The first step to reduce the risk that an investigator will discover an FLSA violation is to ensure appropriate records are maintained. To avoid substantial penalties, you are required to keep the following information for every employee in your records for three years:

  • Full name, home address, ZIP code and birth date (if the employee is younger than 19 years old)
  • Gender
  • Occupation
  • Time and day on which the workweek begins
  • Regular hourly rate of pay, the basis on which wages are paid and regular rate exclusions
  • Hours worked each day and total hours worked each workweek
  • Total daily or weekly straight-time earnings or wages
  • Total weekly overtime compensation
  • Total deductions from wages and additions to wages each pay period
  • Date of payment and the pay period covered by the payment

One easy practice to immediately implement to lessen the risk of an investigator finding an FLSA violation is to ensure the FLSA-mandated poster informing employees of their minimum wage, overtime and other legal rights is displayed prominently. You can obtain a copy of this poster by accessing DOL's Web site at

Also, determine whether you are properly classifying employees as exempt from FLSA's overtime pay requirements.

Particular attention should be given to those employees classified as exempt under one of the "white-collar" executive, administrative and professional employee exemptions. A full discussion of the exemptions is beyond the scope of this article, but it is important to note a thorough and detailed analysis of every employee classification is necessary to determine whether an employee spends more time doing nonexempt work than is permitted under the regulations, which may render the employee nonexempt and entitled to overtime. (For more information about nonexempt and exempt employees, see "Overtime!" August 2004 issue, page 19.)

It also is important to understand simply paying an employee a salary as opposed to an hourly rate does not exempt the employee from overtime pay requirements. Treating nonexempt salaried employees as if they were exempt may result in your company becoming liable for substantial overtime payments.

It is important to ensure nonexempt employees are paid the correct hourly rate for straight-time work (the first 40 hours of work during a workweek) and overtime work (work beyond 40 hours during a given workweek). This becomes an issue that deserves special attention if your company employs individuals who perform two or more types of work at varying wage rates during a single workweek.

The most common example of this is paying employees one rate for compensable travel time and another rate for time spent doing construction work. Many employers are unaware special rules exist in the federal regulations for determining the regular rate of pay from which overtime must be calculated for those employees who perform two or more types of work at varying wage rates during a single workweek. An explanation of the rules can be found on DOL's Web site at

Another common problem in the construction industry is employees working "off the clock." To avoid this violation of FLSA, I strongly encourage you to include a provision in your employee handbook that states nonexempt employees are prohibited from working "off the clock." The handbook should make explicitly clear supervisor approval is required before an employee engages in overtime work.

Supervisors must be trained to monitor nonexempt employees performing overtime work. DOL requires employers to control their employees so work is not performed if the employer does not want it to be performed. Managers may not simply observe "off the clock" work and accept its benefits without facing the prospect of significant liability in the event of a wage and hour audit. Indeed, the most common willful violation is found when employers are discovered to have ordered their employees to work "off the clock" to keep a project under budget. Although maintaining an employee handbook with the provisions described helps overcome a finding that this type of violation is willful, the best defense is actual evidence the policies in the handbook are enforced.

Another area of great concern involves classifying some workers as independent contractors rather than employees. Instead of focusing on the classification given to an individual, auditors focus on the economic realities of the relationship and totality of the circumstances in determining whether a worker is an employee or independent contractor.

Key factors auditors consider include the method of payment to the individual, extent to which the worker has expenses that are not reimbursed, extent to which the worker can realize a profit or a loss, degree of your right to control the manner in which the work is performed, permanency of the relationship, extent of the worker's investment, whether you or the worker furnishes the equipment or tools required for the task, and whether the worker provides services to other companies or works for you exclusively, among other factors. Misclassifying a worker as an independent contractor can result in substantial liability for overtime, payroll taxes, FICA, benefits and other payments, as well as penalties and interest.

After the audit

When the investigator has completed a review of your records, formal findings will be issued. If a violation is found, DOL can seek an injunction, bring a lawsuit on behalf of a specific employee or group of employees, or bring a lawsuit against you.

When DOL seeks an injunction, it seeks to enjoin your continued payroll practice committed in violation of FLSA. These types of injunctions also ask courts to compel employers to pay past due compensation to all employees. DOL also can seek job reinstatement with back pay for an individual who has been discharged for attempting to enforce his rights under FLSA. Violating an injunction may subject you to fine or imprisonment, as well as paying past due wages and, possibly, attorneys' fees.

The statute of limitations for these types of claims is two years unless an employer's violations were willful in which case the statute of limitations is three years. A willful violation is found when an employer either knew or showed reckless disregard for whether his pay policy violated FLSA. A willful violation is deliberate, voluntary or intentional and may be subject to a criminal penalty, including fines up to $10,000 and imprisonment for up to six months for a second violation.

Lawsuits filed against employers by the secretary of labor alleging violations of FLSA also seek back pay, as well as liquidated damages. If DOL prevails in this type of lawsuit, it is entitled to liquidated damages in an amount equal to any unpaid wages in addition to the back pay and interest. Liquidated damages can be avoided if an employer shows he acted in good faith with a reasonable belief his pay practices complied with FLSA.

Be prepared

Although understanding the wage and hour audit process eliminates a lot of anxiety, the best practice is to take preventive measures. It is better to conduct your own audit and discuss and correct potential violations with your attorney rather than have the government conduct an audit that reveals those same violations and concludes with a discussion about payment of back pay, penalties and interest.

Philip J. Siegel is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.


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