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Record retention is complex and time consuming. However, in addition to complying with various federal and state laws, keeping good, well-organized records can be very helpful in documenting and supporting an organization’s employment actions.
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March 02, 2005
5-Minute Overtime Audit: Where Does Your Company Stand?

Managing Editor, Business & Legal Reports, Inc.

BLR's survey Five-Minute Overtime Audit: See How Your Company's Reaction to the New Overtime Rules Measures Up revealed some very interesting information on how the recently revised Fair Labor Standards Act (FLSA) overtime regulations have affected employers and what actions employers have taken to bring their companies into compliance.

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There were approximately 400 respondents to BLR's survey, representing companies of various sizes from all over the U.S. Twenty-three percent of respondents replied that they have fewer than 50 employees, 40 percent have between 51 and 250 employees, 15 percent have between 251 and 500 employees, and 21 percent have more than 500 employees.

The regulations

The new FLSA, which went into effect on August 23, 2004, changed the tests that employers must use to determine whether their employees are exempt from overtime eligibility.

The new rules regulate the exempt or nonexempt status of employees by redefining the "white collar" exemptions for executive, administrative, professional, outside sales, and computer employees. The regulations have also raised the salary threshold for exemption almost threefold, to $455 per week. Many formerly nonexempt employees may have become exempt under the regulations, or vice-versa, due to the increase in the salary threshold and the changes to the various duties tests.

In light of the complexity of the new rules, BLR asked respondents whether they completely understand the interplay between the federal overtime laws and the overtime laws in their state--and when to apply which law. Fifty-one percent of the respondents reporting on this issue claimed a complete understanding of the new federal regulations and their interplay with state law, 13 percent said they did not understand the laws well enough, and 36 percent claimed they had a somewhat complete understanding.

Some states' wage-and-hour laws guarantee more rights to employees than the federal laws. As a rule, employers should follow the law that provides employees with the most protection. It is important, though, to be aware of any regulatory and legislative changes that occur in your state. The new FLSA regulations may prompt state officials to revise their own laws and regulations in the near future.

Reclassifying employees

Fifty-seven percent of respondents to BLR's survey claimed that they did not reclassify any employees from exempt to nonexempt due to the new federal overtime regulations, while 26 percent stated that they reclassified less than 10 employees and 14 percent stated that they reclassified between 11 and 50 employees from exempt to nonexempt.

Eighty-three percent of respondents claimed that they did not reclassify any employees from nonexempt to exempt due to the new federal overtime regulations, while 13 percent stated that they reclassified less than 10 employees.

Increasing salaries to $455

Raising exempt employees' salaries to $455 per week is one of the simplest ways to handle the new salary levels. However, raising salaries may not be the most cost-effective approach. Employers need to determine which would be less expensive:

  • Raising employees' salaries to meet the test, or

  • Paying the workers as nonexempt employees entitled to overtime.

Interestingly, 85 percent of respondents reporting on this issue stated that they did not need to increase the salaries of any of their exempt employees to the $455 threshold in order to keep their exempt status. Eleven percent of respondents stated that they did have to adjust the salary of less than 10 employees upward so that they would meet the threshold for exemption.

Limiting overtime hours

A method for controlling overtime costs for employees working for hourly wages is to hold to a strict 40-hour workweek. BLR's survey revealed that 15 percent of respondents reporting on this issue stated they had placed substantial limits on overtime hours to save money when they reclassified employees from exempt to nonexempt after the new federal overtime regulations became effective, while 27 percent stated that they put limits on overtime hours to save money to a small degree if they reclassified employees from exempt to nonexempt.

Of course, prohibiting overtime work and refusing to pay for any extra hours worked are two different things, and employers who fail to pay a nonexempt worker for any overtime hours will violate the FLSA. The key to the strict 40-hour workweek is having supervisors and managers who can monitor employees' work habits and maintain a strict schedule. Employees should know from the start that overtime hours are not permitted, and that abuse of work hours is reason for discipline. If an employee does work unauthorized hours, he or she must be paid so that the employer remains in compliance with the law. However, the employer has the right to discipline the employee for the infraction.

Employers should also note that forcing workers to leave precisely at the end of a shift could affect productivity or even quality if workers rush to finish a job before the end of the day.

Department of Labor (DOL) audits

In 2004, the DOL collected $197 million in back wages due to FLSA and FMLA wage and hour and leave cases. Of this $197 million, over $165 million was collected under the FLSA and only $2 million was collected under the FMLA.

Such audits are generally triggered either when a current or former employee files a complaint with the DOL or when the DOL targets a specific industry for investigation. As usual, in 2004 the DOL targeted a variety of low-wage industries including day care, agriculture, janitorial services, the garment industry, healthcare, the hotel and motel industries, restaurants, and temporary help. The Wage and Hour Division has traditionally targeted low-wage industries with vulnerable, and often immigrant, workforces, and those industries with a history of chronic violations.

If the DOL decides to audit your company, a DOL representative will visit your facility to conduct interviews, make sure the required posters are hung, and possibly examine the time clocks to determine whether your company is in compliance with the FLSA. The DOL will then review up to 3 years' worth of your wage and hours records and investigate your wage and hour practices to determine whether you have paid your employees the proper amount of overtime. This will include a review of your pay records, so you must make sure the records are accurate and organized.

Where do you stand relative to other companies when it comes to DOL audits? Fifteen percent of respondents to BLR's survey reporting on whether they had been audited by the DOL for a wage and hour violation claimed they had been audited once, while 5 percent stated they had been audited between two and five times. Seventy-nine percent stated that they had never been audited.

It is interesting to note that when comparing the number of audits to the size of a company, BLR's survey showed that the only companies that reported having been audited more than five times were companies with more than 500 employees.

Auditing your company

As a result of the increased scrutiny of employer practices by the DOL and plaintiff's attorneys, and the recent changes to the FLSA, many employers have been conducting wage and hour audits to make certain their current policies and practices conform to the new regulations. However, audits of this type should not be limited to only those times that the laws change. Regular wage and hour audits should be conducted for a number of reasons:

  • To check for employees who have been misclassified in the past and who are entitled to retroactive overtime pay
  • To determine whether supervisors and managers are treating both exempt and nonexempt employees appropriately under the law
  • To avoid the possibility of costly lawsuits by addressing any problems with your FLSA policies before they are brought to the attention of a lawyer or the DOL
  • To be able to show a DOL auditor or other legal entity that your company does all it can to ensure compliance with the FLSA
  • To ensure that job descriptions are up to date and accurately outline the real duties employees perform each day

By conducting internal audits before a lawyer or government investigator shows up at your door, you will be able to show that your company is proactive about FLSA compliance. Internal audits decrease the chances that anyone would view any errors in your past practices or policies to be willful violations of the law-causing a pattern and practice of paying employees improperly.

So, how does your audit schedule compare to those of other companies BLR surveyed? Twenty-nine percent of respondents reporting on this issue stated that they audit their employee classifications yearly, 6 percent every other year, 2 percent every five years, and 63 percent stated that they do not have a set schedule, but intend to continue updating their classifications in the future.

When comparing audit schedules to the size of a company, BLR's survey showed that of those companies that had established a yearly auditing schedule, 19 percent had less than 50 employees, 39 percent had between 51 and 250 employees, 21 percent had between 251 and 500 employees, and 21 percent had more than 500 employees.

In addition, BLR's survey asked whether employers had reviewed their company's job descriptions to determine whether they are still accurate, reflect the jobs being performed, and reflect the skills necessary to perform the job. Forty-one percent of the respondents reporting on this issue stated that they have reviewed all of their job descriptions, 37 percent had reviewed some, 8 percent had not reviewed them and do not plan to, and 14 percent had not reviewed them but plan to do so in the next year.

Employee reaction to the new regulations

In response to how employees reacted to any exempt and nonexempt reclassifications that have occurred in the workplace due to the new overtime regulations, 11 percent of respondents reporting on the issue stated that their employees were generally pleased with the changes, 16 percent claimed that their employees were generally unhappy with the changes, and 29 percent stated that their employees had no reaction to the changes.

Some formerly exempt salaried workers may feel that their new nonexempt status is a "demotion." HR and direct managers should reiterate explanations that the new status refers only to the way their pay is calculated, not to their relative position in the department or company.

Other newly nonexempt employees may find it hard to adjust their work routines and continue to work through lunch or stay late. Supervisors must be aware of these employees' work habits in order to avoid unanticipated increases in departmental wage costs. Nonexempt employees must be paid for all time worked, whether or not the supervisor specifically authorized the time.

Supervisors should make it a point to do "walk-arounds" or check time cards daily to be sure nonexempt employees are not working through meal periods or staying late. If habitual "offenders" are logging extra time out of habit, supervisors should speak to them about adjusting their routines. If the employees are struggling to meet workload demands, redistribution or rescheduling may be in order.

In some cases, employers determined that a job once considered nonexempt is now actually an exempt position. Employees often reject a change in status that will cause them to lose the ability to earn overtime. Employers should discuss any benefits of the new exempt position, including vacation or other benefits that may be more generous or other privileges that exempt employees enjoy in order to make their exempt status more appealing.

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