No doubt about it, being an employer is not for the faint of heart. Employers must constantly navigate the headwinds of differing regulations at the local, state and federal levels, along with employee and customer demands and ongoing operational challenges.

Wage and hour laws are particularly fraught with potential stumbling blocks. Though they vary by jurisdiction, these rules provide employees the legal right to compensation if their employers fail to pay the minimum wage or overtime earnings, require work to be conducted "off the clock," overlook meal or rest breaks during the workday or misclassify employees as independent contractors or exempt employees.

When wage and hour violations are alleged, employers become exposed to severe financial consequences. This is particularly so when workers litigate claims through wage and hour class action lawsuits or other collective (read: California's Private Attorneys General Act) actions.

For these reasons — and no matter their industry — employers must do all they can to ensure compliance with applicable wage and hour laws. How can they do so? By conducting comprehensive wage and hour audits.

What's a wage and hour audit?

In its most basic form, a wage and hour audit is a review of a company's wage and hour practices and policies. In some instances, these audits are simply precautionary — say, when a company evaluates itself to reduce litigation risk. Other times, thorough inspections and investigations are conducted by governmental agencies, including the Department of Labor. In these cases, companies can receive expensive fines or penalties if wage and hour violations are uncovered.

For their part, prophylactic audits address whether a given company is in compliance with applicable wage and hour laws, and if so, to what degree. These self-imposed examinations are undertaken by legal counsel because the process requires a comprehensive understanding of the wage and hour landscape and can help preserve the applicable attorney-client and work product privileges.

More worrisome are wage and hour audits ordered and conducted by the government. Typically, these proceedings are more elaborate than company-mandated reviews, and they oftentimes become adversarial and can result in fines if violations are found. To be clear, the government's decision to audit an employer is not ordinarily a random one. Instead, an agency like the DOL chooses to investigate a company's wage and hour practices after receiving a tip to do so, or when the business was previously audited and cited violations.

How should an audit be handled?

An employer's approach to a wage and hour audit is dependent upon whether it is triggered by management or the government. When a company finds itself staring down the barrel of a governmental audit, it is important for it to ascertain — and, if possible, to narrow — the scope of review in an attempt to limit the chances of turning over documentation that could evidence other potentially unlawful practices that may not even have been a blip on the given agency's radar screen.

No matter its genesis, most every wage and hour audit involves a close look at the following items.

1. Pay and time records

Auditors will undoubtedly take a deep dive into: how employee time is recorded; whether employees track their own hours; if all compensable time worked by non-exempt employees is captured; and the accuracy of timekeeping systems. Additionally, examiners will likely review a company's auto-deduction policy for meal breaks and determine if meal periods are otherwise compliant with the given jurisdiction's wage and hour laws. As for the latter, the investigation may be more exhaustive in certain states. In California, for example, an investigator would need to analyze meal periods to determine if employees who miss them receive a premium paid according to the regular rate of pay (and not the employee's hourly wage rate).

2. Wage and hour policies

A wage and hour audit will also focus on a company's policies as they relate to timekeeping, payment of wages (including overtime), employer deductions, compliance with applicable rounding rules, vacation and sick pay, meal and rest periods and the prohibition of "off-the-clock" work (and whether there is a procedure in place to record "off-the-clock" efforts if and when they occur). Clearly, all of these policies should be included in a company's employee handbook.

3. Employee classification

A wage and hour review also will assess whether the employer correctly classified its employees as exempt or nonexempt for purposes of overtime pay. Further, auditors will consider if individuals classified as independent contractors actually qualify as such. To do so, relevant federal and state law should be applied. California businesses, especially, must closely scrutinize worker classification since the enactment of AB 5 and its stringent presumption against independent contractor classification.

4. Other miscellaneous items

In addition to all of the foregoing, a wage and hour audit should cover: whether previously identified violations have been corrected; the propriety of employer internship programs (most likely applying the "primary beneficiary" test); compliance with any child labor restrictions; the proper display of government-mandated posters and notices; and confirmation of compliance with both state and federal laws.

Employer takeaway

There can be no doubt that it is best practice for every company to abide by all applicable wage and hour laws and to steer clear of government scrutiny where possible. Of course, preparation is key, which is why consultation with experienced legal counsel adept at wage and hour audits is always recommended.