Internal pay audits are rarely enjoyable. Depending on the scope, these audits can be complex and require detailed analysis. However, in the current legal climate, an internal audit can be extremely valuable and greatly reduce, or even eliminate, potential liability for wage and hour claims as well as pay equity claims. As previously reported on this blog, increased scrutiny into pay equity discrimination, changes in EEO-1 reporting requirements, the Department of Labor’s joint employment efforts, and the updated FLSA exemption rules continue to place companies at greater risk of government audits, fines, and lawsuits.

Many employers may have already reviewed and updated their policies in anticipation of the changes to the “white collar” FLSA exemptions, which go into effect on December 1, 2016. But if your company has not yet done so, or to the extent you have not conducted a more comprehensive internal audit, your company should strongly consider doing so as soon as possible for several reasons.

By conducting an audit, your company could:

  • Correct Potential Problems. No one likes to be blind-sided. By recognizing misclassified employees or contractors, identifying gender pay disparities, or uncovering other potential problems, your company can take steps to correct any issues and ensure that workers are properly paid and classified. It is far better to catch and correct these problems internally before the government does.
  • Reduce Legal Exposure. Once your company corrects any problems, the potential legal exposure will be confined. As time goes on, the related liability will continue to decrease as the various statutes of limitations run and claims become time-barred.
  • Establish the FLSA “Good Faith” Defense. If a company relies on counsel for its wage and hour audit and implements the legal recommendations resulting from the audit, it may be able to establish a “good faith” defense in response to any FLSA wage and hour claims. If established, the good faith defense will eliminate liquidated damages (i.e., double damages). Reliance on advice of counsel could also prove that any violations were not “willful,” and thereby reduce the statute of limitations for any claim from three years to two years.

With the upcoming FLSA rule changes, now is the ideal time to conduct a comprehensive audit of your company’s various pay policies. After the internal audit, any changes to pay, job duties, worker classification, etc., can be implemented in conjunction with the changes required by the new FLSA regulations, which could minimize internal disruption and scrutiny.

Moreover, when planning for the internal audit, companies should strongly consider engaging the assistance of legal counsel. Experienced legal counsel can guide companies through the complexities of a wage and hour and equal pay audit, and help companies avoid the associated legal landmines. If performed by counsel, the audit also could be protected by the attorney-client privilege. Further, as mentioned above, if a company relies on the advice of counsel, the company could eliminate possible liquidated damages and reduce the applicable statute of limitations for any FLSA claims, and thereby greatly reduce its potential wage and hour exposure.