The Wage and Hour Audit and What Triggers One

Why this matters

Owners picture a wage and hour audit as a lottery draw and plan for it accordingly, which is to say not at all. It is not a draw. Investigations are opened because something opened them, the somethings are a short and knowable list, and a shop can see three of the four coming. The fourth is the one shops create themselves, by fixing a problem in a way that dates it.

What follows is orientation, not legal advice about your shop. The point where you stop and call somebody is at the end, and it is the most important paragraph here.

Who opens the door

A former employee, usually one you fired. This is the commonest single route into a federal or state wage investigation, and the timing is not a coincidence: a wage complaint costs nothing to file, has no lawyer gate, and is the one lever an angry ex-employee has. The U.S. Department of Labor's Wage and Hour Division does not disclose who complained. That matters twice over. You will not be told, and a shop that decides it knows and reacts has added a retaliation claim under 29 U.S.C. 215(a)(3) to a pay dispute, on facts far easier to prove than the pay question (the retaliation card works that through).

The operational consequence sits upstream, at the termination, not at the audit. Most of these complaints come from exits that went badly - a final cheque that was short or late, a deduction the person did not agree to, a conversation that ended in a threat. The cheapest wage-audit insurance a shop buys is a clean, quiet, documented exit.

A directed investigation. Both WHD and state labour departments run enforcement initiatives targeting specific industries and regions rather than specific employers, and residential construction and field-service trades appear on them regularly. These are published. The way to find out whether your trade is currently on one is to read your state labour department's enforcement news and WHD's news releases for your region, which takes ten minutes a quarter and is the only warning you get.

The classification question arriving sideways. Nobody audits your 1099 decision directly at first. What happens is that a workers compensation carrier runs its annual premium audit and reclassifies payments to uninsured subcontractors into your payroll, or a person you paid on a 1099 files for unemployment and the state agency makes a determination that he was an employee, or that same person gets hurt. Any of those produces a written finding by one agency, and findings travel: the Department of Labor has had information-sharing arrangements with the IRS and with a long list of state agencies since 2011. The classification cards own the test; what matters here is that the test gets run by whoever you meet first, and you do not choose who that is.

The fix that documents the violation. A shop realises its techs have been unpaid for the morning load-out, starts paying it in March, and says nothing about January and February or the two years before them. The change is now a dated admission that the prior practice was different, and the date brackets the period. This is the trigger shops manufacture, and it is the one with the best available answer, below.

What an investigator actually asks for

A WHD investigation is typically records plus interviews plus a final conference. The records request runs to the set the regulations already require you to keep, so nothing in it should be a surprise. Under 29 CFR 516.2 that set includes the employee's identifying information and occupation, the time of day and day of week the workweek begins, the regular hourly rate and the basis on which wages are paid, hours worked each workday and total hours each workweek, straight-time earnings, the overtime premium, every addition and deduction, total wages per pay period, and the date of payment with the period it covers.

Retention has two clocks that shops routinely collapse into one: payroll records for three years under 29 CFR 516.5, and the supplementary basic records - time cards, wage rate tables, work time schedules - for two years under 29 CFR 516.6. The supplementary set is the one nobody keeps, and it is the one that answers the only question that ever matters.

Employees are interviewed, some on site and some not, and the investigator is not obliged to interview all of them or to tell you what was said.

The three records that decide it

Everything above narrows to three things. Time records, meaning hours worked each workday. The pay basis, meaning whether a person is hourly, salaried, commissioned, piece-rate or day-rate, and whether the overtime arithmetic on that basis was done right (the FLSA overtime card owns the arithmetic). The classification file, meaning why each 1099 is a 1099.

Notice that two of the three are documents about a decision rather than records of work. A shop can have perfect time records and lose on the pay basis, because the regular rate was computed without folding in a nondiscretionary bonus.

The asymmetry nobody expects

Here is the part that inverts what owners assume, and it is why the missing record is worse than a bad record.

The duty to keep the records is the employer's, under 29 U.S.C. 211(c). In Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946), the Supreme Court held that where an employer's records are inaccurate or inadequate, the employee need only produce enough evidence to show the amount and extent of the work as a matter of just and reasonable inference; the burden then shifts to the employer to come forward with evidence of the precise amount of work performed, or with evidence to negate the inference. If the employer cannot, damages may be awarded on the inference even though the result is approximate.

Read plainly: keep no records and the other side's recollection becomes the starting number, and your job is to disprove it. Owners assume the person claiming the hours has to prove them. That is true only when you have kept what the law already required.

Worked: rebuilding a number from records that were never time records

Seven field techs. The shop pays a flat 40 hours a week regardless of the day, keeps no daily time records for field staff, and has a payroll summary showing 40.0 every week for two years.

An investigator interviews four of the seven. Their estimates of a normal week run from 46 to 52 hours. Under Mt. Clemens that range is sufficient evidence of amount and extent, and the investigator works from 47 hours.

• Hours over 40: 47 minus 40 is 7 per tech per week, paid nothing at all.
• Owed at one and a half times the regular rate: 7 times 1.5 is 10.5 hours of pay per tech per week.
• Across 7 techs: 10.5 times 7 is 73.5 hours of pay a week.
• Over the FLSA's ordinary two-year lookback (29 U.S.C. 255(a); three years where the violation is willful), 104 weeks: 73.5 times 104 is 7,644 hours of pay.
• Liquidated damages under 29 U.S.C. 216(b) are an additional equal amount, so 15,288 hours of pay, unless the employer carries the good-faith defense at 29 U.S.C. 260.

Now the shop's bookkeeper remembers that the dispatch software timestamps first arrival and last departure, and the vans have telematics. Nobody ever called those time records. Pulled and averaged across the same period, they put the mean week at 44.6 hours.

• Hours over 40: 4.6 per tech per week. At 1.5, that is 6.9 hours of pay per tech per week.
• Across 7 techs: 48.3 hours of pay a week. Over 104 weeks: 5,023.2 hours of pay.
• Against the interview-based 7,644, that is a reduction of 2,620.8 hours of pay, about 34 percent of the 7,644-hour figure.

Two honest notes on that. First, the telematics could as easily have come back at 49 hours and raised the number - the point is not that records help, it is that records decide. A shop with them argues about the figure; a shop without them has lost that argument before it opens. Second, if the violation is found willful the lookback goes to three years, and 156 weeks instead of 104 multiplies either figure by 1.5.

And the good-faith defense is worth naming precisely, because it is the only thing that removes the doubling and it is earned in advance. Section 260 requires the employer to show it acted in good faith and had reasonable grounds to believe the practice was not a violation. Subjective belief alone does not do it. What does is a document created before the fact: a written pay policy, a documented review with counsel, reliance on a DOL opinion letter. A shop that has never once written down why it pays the way it does has nothing to show under that section.

One more thing about those telematics. Most systems roll old data off on a retention schedule. Once a shop reasonably anticipates a claim, letting that happen on schedule is no longer housekeeping, and suspending the auto-delete is one of the first calls a lawyer will make.

Fixing it forward without confessing backwards

You have found a problem. Do not just start doing it right quietly, because that is the fourth trigger and the change date does the plaintiff's framing for them.

The genuine fork is how to handle the back period, and it is a fork with two defensible branches. A supervised settlement through WHD under 29 U.S.C. 216(c) buys a waiver of the employee's private right of action for those wages, which a private cheque and a signed release generally does not - unsupervised releases of FLSA claims are of doubtful enforceability in much of the country. Against that, a supervised process brings the agency into a shop it was not looking at. A private correction with a documented methodology is faster and quieter, and leaves the claim technically alive.

Which is right depends on the size of the exposure, whether a complaint is already filed, whether the practice touched everybody or one crew, and what your state's own wage law does on top of the federal floor. Several states run longer limitation periods than the FLSA's ordinary two years: New York's is six, and California's is three, reaching four where the wage claim is carried under that state's unfair-competition statute. A federal-only calculation can understate the real window badly.

That is the hard stop. Before you change a pay practice you know was wrong, and before you pay anybody anything, take the payroll register for the full lookback, whatever time records exist and an honest statement of which do not, the written pay policy if there is one, and the date and reason you were about to change it, to an employment lawyer. The decision about the back period is not a bookkeeping decision, and the paperwork you generate making it is the first thing anybody reads afterwards.

References

• Fair Labor Standards Act recordkeeping duty, 29 U.S.C. 211(c); limitations period 29 U.S.C. 255(a); liquidated damages 29 U.S.C. 216(b) and the good-faith defense at 29 U.S.C. 260; supervised payment 29 U.S.C. 216(c)
• Recordkeeping regulations, 29 CFR 516.2, 516.5 and 516.6
• Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946)
• U.S. Department of Labor, Wage and Hour Division, investigation procedures and enforcement news releases
• See related: FLSA Overtime Rules for Trade Businesses; Off-the-Clock Time: The Drive, the Phone and the Load-Out; What Misclassification Actually Costs When You Lose; Retaliation: The Claim That Outlives the Original Complaint