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Preventing a DOL Overtime Audit

Proposed Changes to FLSA White Collar Exemption Rules

It is estimated that more than 50 percent of all employers groups have misclassified their employees under the FLSA, although many do not realize it. Payroll errors can trigger a DOL audit, which not only opens your business up to significant fines but can also harm your company’s reputation and can be an administrative burden.

During a DOL audit, the DOL will visit your company to conduct interviews, examine time clocks and ensure that all employment notifications are available to your employees. The auditor will also review up to three years of wage and hour records to determine if there are any violations in your payroll practices.


Audit Prevention Strategies

To minimize compliance risks, consider the following recommendations:

  • Review your employees’ job descriptions to make sure they are accurate and reflect the jobs that employees are actually doing.
  • Review your employee’s job duties to evaluate whether they fall within the “white collar” exemptions.
  • Determine whether you have properly calculated overtime for non-exempt employees based on FLSA and state laws.
  • Make sure that all required employment postings are hung up and visible to your employees.
  • Assess your company’s timekeeping procedures and methods for calculating regular rate pay.
  • Conduct an internal audit to reveal any misclassifications before the DOL has the opportunity to do so.
  • Pay employees who were misclassified for overtime pay under the supervision of your attorney.

Joint Employment

DOL recently released guidance regarding joint employment that may make many employers think twice about relying on contracted labor and staffing firms. Currently, many employers use these types of services but do not consider themselves to be joint employers. Employers should use this guidance to determine whether they are in a joint employment situation.

Joint employment occurs when an employee works for two or more related employers. When joint employment exists, all joint employers are jointly and severally liable for compliance with the FLSA. The concept of joint employment is possible because the FLSA has adopted a broad definition of employment—“to suffer or permit to work.” According to the DOL, a broad definition of employment is necessary to ensure that employers do not use “middlemen” to evade their responsibilities under the law.

When joint employment exists, an employee’s hours worked for all of the joint employers during the workweek are aggregated and considered one employment. As a result, that employee’s overtime compensation depends on whether his or her aggregate hours of work exceed the limits set by the FLSA and the MSPA.

Under this new guidance, the DOL classifies joint employment in two categories—horizontal joint employment and vertical joint employment.

  • Horizontal joint employment exists when a worker is employed by two or more employers that are “sufficiently associated or related.” This means that the employers are technically separate entities but are related or share some administrative or employment functions. Horizontal Joint Employment
  • Vertical joint employment situations exist when employers contract with intermediary employers for labor, such as in situations involving staffing agencies, subcontractors and labor providers. Vertical Joint Employment

Assess whether the intermediary employer is an “employee” of the potential joint employer:

  • If the intermediary employer is the potential joint employer’s employee, then the intermediary’s employees are also the potential joint employer’s employees, and a joint employment determination is not necessary.
  • If the intermediary employer is not an employee, determining whether vertical joint employment exists depends on the outcome of an economic realities test. This test shows the degree of economic dependence a worker may have on a potential joint employer.