Signs Your Organization Needs a Wage and Hour Audit
Wage and hour compliance is complex and ever-changing, making it a challenge even for well-equipped HR teams. Here's why a proactive audit is essential to minimize risk, stay ahead of evolving regulations and build employee trust.
Wage and hour compliance is one of those areas where even the most diligent business owners or human resources (HR) leaders can feel a bit unsure. With overlapping federal, state and sometimes even local laws, compliance is far from straightforward. Despite having dedicated HR and payroll teams, organizations face risks simply because rules change quickly, the workforce evolves, and the tools used to manage timekeeping and payroll haven't kept pace.
The consequences of even minor discrepancies can quickly escalate into significant legal and financial issues. A proactive wage and hour audit not only helps protect your business but also reinforces employee trust.
The following information can help you assess whether it's the right time to review your pay practices and show you where to begin.
Signs your organization needs a wage and hour audit
For many employers, pay compliance issues don't announce themselves with flashing red lights. They surface through subtle, everyday signals.
One common sign is an increase in employee questions or confusion about pay. These don't have to be formal complaints. As Michael Grosso, Senior Counsel at ADP, notes, "It doesn't have to rise to the level of, 'Hey, I think I'm getting cheated.' Even general questions about how pay is calculated can signal a disconnect." When employees don't understand how their wages are determined, it's a red flag that your policies or their application needs a review.
Another indicator is organizational change. Growth, restructuring, opening new locations, or adopting remote and hybrid work arrangements increase payroll complexity.
Grosso cites an example of an enterprise-level business that acquired a subsidiary with an entirely different pay structure. The acquiring company used a complex piece-rate system, while the target company paid straight hourly wages. Though the new model had the potential to benefit employees, the lack of clear communication led to confusion and dissatisfaction among the new team members.
"It looked like they were making less, even if they weren't," Grosso says. "They didn't understand the system, and that lack of clarity eroded trust."
Changes in job roles or compensation policies, like introducing bonuses, daily pay or pay cards, can also create compliance challenges. New pay methods may require updated processes to ensure accurate overtime calculations and timely payments.
Finally, whenever federal, state or local wage and hour laws are updated, review your policies accordingly. Grosso emphasizes that many organizations fall into the trap of "we've always done it this way." But that mindset becomes a liability when laws shift across jurisdictions.
If any of these scenarios sound familiar, it's a good sign you need to proactively audit your compliance processes.
Download our complimentary guidebook, "Wage and hour laws: Six issues to monitor as the landscape changes."
Common wage and hour challenges to watch out for
Even well-intentioned employers can find themselves out of compliance with the Fair Labor Standards Act (FLSA). Issues tend to fall into a few key categories, and each has the potential to trigger costly consequences if not addressed.
Misclassifying workers
One persistent challenge is misclassifying employees as exempt when they should be nonexempt. In 2023 alone, the Department of Labor Wage and Hour Division collected over $274 million in back wages.
Misclassifying workers as independent contractors when they legally qualify as employees is another common issue. The National Employment Law Project estimates that 10% to 30% of employers misclassify employees as independent contractors.
These errors often stem from misunderstandings about job duties and what it means to pay on a salary basis, and they can lead to hefty liabilities for missed overtime and back payroll taxes, as well as other legal exposure.
Overtime calculation errors
Another common pitfall is failing to include all eligible earnings when calculating overtime. For example, employers must factor nondiscretionary bonuses or incentive payments into an employee's regular rate of pay. As Grosso explains, "The minute an investigator sees a bonus paid to an hourly worker, the first question is, 'How are you calculating overtime for those employees?'"
Inadequate recordkeeping
Accurate records are your first line of defense in a pay compliance dispute. If your timekeeping systems show every employee clocking in and out at the exact same time every day, it may indicate manual entry, which raises red flags for auditors.
Meal and rest break violations
Industries like retail, hospitality and healthcare are particularly vulnerable to noncompliance around mandated breaks because employees are under pressure to attend to customer or patient needs, even during breaks.
For example, employers should not automatically deduct a set amount of time from employees' pay to account for meal breaks, rather than having employees clock in and out. Failing to provide or properly document rest and meal periods can quickly become a liability.
Monitoring these issues on an ongoing basis is essential, but identifying them early through an audit can help you correct course before problems escalate.
How to conduct a wage and hour audit
A well-executed wage and hour audit can identify compliance issues before they escalate into legal problems. Here are six steps to help you get started.
Step 1: Assemble your audit team
Start by identifying the right people, including HR and payroll leaders, internal or external legal counsel, and frontline supervisors who understand day-to-day operations. "Without frontline insight, you might miss how policies are really playing out," says Grosso.
Step 2: Review pay policies and job descriptions
Ensure job classifications (exempt vs. nonexempt or employee vs. contractor) align with actual job duties and applicable laws. Cross-reference pay policies for accuracy and clarity.
Step 3: Examine payroll records
Look for patterns that suggest rounding issues, missed overtime or discrepancies in bonus and incentive pay calculations.
Step 4: Interview managers and employees
Where confusion or inconsistencies arise, gather feedback from both groups to identify gaps between policy and practice.
Step 5: Document audit findings
Record issues systematically, highlighting what's working and what isn't.
Step 6: Implement corrective actions
Prioritize fixes based on the severity of legal exposure and potential impact on employees. Work with legal counsel to address risks and communicate changes clearly across the organization.
Use technology to strengthen wage and hour compliance
Technology can improve pay compliance by reducing human error, providing visibility into potential risks and enabling faster, more informed decision-making.
Modern HR compliance solutions automate many of the most error-prone aspects of payroll management. For example, systems that track hours worked down to the minute and flag inconsistencies like missed punches or unapproved overtime help ensure accurate pay and reduce liability.
"Technology allows companies to look at patterns in the data and see where there might be issues before they turn into problems," Grosso says.
Compliance platforms can also provide real-time alerts when pay practices deviate from regulations. Some tools even update automatically as laws change across states and municipalities. These features are especially valuable for organizations managing a dispersed or hybrid workforce.
But while automation is powerful, it's not a substitute for oversight. Grosso emphasizes the importance of pairing technology with human judgment. "You can't completely outsource compliance to a tool," he says. You need knowledgeable people using that technology to ask the right questions and act on what they find."
Don't wait for a knock at the door
Wage and hour audits can help your organization avoid penalties, but more importantly, they help build trust, protect your workforce and reinforce fair, consistent pay practices.
"The day you stop the bad practice is the day you actually stop liability," Grosso says. So, whether you're conducting your first audit or reviewing practices as part of ongoing compliance, it demonstrates your commitment to doing right by your employees and reduces the risk of costly surprises down the road. Don't wait for an investigation to start the process. Start now, and get ahead of potential problems.
Get our complimentary guidebook, "Wage and hour laws: Six issues to monitor as the landscape changes," for more details on the latest wage and hour issues you should monitor and suggested use cases for automated time tracking solutions.
