The U.S. Department of Labor (DOL) has estimated that more than one-half of employers have incorrectly classified employees under the Fair Labor Standards Act (FLSA). That might mean you. The number of audits conducted by the DOL on employers' wage and hour practices is increasing by the day. In fact, in 2003 DOL wage and hour settlements added up to $212 million. Cause for concern? Maybe. If you have just one employee who feels he or she was incorrectly classified as exempt and should have received overtime for any hours worked in excess of 40, the DOL may be looking to audit you.

When do audits occur? Audits are usually triggered either when a current or former employee files a complaint with the DOL or when the DOL targets a specific industry for investigation.

With the proposed FLSA regulations in the news on a regular basis, employees are increasingly knowledgeable about their rights under the FLSA. Employees know they will be heard if they knock on the DOL's door. So, proactive employers are addressing any incorrect classifications that might exist now, rather than waiting for that knock on the door or even for the new proposed FLSA regulations to be finalized.

What are the steps of a DOL audit? If the DOL decides it is going to audit your company, a DOL representative will visit your facility to conduct interviews, make sure the required posters are hung, and possibly examine the time clocks. The DOL will then review up to three years worth of your wage and hours records and investigate your wage and hour practices. This will include a review of your pay records, so you must make sure the records are accurate and organized.

The DOL will also interview employees to reveal any complaints your employees may have about the company's wage and hour practices. After the review is complete, the DOL will let you know that there are either no violations, some borderline cases, or will set up a meeting to discuss any violations they did find during the audit process. You then have the choice of settling or litigating.

Avoiding (or making the best of) a DOL audit. There are several steps an employer or human resources professional can take to help insure that its company will emerge successfully from a DOL audit:

• Take the time to understand the FLSA, including the proposed regulations.
  
  
• Conduct an internal audit. You will preempt the DOL and discover your misclassifications before it is too late. As part of your audit you should:
  
  
  • Review job descriptions to determine whether they are still accurate, reflect the jobs being performed, and reflect the skills necessary to perform the job.
    
    
  • Review employees' actual job duties to ensure that they still fall within the administrative, executive, professional, computer, or outside sales exemptions.
    
    
  • Make sure you have properly calculated overtime for nonexempt employees. For instance, bonuses and shift premiums should be included in the calculation of the regular rate of pay.
    
    
  • Make sure you have the required posters hung in the appropriate places in the workplace.
    
    
• Train your managers so they are fluent in the language of the FLSA.
  
  
• Determine whether the state's wage and hour laws conflict with federal law, then follow the law that is most beneficial to the employee.
  
  
• Pay past overtime due to employees you have misclassified. Paying them now will be far less expensive than paying them in a DOL settlement.
  
  
• In the case of an audit by the DOL, assign a representative of your company, or perhaps legal counsel, to be the main point of communication between the company and the auditors. This person should have a complete understanding of the FLSA.

DOL audits vs. private settlements. One advantage of a DOL audit over a private lawsuit is that if you reach an approved settlement with the DOL, your settlement is final. On the other hand, if you are sued privately by a disgruntled employee or class of employees and settle without DOL approval, the DOL has a right to reexamine your company's wage and hour practices and you may be under the gun a second time.

Last but not least ­ avoid backlash. The FLSA prohibits retaliation against employees, including discharge and discrimination, for filing a complaint with the DOL. In light of this, it is important that employers do not stand in the way of employees filing complaints or cooperating with the DOL investigators.