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We’ve compiled a list of the 100 most commonly asked questions we have received on the federal Fair Labor Standards Act (FLSA) overtime regulations.
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This report, "Top 100 FLSA Q&As", is designed to provide you with an examination of the federal FLSA overtime regulations in Q&A format, including valuable tips for bringing your workplace into compliance in an affordable manner.

At the end of the report, you will find a list of state resources on wage and hour issues. This report includes practical advice on topics such as:
  • FLSA Coverage: How FLSA regulations apply to all employers and any specific exemptions from the overtime requirements
  • Salary Level: Qualifying for exemptions and nonexempt employees
  • Deductions from Pay: Deducting for violations, disciplinary reasons, sick leave, or personal leave

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November 01, 2005
Tips for Conducting OT-Exemption Audits

The consequences of breaking overtime-exemption rules are so great that employers should see audits as a necessity, according to two experts who recently presented a BLR audio conference.

For a Limited Time receive a FREE Compensation Special Report on the "Top 100 FLSA Q&As," designed to provide you with an examination of the federal FLSA Overtime Regulations in Q&A format, including valuable tips for FLSA Coverage, Salary Level, and Deductions from Pay. Download Now

Thomas Makris of the law firm Pillsbury Winthrop Shaw Pittman, LLP, in California, said that if an employer is caught breaking overtime rules, its exposure can be tremendous. Employers could be liable for back wages and liquidated damages. In addition, the risk of class-action lawsuits has increased significantly in the last 10 years, he noted. He said one reason audits are important is because if a challenge of an employee's exempt status comes, the employer has the burden of proving an exemption exists for the employee.

Besides the legal implications of breaking overtime-exemption rules, there are practical reasons to conduct audits, according to Adrianne Miller, principal of The Miller Group, which focuses on strategic HR solutions. She said that one of the easiest ways to lose employees is when they no longer trust that their employer is paying them correctly.

Therefore, employers who conduct audits can catch problems early and keep themselves out of out of trouble with the Department of Labor and employees, Makris and Miller said. During the audio conference, they offered tips for conducting audits.

The first step is to plan the audit. This includes deciding who should conduct and participate in the audit, how you will communicate information about the audit, what techniques you will use to conduct the audit (e.g. review of position descriptions, exemption-test questionnaire, interviews with managers and employees), and what you will do with the audit's findings, they said.

Makris said that a tricky part of audits is obtaining accurate information from employees about their jobs. He said detailed interviews with supervisors can be a useful tool to help gather accurate information. Miller agreed, saying that a best practice is to have the manager and employee describe the job and have HR review the information. She said job titles do not determine exemption.

Makris and Miller said a number of questions should be addressed by the audit, including:

  • How are policies related to exemption status and overtime communicated?
  • How does the company evaluate exempt versus nonexempt status?
  • Are duties adequately described and evaluated?
  • What are the company's policies regarding deductions from exempt employees' pay?
  • When was the last time the company reviews the status of the position?
  • How has the position changed since the last audit?
  • Does the position meet the requirements of the executive, administrative, professional, computer employee, outside sales, or highly compensated employee exemptions?
  • Do overtime rules specifically entitle the job to overtime (e.g. police officers and fire fighters)?

Another step is to review your pay practices to ensure that exempt employees are being paid on a salary basis. Miller and Makris said some questions your audit should address include:

  • Is the employee paid on a salary basis receiving a predetermined amount of compensation each pay period on a weekly, or less frequent, basis?
  • Is the predetermined amount reduced because of variations in the quality or quantity of work?
  • Are any deductions being made from the salary? What are they?
  • Is there a clearly communicated policy prohibiting improper deductions? Is there a complaint mechanism?
  • Are employees reimbursed for any improper deductions?

Miller offered these additional tips:

  • Establish an audit schedule. She said on-going audits are important.
  • Design job descriptions to complement the audit process
  • Educate managers about Fair Labor Standards Act rules and the company's overtime policies.

Makris had these suggestions:

  • Err on the side of classifying employees as nonexempt
  • Seek expert assistance on the audit process
  • Remember the purpose of the audit. If it is designed for litigation protection, it's important to retain the audit's final conclusions and data.

Both experts said it can be difficult to communicate to employees that they are moving from exempt to nonexempt after an audit. They said many employees attach a certain level of prestige to an "exempt" job and see a change to nonexempt as a demotion. When an employee goes from exempt to nonexempt, it is important for the employer to stress to the employee that it is no demotion and his pay will increase if he works more than 40 hours, Miller said.

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