The word audit is a fairly loaded one. Many people think of audits as disciplinary actions and often fear being penalized for doing something wrong. However, audits can actually be extremely helpful events, especially for business owners. They can help to identify problem areas and ensure everything is running as it should.
Employers have a lot to think about when it comes to their employees. Paying workers fairly and accurately is more involved than many people think, and it’s not difficult to make mistakes. However, it’s important to do your best to follow all employment laws as closely as possible. If you don’t, you could face litigation that few companies can afford.
Whether you are facing an issue or are simply trying to stay on track, it’s essential to understand what a wage and hour audit entails. When you understand this process, you can better manage your company to avoid punitive action and stay on track for success.
A Federal Wage and Hour Audit
A wage and hour audit is a review of your finances and payroll processes. These events are intended to ensure accuracy and protect both employees and employers from fines and punishments. The Department of Labor conducts these reviews, during which they assess a company’s payroll records from the past two years.
During an audit, the Department of Labor will look at the following:
- Employees
- Pay rates
- Wages
- Tax withholdings
The department is simply trying to ensure accuracy by reviewing your books. If you keep everything up to date and record your finances, the audit shouldn’t be an issue.
Why Does a Federal Audit Happen?
Many times, federal audits occur because an employee made a wage or payment violation complaint. Not all complaints warrant an audit, but it’s a possibility if an employee makes a report. This is another reason why it’s essential to make sure you are constantly complying with state and federal wage laws. When you do, you keep your employees happy and minimize your risk of being audited by the Department of Labor.
However, employee complaints are not the only reason that a federal audit can occur. Recently, the Department of Labor has been doing random reviews in certain industries. The industries that they target often have a history of violating wage or employment laws. You do not need to do anything wrong to be audited.
It’s also important to note that there may be no warning of your audit. The Department of Labor is not obligated to give you warnings or opportunities to change your methods before they conduct an audit. It can happen at any time.
Internal Audits
Federal audits certainly seem intimidating, but not all wage and hour audits are done by the federal government. Many companies perform their own internal audits to make sure everything is running as it should and that all current laws are being followed. Wage laws change fairly frequently, so running internal audits is an effective way to make sure the company is always functioning above board.
Many companies perform internal audits once per year. This is a manageable amount of time to review, and it gives you a good snapshot of how your company is performing in relation to current employment laws.
Benefits of an Internal Audit
Running your own internal audit has many different benefits for your company. If you haven’t considered doing one, it’s likely worthwhile to explore it. Benefits of an internal wage and hour audit include:
- Reassurance that you are compliant with current wage and employment laws
- Elimination of calculation errors
- The ability to get ex-employees or ghost employees off your payroll
- Ensure you are accurately withholding taxes
- Clarity about whether a wage increase is needed or appropriate
- A better idea of how your budget is working and where spending can improve
These benefits can have profound effects on your company and are sufficient inspiration for many companies to do internal audits.
How to Do an Internal Audit
If you do wish to reap the benefits of performing your own internal audits, you’ll want to have a plan before you begin. Going in blindly can make the process more stressful than it’s worth. Outline what you will do beforehand so you can follow your list and stick to the objective.
Your first step should be to review the employees on your company’s payroll. If you find that there are more employees on the payroll than you actually have, this signals a significant problem. There could be possible embezzlement or other fraudulent activities occurring through payroll this way.
After your employee list is accurate, review their wages. Make sure their paperwork is up to date, and you are paying them what you owe them. If they haven’t gotten a raise in a while, it may be time to consider such a gesture. This is also a good time to look at employee hours to make sure that everyone is working sufficient hours for their pay and clocking in and out at the correct times. If you see discrepancies, it may be worth investigating. This is a great time to double-check that you have employees correctly classified in your system.
Next, line up your financial records with your receipts and employee payments. Make sure you have accurately recorded spending information. Also, be sure to look at tax withholding and ensure you are being accurate and honest.
This process can be made infinitely easier by the help of an employment attorney. Having a specialist look through your books to verify that everything is accurate is incredibly helpful, and it gives businesses the peace of mind that they need to continue operations. If the Department of Labor comes knocking for a federal audit, your employment attorney can work with them to show that you’ve conducted regular audits and your records are accurate. You save yourself a lot of time and headache by hiring a professional.
Contact Fishman, Larsen & Callister
At Fishman, Larsen & Callister, our Wage and Hour Claims Defense Attorneys have been helping employers navigate employment laws for many years. You can trust us with your finances and your business. Contact us today for more information.