ne of the best ways to reduce a municipal employer’s exposure to claims under the Fair Labor Standards Act (FLSA) is to conduct periodic self-audits. This will help detect problems before they become the subject of a U.S. Department of Labor investigation or a civil suit (with potentially double damages and attorney fees.)
Goals of Internal Audit
Compliance with the FLSA is the primary goal of an internal audit. This is done by checking whether the following is true:
• All nonexempt employees’ base pay, and therefore overtime rates, are properly calculated
• No employee has been misclassified as exempt from overtime eligibility
• All hours worked are properly counted for nonexempt employees
• No improper deductions have been made from any exempt employee’s salary, possibly resulting in the loss of his or her exempt status
Involve Municipal Officials
Chiefs should consult their mayor, manager, selectmen, or other municipal officials before undertaking an FLSA self-audit. Without these officials’ support and commitment to address any discrepancies, chiefs might be exposing the municipality to even greater liability. This is because once a violation is uncovered a willful-violation charge is likely to result in much greater damages (three years’ back pay instead of two years’ back-pay, for instance). Similarly, since the department’s findings are likely to be deemed public records, a civil suit by employees or the union will be the beneficiary of this effort.
In most cases, simply pointing out recent changes in the FLSA may be enough to prompt municipal officials to support a self-audit. Where they need a little prodding, informing them of the prospects of double damages, back wages, and legal fees (never mind criminal sanctions or even personal liability in extreme cases) should help. Examples of large damage awards paid by municipalities across the country should also be noted.
Who Conducts the Audit?
Chiefs are rarely the most qualified persons to conduct an FLSA self-audit. Likewise, neither the manager nor municipal counsel is likely to have much experience in this area. If the city or town has labor counsel, it is possible that the firm has conducted FLSA compliance audits. Often a team composed of outside counsel, the manager, the chief, and the treasurer and auditor should be assembled to address the issue.
A thorough review of the job descriptions of all employees is a good place to start. This will help determine whether positions are properly classified as exempt or nonexempt. Auditors must also determine whether job descriptions are up-to-date and accurately reflect what employees actually do.
An initial spot-check of sample time and payroll records should help determine whether a more comprehensive review is required. Departments should verify that the municipality has kept records for the past three years, just in case an audit reveals that a three-year, as opposed to the customary two-year, statute of limitations might apply (where the violations were knowing or willful.)
One simple audit item is checking to see if wage and hour notices are conspicuously posted. Laminated charts, often containing multiple notices, are available commercially or can be downloaded from the Department of Labor’s Web site, www.dol.gov .
A self-audit also involves a more detailed analysis of the department’s compensation policies. This analysis will require a review of how base pay is determined and how overtime is paid. If the employer has adopted a work cycle of between 7 and 28 days, as described in section 207(k), this fact must be taken into account. If there have been any complaints, the audit should confirm that they have been properly addressed. Recent FLSA changes afford employers a safe harbor if they promptly correct inadvertent errors. (Failure to do so may mean the loss of exempt status for a group of positions.) Attention should also be paid to joint employment or dual employment situations, combining hours worked when computing overtime where required.
Self-audits of municipal departments must include a close look at the use of compensatory time. In police departments, all overtime hours worked may be credited at time and one-half as compensatory time up to a maximum of 480 hours. Chiefs should pay special attention to their department’s policy of denying requests to use accrued compensatory time. Unless there is clear language in an agreement with the employee and union, a chief may not deny a request simply because it will result in calling in another officer at overtime, for example. (Even such language may not be enforceable.)
Exempt employees are entitled to a full week’s salary, even if they take off small amounts of time for personal reasons, for example. An employer may dock an employee’s pay without converting the individual from an exempt to a nonexempt position, for the following:
• Full-day absences, including sick leave if done pursuant to bona fide policy
• Military leave or jury duty
• Discipline for major safety rule violations
• Sexual harassment
• FMLA leave on intermittent basis
• First and last week’s pay
Isolated or inadvertent errors, including improper deductions from exempt employees’ salaries that are promptly corrected, need not result in a loss of exemption for the employee involved or other similarly situated employees. Under the safe harbor rule, if the employer has a clearly communicated policy—including a complaint mechanism—prohibiting improper deductions, reimburses employees for improper deductions, and makes a good faith commitment to comply in the future, the exemption will not be lost.
A report of all findings should be made. This should include potential violations and steps taken to address them. Changes in policies, job descriptions, record keeping, and complaint handling should be included as appropriate. The best way to avoid future problems is to follow the FLSA’s requirements and to respond promptly to all complaints before they blossom into formal Department of Labor investigations or civil suits.