Anatomy of an Audit

Audit may not be a four-letter word, but many construction companies treat it that way. Audits can be scary because you don’t always know what to expect and the consequences can be severe.

Audits are a way of enforcing compliance in the construction industry. Federal and state laws mandate how construction, and most other industries, pay and treat their employees.

The Fair Labor Standards Act (FLSA) is at the heart of the US labor law compliance. It is enforced by the Department of Labor (DOL) and compliance is monitored by the DOL’s Wage and Hour Division (WHD).

Established in 1938, the FLSA sets an 8-hour workday, 40-hour workweek, time-and-a-half pay for hours worked beyond 40 per week and a nationally consistent minimum wage. Businesses that don’t comply with FLSA face audits and fines. For example, in 2021, WHD:

• ​Found more than 24,700 compliance actions
• ​Collected more than $36 million in back wages for the construction industry

What You Need for An Audit

If you employ nonexempt workers in the U.S., you must keep these employee records for at least three years in order to comply with FLSA regulations.

• ​Employee’s name, gender & birthdate
• ​Employee’s social security number
• ​Employee’s address
• ​Employee’s occupation
• ​Time and day when the employee’s workweek begins
• ​Number of hours the employee worked each day
• ​Total hours the employee worked each week
• ​How the employee was paid (hourly, salary, commission, etc.)
• ​Employee’s regular hourly pay rate
• ​Total daily/weekly ‘straight time’ earnings
• ​Total weekly overtime earnings
• ​Any additions to or deductions from the employee’s wages
• ​Total wages paid to the employee
• ​Dates that the given pay period covers

This information is essential when an audit happens, which could be ANYTIME.

What’s Involved in an Audit

• ​Why Would I Get Audited? Companies are typically audited for one of three reasons: a competitor reported you, a random audit, or—most often—an employee complaint.
• ​Will I Know Beforehand? The DOL can just show up if they want to—but they usually give notice of a month or two. Employers may be represented by an accountant or lawyer during the audit process.
• ​What Could I Be Reported For? The DOL wants to know that your records accurately reflect what your employees worked, and that your workers got paid correctly for those hours. If an employee lodges a complaint to the contrary, it can lead to an audit.
• ​How Long Will the Process Take? It depends on company size, employee number and other factors, but investigations usually take about two to four weeks. The auditor then deliberates for as long as a few weeks before deciding whether to issue a citation.
• ​What’s the Usual Penalty? Audits don’t often lead to court, but the Wage and Hour Division will force you to pay back any wages it deems went unpaid in the past. It may also award liquidated damages. With repeat or willful violations, civil money penalties are levied.
• ​Can I Defend Myself? The best defense is accurate records. However, if—after you get notice of an audit and before it occurs—you can identify the problem and correct it over your next couple of payrolls, this might help you avoid a fine.

Certain employees—including administrative staff, and other salaried positions—are exempt from many FLSA regulations. You still need some record of their wages and any other remunerations to prove their exempt status, though.

Self Audit Checklist

It is always better to take a hard look at your process now to identify mistakes before an audit comes later.

Use this checklist to help make sure you cover all your bases. Please note: this does not replace a lawyer’s advice.

1. 1.Are all positions within your company classified as either exempt, non-exempt or independent contractor? Yes— No—
2. 2.Do all employees classified as “exempt” fall under the Executive, Administrative, Professional, Computer Employee, Outside Sales, or Highly Compensated Employee exemption categories in the FLSA? Yes— No—
3. 3.Are your non-exempt employees paid at least minimum wage for all their hours worked? Yes— No—
4. 4.Are your non-exempt employees paid at least 1.5 times their regular rate of pay for hours worked over 40 during a workweek? Yes— No—
5. 5.When calculating regular rate of pay for overtime purposes, do you count non-discretionary bonuses, commissions, and other forms of compensation not specifically excluded? Yes— No—
6. 6.Are employees paid their wages as agreed upon by company policy and in accordance with state and federal laws? Yes— No—
7. 7.Does the company take immediate action to correct any wage and hour violations and to prohibit any retaliation against an employee for filing a complaint? Yes— No—
8. 8.Are wage, hour and other employee records retained as mandated by the FLSA for at least three years? Yes— No—

Did you answer ‘no’ to any of the questions on the left? You could be susceptible to large fines in case of an FLSA audit.

Time tracking software helps you either avoid audits or handle them well by recording accurate hours, breaks, lunches and overtime for all employees in real time. Digital time records collected with an app or through a rugged onsite time clock and synced directly to your accounting program are much less susceptible to human error and disputes. Cloud-based time tracking software stores records for good, so they’re available for easy retrieval if and when you need them.

ExakTime by Arcoro is the construction industry’s go-to solution for accurate time tracking. Learn more about how ExakTime’s mobile app, rugged time clocks and kiosk option meets the needs of thousands of construction and contracting companies.

See a demo of how HR technology can help your construction business.

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