Summary. Most wage and hour exposure is created by a system configured once and never tested, not by a decision to underpay — the classifications were set when the roles were created, the payroll system was configured at implementation, and the rounding rule has run untouched for six years. This checklist tests each: exempt classification against the duties test rather than the job description, the regular rate calculation that catches employers who pay overtime diligently and still get it wrong, timekeeping including rounding and automatic deductions and remote work, the compensability of travel and on-call and training time, contractor classification, deductions, and recordkeeping — closing with quantification and remediation.

What this checklist is for. A privileged internal audit of pay practices. Run it under counsel; the findings are the roadmap a plaintiff or an investigator would want. For the doctrine, see Wage and Hour Law Under the FLSA.

Phase 1 — Set up

  • Engage counsel and structure the audit for attorney-client privilege and work product, recognizing that a decision to assert good-faith reliance on the analysis may waive it.
  • Define the scope: which locations, which job classifications, which states, and what period.
  • Set the look-back by reference to the limitations periods: FLSA two years, or three for a willful violation under 29 U.S.C. § 255(a); state wage laws frequently three to six years.
  • Assemble: the employee census with classification, location, and pay; job descriptions; payroll registers; time records; the timekeeping system configuration; the payroll system's pay component setup; bonus and commission plans; the handbook and pay policies; and any prior audits, charges, or complaints.
  • Identify every state where an employee works, because state overtime, break, and wage statement rules layer on top of the FLSA.

Phase 2 — Exempt classification

For each exempt position:

  • Salary level. Confirm the salary meets the current federal threshold and any higher state threshold — several states set thresholds as a multiple of the state minimum wage that rises annually.
  • Salary basis. Confirm a predetermined amount not subject to reduction for variations in quality or quantity of work, and review actual deductions against the narrow permitted categories. An actual practice of improper deductions can destroy the exemption for the whole class; confirm the safe harbor requirements are met — a clearly communicated policy, prompt reimbursement, and a good-faith commitment to comply.
  • Duties. Test against what the incumbent actually does, not the job description, by interviewing the incumbent and the supervisor:
    • Executive — primary duty is management of the enterprise or a recognized department, customarily directing at least two full-time equivalents, with hiring and firing authority or recommendations given particular weight.
    • Administrative — primary duty is office or non-manual work directly related to management or general business operations, including the exercise of discretion and independent judgment with respect to matters of significance. This is the most abused exemption; performing important work is not the same as exercising discretion on matters of significance.
    • Professional — learned (advanced knowledge in a field of science or learning customarily acquired by prolonged specialized instruction) or creative.
    • Computer employee — the specific duties definition, which is narrower than "works in IT."
    • Outside sales — customarily and regularly engaged away from the employer's place of business.
    • Highly compensated — the relaxed duties test above the compensation threshold, which still requires at least one exempt duty.
  • Confirm any state duties test that is narrower than the federal one.
  • Where the classification is close, document the reasoning — that document is the good-faith showing that reduces liquidated damages.
  • Note that job titles decide nothing.

Phase 3 — The regular rate

This is the finding that catches employers who otherwise do everything right.

  • Pull the payroll system's pay component schedule and confirm, for each component, whether it is included in or excluded from the regular rate.
  • Confirm non-discretionary bonuses are included — production, attendance, safety, quality, retention, and any bonus announced in advance or that employees expect. Only a genuinely discretionary bonus, in both the fact and the amount and not announced in advance, is excludable.
  • Confirm bonuses earned over a period are allocated back across the workweeks in that period, retroactively increasing the overtime owed for each.
  • Confirm shift differentials, on-call pay, commissions, non-cash prizes, and most incentive pay are included.
  • Confirm the statutory exclusions are applied correctly — gifts, discretionary bonuses, reimbursed expenses, premium pay for weekend or holiday work meeting the statutory conditions, and benefit plan contributions.
  • Hand-test a sample of overtime weeks that include a bonus, and compare the result to what payroll actually paid.
  • Confirm the correct method for salaried non-exempt employees, and whether any fluctuating workweek arrangement meets all of its conditions, including a clear mutual understanding and a fixed salary that does not vary.
  • Confirm weighted average calculation where an employee works at two or more rates.

Phase 4 — Hours worked

  • Rounding. Confirm any rounding practice is neutral in application, not merely neutral in theory — test the actual data over a period and confirm it does not systematically favor the employer. Several states prohibit rounding entirely.
  • Automatic meal deductions. Confirm there is an affirmative mechanism to record a missed or interrupted meal, that employees actually use it, and — better — replace the automatic deduction with clock-out.
  • Off-the-clock work. Look for pre-shift setup, post-shift cleanup, donning and doffing where compensable, work performed during unpaid breaks, and after-hours email and messaging. The employer must pay for hours it knew or should have known were worked, and a policy prohibiting unauthorized overtime is not a defense to paying for time actually worked.
  • Remote work. Confirm the timekeeping system captures work performed outside scheduled hours, and that supervisors are not encouraging unrecorded work.
  • Travel time — home-to-work commuting is not compensable; travel between job sites during the workday is; overnight travel during normal working hours on non-working days is compensable in most circumstances.
  • On-call time — compensable where the restrictions are so onerous that the employee cannot use the time effectively for personal purposes.
  • Training time — compensable unless all four conditions are met: outside normal hours, voluntary, not directly related to the job, and no productive work performed.
  • Waiting time — engaged to wait is compensable; waiting to be engaged is not.
  • Short rest breaks of 20 minutes or less are compensable under federal law regardless.
  • Confirm time record edits have an audit trail identifying who changed what and why, and sample them for a pattern.

Phase 5 — Contractors, tips, deductions, and records

  • Apply the economic reality test to every independent contractor engagement, and separately apply any ABC test in the states where they work — where prong B, requiring the work to be outside the usual course of the hiring entity's business, is generally decisive.
  • Confirm joint employment exposure for staffing agency, PEO, and subcontracted workers.
  • Where a tip credit is taken, confirm the notice requirement was met, the tip pool includes no managers or supervisors, and the time spent on non-tip-producing work complies with the current standard.
  • Confirm deductions do not reduce pay below minimum wage or cut into overtime, and that state authorization requirements are met — many states prohibit deductions for cash shortages, breakage, uniforms, and business expenses entirely.
  • Confirm expense reimbursement obligations in the states that impose them, including for remote work.
  • Confirm recordkeeping against 29 C.F.R. Part 516: name, address, date of birth if under 19, sex and occupation, the workweek start, hours each day and each week, the pay basis, the regular rate, straight-time and overtime earnings, additions and deductions, total wages, and the payment date — retained three years for payroll records and two years for the records on which computations are based, with longer state periods.
  • Confirm wage statements meet each state's content requirements.
  • Confirm child labor compliance where minors are employed — hours restrictions and prohibited occupations.

Why this matters. Where the employer's records are inadequate, the employee may prove hours worked by just and reasonable inference, and the burden shifts to the employer to negate it. In practice the absence of records is resolved against the employer, which is why recordkeeping — the least interesting obligation in the statute — determines the number.

Phase 6 — Quantify and remediate

  • Quantify each finding: affected employees, periods, and amounts, using sampling and extrapolation where the population is large.
  • Model the exposure at two years and three years, with and without liquidated damages doubling the back wages, plus state penalties and attorney's fees.
  • Decide the remediation:
    • Correct prospectively — mandatory in every case, because continuing a known violation is the definition of willfulness.
    • Pay back wages directly, recognizing that a private FLSA settlement is generally unenforceable as a release without court approval or Division supervision.
    • Seek a supervised settlement with the Wage and Hour Division, which produces WH-58 receipts that operate as waivers of the private right of action for the covered period and violations.
    • Use any self-audit program the Division currently offers, verifying availability, since such programs have been established, suspended, and reinstated across administrations.
  • Communicate a reclassification carefully — from exempt to non-exempt with a compensation structure that holds the employee whole, and without a statement that concedes the prior classification was unlawful.
  • Fix the system: the payroll configuration, the timekeeping rules, the classification governance process, and supervisor training.
  • Set an annual re-audit and a trigger for re-review whenever a role's duties change materially or a new state is added.

Common mistakes

  • Auditing against job descriptions rather than against what people actually do.
  • Assuming the payroll system handles the regular rate without confirming the pay component configuration.
  • Rounding that is neutral on paper and systematically favorable in the data.
  • Automatic meal deductions with an exception process nobody uses.
  • Treating a no-unauthorized-overtime policy as a defense to paying for time actually worked.
  • Auditing only the contractor question and ignoring exempt status, which is frequently the larger exposure.
  • Applying one salary threshold across states with different ones.
  • Paying back wages directly and believing it produces a release.
  • Identifying a violation and not correcting it prospectively, which supplies the willfulness that adds the third year and the liquidated damages.
  • No documentation of close classification calls, which forfeits the good-faith argument.

Primary authority

Related

This checklist is educational and not legal advice. Salary thresholds, regulatory standards, and state wage laws change, and several standards discussed here have been recently revised or litigated. Run any audit under the direction of qualified employment counsel.