Employers should Audit Wage Practices before Someone Else Does it for Them

When a company’s employee numbers start to grow, so too does its exposure to a plethora of wage and hour rules. A small business can become “enlightened” about one or more of them in a number of ways, from a complaint by a disgruntled former (or current) worker to a random audit by governmental authorities to a class action lawsuit by opportunistic lawyers. Violations of the law can bring substantial damages that may include civil penalties, tripling of unpaid wages, and reimbursement of an opponent’s legal fees.

In most cases, complaints from individual employees can be handled expeditiously. It’s when employees join together in class action suits or employers are audited by state or federal labor authorities that damage exposure becomes dangerous. Audits are common in Massachusetts and can revolve around worker classifications, weekly wages or overtime payments, contributions to the unemployment fund, and other issues. As companies grow, then, they should audit their own policies in these areas to ensure they comply with applicable laws. Waiting to do so until an auditor or a lawsuit arrives at the door can cost tens or even hundreds of thousands of dollars.

Employers should remember that state and federal auditors have broad powers to demand access to employee pay and time records, which must be maintained under the law. In many cases, a single unhappy employee’s complaint is enough to trigger a company-wide investigation of an employer’s wage and hour practices. While an employer could, in theory, resist an auditor’s requests for information, doing so normally makes little sense. Resistance is likely to be costly and futile in the end. It may also encourage harsher treatment of any violations an audit ultimately uncovers.

Key issues for employers to watch over in advance of an audit or a lawsuit are the classification of employees as contractors or employees; payment of minimum and other wages for hours worked; overtime pay for work in excess of 40 hours weekly; and the handling of tips and related issues. In all of these areas, state law requires that standards be met and that all money earned by employees be paid promptly. Because Massachusetts makes the use of independent contractors extremely difficult, companies that use them must be especially careful. Misclassification can trigger a number of wage payment violations that can lead to back payments to both employees and government tax authorities.