Are all your employees accurately classified as exempt or nonexempt? Are you sure? The costs of misclassification can add up quickly, and the DOL estimates that nearly 70 percent of employers are not in compliance. You shouldn't risk it. By learning how to conduct an internal payroll self-audit that evaluates your current policies and practices, you can discover mistakes before enforcement officials or employee attorneys do it for you.

In a CER webinar titled "Exemption Audits in California: Practical Strategies for Conducting a Successful Self-Audit of Your Job Classifications," Allen M. Kato outlined some advice for employers on why you should be conducting these audits.

Determining Exempt or Nonexempt Status: Why You Should Conduct an Audit

What happens if your exempt or nonexempt status is wrong for some employees? Firstly, if workers are misclassified, then you have potential liability for unpaid overtime and more. "There are penalties that may be assessed – either by the government agency that is auditing the organization, or by a court in the context of litigation. There's also the liability for attorney's fees, interest due, as well as the cost for litigation." Kato advised.

These potential liabilities are quite extensive. How can you protect yourself? One of the primary things you can do is to conduct an audit. Doing so will allow you the opportunity to review job descriptions to ensure they accurately reflect workers' duties and responsibilities. It will also confirm that you have accurate recordkeeping and time-keeping practices. These two pieces are the groundwork for you to be able to meet your obligations in terms of accurate classification of exempt or nonexempt employees.

Kato outlined some additional reasons to conduct a self-audit:

• You can reduce the chance that an agency and/or court will impose penalties. While penalties for misclassification are often automatic, in practice the penalties can be removed by the courts' discretion. If you've recently conducted an audit in good faith and objectively determined that a position was correctly classified as exempt, a court may be more likely to remove the penalties.
• You can determine if workers are abusing the time system (e.g., rounding up time, punching in long before actual work, or punching out long after work finished). This is a side benefit to analyzing the system.
• You may be able to determine whether worker time can be better managed, and determine alternatives to working overtime to complete necessary work. This can be a strategic consideration for the long term.

To register for a future webinar, visit CER webinars.

Allen Kato is an attorney in the Employment Practices Group of Fenwick & West LLP in San Francisco. His practice concentrates exclusively on representing management in equal employment opportunity, wage and hour, wrongful termination, privacy, unfair competition, and trade secret matters, and litigating individual and class action lawsuits before courts and agencies.