How to Ensure Your Compensation Practices are Compliant with Relevant Laws & Regulations

It can be easy to neglect compensation compliance when you feel overwhelmed by all the considerations. Laws and regulations around pay practices exist to protect employers and employees. Taking a compliant approach ensures you’re doing what’s best for your team, helps attract and retain talent, and most importantly keeps you out of legal trouble.

We’ve broken compensation compliance down into useful questions that, when answered, will offer insight into what you’re doing right and what needs addressing. This is a good starting point, but the whole process requires a lot of compensation research.

Do you audit your non-exempt positions to ensure that you’re paying minimum wage and overtime?

Minimum wage requirements vary state by state. In America, the federal minimum wage is $7.25 per hour as of 2009. You as an employer are required to comply with federal laws and unique state regulations. The employee is entitled to the higher of the two minimum wages. They are also guaranteed overtime pay for any time worked over 40 hours in one week.

Have the finance team and HR conduct weekly or monthly audits. They should review employee data, check hours worked and paid, and note different types of compensation received. If any issues arise, the findings should be reported immediately.

Have you audited exempt positions to ensure they meet their salary and overtime requirements?

Exempt employees are those that earn a salary as opposed to an hourly wage. Employers are required to pay them a salary that is in line with the Fair Labor Standards Act (FLSA). As of 2023, to be considered exempt, an employee should be earning a minimum of $35,568 annually.

If these laws are violated, you can face serious issues. Employees can file lawsuits, you may be required to recover back wages, or face monetary penalties. Auditing your salaries is a sensible way to ensure you’re doing nothing wrong. You may make an honest mistake that goes unnoticed for a long time.

Do you have employees requiring reclassification?

Are you certain you have classified your employees correctly? Someone’s responsibilities and accountability could shift and mean their job titles no longer describes their position. If you’re not classifying your workers appropriately, you may unintentionally evade your legal compensation, rights, tax, and other duties.

Doing this could also be beneficial for your organization. For example, it could be more cost-effective to hire workers on a salary basis rather than pay hourly workers significant overtime.

Are you ensuring pay equity where required by law and not discriminating against a protected class?

In recent years there has been a stronger focus on pay equity in the workforce. The US Equal Employment Opportunity Commission enforced laws that prohibit compensation discrimination on the basis of race, color, religion, sex, national origin, age, or disability.

It’s recommended to use software to measure pay equity in your organization. It will help you perform a holistic analysis of all your employees to identify any pay disparities. Job descriptions of positions in your team must be accurate to allow for job grouping. You’ll need to consider responsibilities, experience, education, and demographic information. This will also show the scope of your organization’s diversity.

Can you ensure that your pay practices comply with the Fair Labor Standards Act?

The Fair Labor Standards Act (FLSA) outlines the following requirements:

• Minimum Wage - $7.25 federal minimum and varies state by state
• Overtime Pay – any time worked over 40 hours weekly
• Hours – include required time on the employer’s premises, on duty, or at a prescribed workplace
• Recordkeeping – displaying an official FLSA poster and keeping employee time and pay records
• Child Labor Provisions

You can find more information about these on the US Department of Labor official website.

Do your pay practices align with any applicable state and local laws?

Remember that you are responsible for meeting federal regulations but also your individual state laws. Some states have higher minimum wages and overtime rules, or stricter rules about classifications and internships.

Don’t just assume that you’re doing the right thing. Ensure you’re conducting necessary compensation research when making pay choices. It may take time and effort, but if it means doing what’s legally right, it goes without saying. The US Department of Labor website has more information regarding each state, as well as information about receiving tips, young workers, students, and more.

Key Messages

Compensation compliance can be lengthy and complicated, but it’s necessary. Conduct regular internal audits. Keep up with requirements and update your employee handbooks accordingly. Track employee responsibilities, hours worked, and wages paid. Do the right thing and you’ll be rewarded for your efforts with satisfied and committed workers.