Why Wage and Hour Audits Matter in California
With the laws and regulations that require strict compliance for overtime, meal and rest breaks, and employee classifications, even small errors can create substantial liability.
What’s at Risk?
Failure to comply with California wage and hour laws can result in:
- Penalties for missed meal and rest breaks (one hour of pay for each violation with a maximum of two penalties per day).
- Overtime pay liability, including interest and attorney’s fees.
- Waiting time penalties for late or unpaid final wages calculated at the employee’s regular daily rate up to 30 calendar days).
- Civil penalties under the Private Attorneys General Act (PAGA).
- Exposure to class action lawsuits, which can multiply damages significantly.
Why Conduct an Audit?
Even if you believe that your timekeeping and payroll practices are compliant, a proactive wage and hour audit can reveal errors, and identify and fix issues before they turn into liability. In addition, regular self-audits of wage and hour compliance may reduce potential penalties available under the amended Private Attorneys General Act (PAGA).
Key areas to review include:
- Employee classification: Are workers properly classified as exempt or non-exempt, and as employees or independent contractors?
- Timekeeping practices: Are all hours worked accurately recorded, including start/stop times and meal periods? Are employees working “off the clock”?
- Overtime: Is overtime being paid at the employee’s “regular rate of pay” which includes multiple rates, commissions, or bonuses
- Meal and rest breaks: Are employees taking uninterrupted, timely meal and rest breaks? Are employees permitted to leave the premises during meal and rest breaks?
- Final pay practices: Are employees timely receiving all wages (including accrued vacation/PTO) at the time of separation?
- Payroll records: Are wage statements accurate, complete, and compliant with Labor Code requirements?
By addressing these areas through regular audits, employers can reduce risk, strengthen compliance, and create a workplace that is legally sound.
What Should be Reviewed?
1) Meal Break Timing
Non-exempt employee time-cards should be reviewed regularly to confirm that meal periods are taken no later than the 5th hour.
The following chart helps to understand when the 5th hour of work occurs to determine proper meal break timing for an employee who begins work at 8:00 a.m.:
| Time | Hour Of Work |
| 8:00 a.m. to 9:00 a.m. | 1st hour of work |
| 9:00 a.m. to 10:00 a.m. | 2nd hour of work |
| 10:00 a.m. to 11:00 a.m. | 3rd hour of work |
| 11:00 a.m. to 12:00 noon | 4th hour of work |
| 12:00 p.m. to 1:00 p.m. | 5th hour of work |
The meal break should be provided no later than the end of the 5th hour of work or 12:59 p.m.
Review time cards to ensure that the meal breaks are taken timely. Also confirm your policy permits employees to leave the premises during their meal breaks and the meal breaks are duty-free and uninterrupted for a full 30 minutes.
2) Overtime Compensation
Review employees’ time cards to ensure that any overtime hour worked is paid at the “regular rate of pay” which is not always an employee’s normal hourly rate. The “regular rate” must include almost all forms of pay the employee receives including: commissions, production bonuses, piece work earnings.
The following forms of compensation are not included in the “regular rate”: holiday gifts, discretionary bonuses, hours paid but not worked (e.g., sick leave, holiday, vacation pay, reporting time pay, split shift premiums.)
3) Rest Breaks Schedules
While rest breaks are paid time, and not recorded on the employees’ time records, it remains the employer’s obligation to ensure that the rest breaks are timely taken, duty-free and uninterrupted and like meal breaks, employees can leave the premises.
Rest Breaks must be authorized and permitted based on the following schedule:
| Hours Worked | Number of Rest Breaks |
| 0 – 3.5 hours | 0 |
| 3.5 to 6.0 hours | 1 break |
| 6.0 to 10.0 hours | 2 breaks |
| 10.0 to 14.0 hour | 3 breaks |
| 14.0 to 18.0 hour | 4 breaks |
4) Meal & Break Penalty Premium Pay
Whenever a meal or rest break violation occurs, an employee is required to be paid a penalty of one hour of pay at their hourly rate for each violation – up to a maximum of two penalty payments per day. The penalty payment is to be paid in the pay period in which the violation occurs and must be recorded on the employee’s wage statement as a separate line item.
5) Expense Reimbursements
Ensure that anyone that is using their personal cell phone for business purposes is reimbursed or paid a stipend for the reasonable cost of the business use of their device. Employees who drive their personal vehicle for business purposes must also be provided with reimbursement either on a per mileage basis (using the IRS rate is the easiest) or a monthly stipend.
6) Wage Statement
At the time wages are paid, employers must provide each employee with an accurate, itemized written wage statement. Labor Code section 226 describes a wage statement as an itemized written statement provided to employees either as a “detachable part of the check, draft or voucher paying the employee’s wages” or a separate writing if the wages are paid by personal check or cash.
Wage statements must contain all the required information on their face. A wage statement is not complete if an employee must refer to another document to get the required information.
Information required to be on a pay-stub includes:
- Gross wages earned in the pay period;
- Total hours worked in the pay period for non-exempt employees;
- All deductions, including taxes, disability insurance and health and welfare payments;
- Net wages earned in the pay period;
- The pay period’s inclusive dates (meaning the start and end of the pay period);
- Name of the employee and last four digits of their Social Security number (SSN);
- The full name and address of employer or legal entity that is the employer;
- All applicable hourly rates in effect during the pay period and the corresponding number of hours the employee worked at each hourly rate;
- The number of piece rate units earned and any applicable piece rate, if the employee is paid on a piece rate basis.
Paid Sick Leave on the Wage Statement
California’s mandatory paid sick leave law requires employers to provide employees with a written notice that sets forth the amount of paid sick leave available for use, or paid time off leave an employer provides in lieu of sick leave. Employers can provide the information on either the employee’s itemized wage statement or a separate writing provided on the designated pay date with the employee’s payment of wages.
The Bottom Line
California’s challenging employment law landscape requires strict compliance. Wage and hour audits, along with training of managerial and supervisory employees of the laws, can be an effective tool to reveal any errors and potential violations, and enable the company to correct these mistakes, and avoid potential costly penalties.
This Newsletter is intended as a brief summary of employment law. While every effort has been made to ensure the accuracy of the information contained herein, it is not intended to serve as “legal advice,” or to establish an attorney-client relationship. If additional information is needed on any of the topics contained herein, please contact our office. All rights reserved. ©2025