FLSA & California payroll audit

Your payroll system probably pays overtime on the wrong rate.

Overtime must be paid on the regular rate of pay — recomputed every workweek, bonuses and differentials included. Payroll systems get it wrong so routinely that finding the errors is a $500/hour cottage industry for litigation economists — after the lawsuit is filed.

ONE EMPLOYEE, ONE WEEK · $20.00/HR · 50 HRS · $200 ATTENDANCE BONUS

regular rate on the stub ......... $20.00
regular rate at law .............. $24.00    ($1,200 ÷ 50 hrs · 29 CFR 778.110)
OT premium paid .................. $100.00   (0.5 × $20.00 × 10 hrs)
OT premium owed .................. $120.00   (0.5 × $24.00 × 10 hrs)
short this week .................. $20.00    × headcount × 52 weeks

The stub looks exactly right — the error lives in the rate, not the line items (the arithmetic, with sources). The audit runs that same computation on your own payroll register and time-punch exports — before a plaintiff's lawyer does.

Three reasons this landed on your desk in 2026

• W-2 Box 12 code TT is mandatory for tax year 2026. The "no tax on overtime" number due on W-2s in January 2027 is the FLSA overtime premium computed off the regular rate — a number most payroll systems have never stored. Getting it wrong carries information-return penalties of up to $330 per form (IRC §§6721/6722). Read the employer guide →
• California's PAGA reform rewards a documented audit. A periodic payroll audit is a statutory "reasonable step" that caps PAGA penalties at 15% — an ~85% reduction the legislature wrote into the 2024 amendments.
• Regular-rate errors are formulaic and class-certifiable. No he-said-she-said — just arithmetic, provable from your own data, identical across every employee in a pay group. That's what makes them a plaintiff lawyer's favorite claim, and a computer's easiest catch.

How the audit works

1. 01

   Export

   Payroll register + time-punch detail — the same CSVs litigation subpoenas (ADP, UKG, Workday, Paylocity). Typically under an hour of your team's time.

2. 02

   Recompute

   The engine rebuilds legal workweeks from punches and recomputes the regular rate per employee, per week — bonuses, differentials, Alvarado divisors, Ferra premiums, 29 CFR 778.209 true-ups — then diffs it against what was paid.

3. 03

   Report

   One of three findings: a documented clean audit (your "reasonable steps" artifact), data-quality gaps, or quantified errors with a correction file. Built to be commissioned by counsel, under privilege.

Free tools & guides

More employer guides — regular rate of pay, California overtime, PAGA payroll audits — in the learn hub.