Why Uncompensated Overtime is a High Risk Area

Uncompensated overtime is hours worked in excess of 8 hours a day or 40 hours per week by salaried employees who are paid a fixed amount per week, month or year regardless of the number of hours worked.

The terms "uncompensated overtime" or "unpaid overtime " are really misnomers however, since the salaries of exempt employees under the FLSA are considered compensation for all hours worked. An inequity in the costing of Government contracts could occur if uncompensated overtime is worked, but not accounted for, and more than one contract or project is worked on by the salaried employee. The lack of proper accounting for the overtime hours can create the potential for contractors to manipulate its labor accounting system.

 

The Government always prefers that contractors implement timekeeping and labor distribution systems that properly accounts for all hours worked. Some contractors have not done so, sometimes because the occurrence of uncompensated overtime is insignificant. Where contractors have not done so, auditors will conduct testing to validate the contractors' assertions. Auditors will  expand floorchecks or employee interviews to determine whether the failure of the contractor to record all time worked results in a material difference in the charging of costs.

Uncompensated overtime can increase contractor profits, especially on a fixed-price contract which was bid on the basis of a 40-hour week and employees are either required to work uncompensated overtime or they voluntarily do so. Contractor profits increase because for every additional uncompensated overtime hour per week an employee works, a lower effective hourly rate is paid by the contractor. That practice can also cause problems if the contractor wishes to use history to bid fo1low-on contracts.

The DoD Inspector General's office has published six fraud indicators related to uncompensated overtime that auditor's are required to consider when auditing labor costs. Although auditors are not responsible for proving fraud, they are responsible for finding and reporting fraud indicators. Fraud indicators are not fraud. However, by looking for fraud indicators and properly assessing them during an audit, the auditor is taking the proper approach to uncovering fraudulent acts and, thereby, protecting the Government's interests.
These fraud indicators include:

1. Professional staff required to work a significant amount of unpaid overtime on a variety of projects-both direct and indirect.
2. Salaried employees only charging the first 8 hours worked during any day for an extended period.
3. A pattern of management directed unpaid overtime with employee bonus based on the extra hours worked.
4. Cost-type Government contracts worked during the first 8 hours and fixed price or commercial contract work performed only during the unpaid hours.
5. Overrun contracts/projects worked on only during unpaid hours.
6. Encouraging employees to work significant unpaid overtime but to not record the hours in direct conflict with company policy.

Contractors should periodically perform their own self-assessments (internal audits) of their timekeeping and labor distribution policies, procedures, and practices to ensure they are in compliance with sound Governmental contracting and accounting practices.