Mitigating the Risks of a Department of Labor Audit
New FMLA and wage-hour regulations are among the many reasons to be vigilant and as prepared as possible.
In December 2014, the U.S. Secretary of Labor made the declaration that “[w]e are back in the enforcement business, putting more cops on the beat and giving them more resources to protect families who bear the greatest burden when labor standards are violated.” For employers, this declaration wasn’t news; instead, it simply confirmed what had been evident for quite some time. The risks associated with a Department of Labor (DOL) audit are growing, and employers must be more proactive than ever in attempting to mitigate those risks.
There are several reasons for the increased risk. For one, the DOL truly has been “putting more cops on the beat.” Over the past few years, it has added hundreds of new investigators, and hundreds more may be added in the near future, based on DOL budget information for the 2016 fiscal year.
Additionally, the DOL has been working to increase its available resources. For example, the agency has called for more funds to devote to efforts involving certain targeted industries, such as construction and employee leasing/staffing companies. And the DOL is actively seeking to upgrade its technology, particularly as it relates to violation tracking. A currently available smartphone application that allows workers to track their hours and identify wage-hour violations is perhaps just one small sign of what may be on the horizon.
The risk also is heightened because of how DOL audits are being conducted. In fiscal year 2014, nearly half of DOL audits were “directed,” i.e., they were random audits as opposed to ones that arose due to specific complaints to which the DOL was responding. As anyone who regularly interacts with DOL investigators likely knows, the audit process can be more random than many employers might expect. Just driving past a business or even seeing a business’ benign advertisement on television can be what causes a DOL investigator to select an employer for an audit. A random audit also may be triggered by the fact that an employer is in a particular line of business that the DOL has identified as an overall target for audits during a specified time period.
Moreover, when a DOL audit occurs, investigators will not be confining their inquiries to certain areas. During an audit, an employer can expect an investigator to address not only wage-hour issues, but also issues related to Family and Medical Leave Act (FMLA) compliance. FMLA compliance has been identified as a particular area of focus for DOL investigators, and the FMLA portion of an investigation will not be limited just to employees currently on FMLA leave. Instead, the investigation also will address FMLA compliance regarding employees who have taken such leave during prior years, too.
Finally, even the risks themselves are changing. The DOL is taking a more aggressive position during audits, which seems to be resulting in more limited opportunities for employers to compromise and resolve violations. Further evidence of the DOL’s more aggressive position has been particularly concerning for employers. For the first time, the DOL has been invoking its ability to obtain liquidated damages when violations are found. This is resulting in the DOL requiring employers to pay what amounts to double damages to rectify violations, which is perhaps the most tangible and easily understood evidence of the increased risk of a DOL audit.
So what can employers do to mitigate these increasing risks? First, they can conduct their own audits to make sure they are not making some of the most common mistakes identified during a DOL audit. These typically include not paying for all hours that employees are working (such as breaks, travel and/or training time, and work done remotely); improperly calculating the overtime rate; not keeping adequate time records; and—a particular DOL favorite at the moment—misclassifying employees as independent contractors. All of these mistakes can result in costly wage-hour violations, which may be multiplied over many weeks or months among a significant portion of the employer’s workforce, instead of just one or a few workers. Add in the new potential for enforcement of liquidated damages, and these common mistakes could be incredibly harmful to a business. As a result, the preventative costs associated with a self-audit, even if performed by experienced labor and employment counsel (which may provide some attorney-client privilege protection if issues are found), easily can pale in comparison to the costs associated with violations found by a DOL investigator when it’s already too late.
Second, employers can prepare themselves for how to respond when a DOL investigator notifies them of an audit. Even when that notice comes immediately via an investigator’s “walk in” audit, there are best practices that can help an employer survive a DOL audit. These practices include, but are not limited to, the following:
K Be cooperative with the investigator, but identify in advance of an audit who will interact with the investigator and how that person should respond initially to notice of an audit.
K Plan to request that the audit be deferred until counsel has been retained, and then actually retain experienced labor and employment counsel.
K When responding to an audit request, provide only the information asked for and do not permit indiscriminate copying of all employment records.
K Avoid conduct that may be seen as interfering with the investigation.
K Use the final audit conference wisely by working to understand the investigator’s findings and then responding to the findings at a later date, after further analysis.
K When desired, negotiate the amount and timing of payments for any liability and ensure that the DOL provides receipt of payment for back wages paid.
As employers work to get a handle on these newer risks associated with DOL audits, even more risks will emerge. For example, employers must be aware of new DOL regulations related to same-sex couples and FMLA leave, and wage-hour regulations also are in the works. Therefore, it is never too soon to begin work on mitigating the risks associated with DOL audits in their current form.