NO company wants to be audited by the Department of Labor (DOL). At the same time, no company can afford to be unprepared for an audit after being notified.
In a webinar, “DOL Audits: How to Prepare for the Unexpected,” Timothy Scott — a partner in Fisher & Phillips LLP, which specializes in employment law — covered the minefield of DOL issues.
He said the Fair Labor Standards Act (FLSA) was established in the 1930s and has not been updated since, so it's a difficult law with which to comply. The DOL is charged with the responsibility of enforcing it, and its Wage and Hour Division focuses on the FLSA because it deals primarily with pay issues.
“Once you get an audit letter, it's too late to try to fix things,” Scott said.
The basic requirements are for a minimum wage of $7.25 for hours worked up to 40, with overtime at 1.5 times the “regular rate” of pay for hours worked over 40 in a work week (all pay divided by all hours the pay covers). There are limitations on the employment of minors under the age of 18.
He said audits typically come with a fax and a letter or a phone call and a letter. It will want to establish that the company is covered by the law through two methods:
- Enterprise
This applies to companies with two or more employees plus $500,000 in annual gross revenue (all employees covered).
- Individual
Engaged in interstate commerce or producing goods for interstate commerce. If a business has three employees and is making baskets sold over the Internet, and one person is involved but not selling over $500,000, that one individual is producing those goods.
“A lot of times I've seen employers characterize individuals as contractors or trainers or interns — people who might not have a right to get paid,” he said. “State governments right now are looking at cracking down on independent contractors. If you have individuals working with you on a regular basis and you're paying them with a 1099 as independent contractors, you want to make sure you're OK.
“The IRS has a 20-factor test that focuses on the amount of control an owner has on an individual. But the Department of Labor has a different test that focuses on the economic reality of the situation. I've seen situations where employees are not considered an employee by IRS purposes but would be by Department of Labor purposes. If you have independent contractors regularly working for you and you have concerns about whether they are, review that with your CPA and your attorney.”
Exemptions basics
Scott said many human resources professionals, managers, and owners don't have a good grasp of FLSA exemptions.
“They sometimes use terms ‘salaried’ and ‘hourly’ to mean exempt and non-exempt, and that's really not appropriate,” he said. “People need to start from the premise that everybody in an organization has to be compliant. Everybody has to get overtime and get paid at least minimum wage, and everybody has to record hours unless a specific exemption applies to one or more of those requirements. There are a lot of exemptions out there.”
FLSA exemption basics:
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Specific criteria apply, and it's the employer's burden to prove they are met. “If you can't, you lose.”
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Exemptions relate to individuals — not to job descriptions, pay classifications, positions, job groups, etc. “You can call somebody a manager, but unless they're doing things required under the exemption, they're not going to be exempt from the requirements of FLSA. So be very careful about that.”
White-collar exemptions include: executive; administrative (“much less broad than you think”); academic administrative; professional (doctors, lawyers, engineers); teacher; computer employee (“a very narrow exemption that doesn't cover the general IT guy”); outside sales; and highly compensated.
Most full exemptions require payment on a “salary basis.”
Other partial (OT only) industry or job-specific exemptions: agricultural work; automobile dealership sales, parts, and mechanics; commission-based work in “retail” establishments; and transportation work subject to DOT regulation.
If a company fails to comply with FLSA, the DOL insists on back pay, he said.
“If they think you acted in a willful manner, sometimes they insist on liquidated damages, which are equal to the amount of back pay,” he said. “Civil money penalties are fines levied on organizations, and they vary greatly. In rare situations, the government can pursue criminal penalties.”
He said that with more investigators on the force now, there is a higher likelihood that a company will be targeted. But most investigations are triggered by complaints — perhaps from a disgruntled ex-employee.
“Also, there are targeted industries: low-paying, dangerous, and positions that require tips or attract a lot of foreign workers,” Scott said. “They will coordinate with Immigration and Customs Enforcement (ICE) and the Occupational Safety and Health Administration (OSHA), and there is an increased chance of random audits.”
The audit scheduling letter is sent not to HR but typically to the CEO or president, with an immediate follow-up by investigator.
“They set a very short time frame and require the compilation payroll information going back two years — and that can go back three years,” he said. “Respond quickly but control the situation. You can buy some time. You can say, ‘I just don't have the manpower to pull these records.’
“Once the letter is received, immediately involve senior management and legal counsel. Contact the investigator and select a mutually agreeable time. Investigations are conducted on the job site. Always check and copy government credentials. It is OK to ask what the investigation is about or will focus upon. They never will tell you the name of the person who made the complaint but it will be easy for you to figure it out based on who left.
“Review and carefully consider all documents before providing them to the DOL. Be cooperative throughout the investigation. Try not to let them get to you. Make sure that all required posters are displayed. Respond to questions but do not feel the need to provide information that is not requested. Some clients are so eager to get them out of there that they tip their hand and tell things they shouldn't.
“During the on-site interview, find a quiet place for the investigator to sit. The goal is to get them out as quickly as possible, and it's best not to keep them waiting. If additional documents or information are requested while on-site, tell them you will provide that information later.”
He said a responsible individual should serve as point person. Work with legal counsel when appropriate, do not do the investigator's work for him, do not permit the investigator to wander the work site unaccompanied, and make sure you comply with FLSA in view of investigator.
The other part of the audit is the interview process of current and former employees, including management and non-management. Counsel can be present for management interviews but not for individual interviews.
“Confirm additional documents requested and the time frame to provide them,” he said. “Determine whether a formal closing conference will be held. Do not provide any explanations at this point, and avoid making any admissions of liability.
“At the closing conference, the investigator will reveal the findings to the employer. Ask about the conclusions in detail. Ask the investigator to walk you through calculations. Avoid agreeing to anything before talking to legal counsel. No written report is generally prepared by the investigator — consider a letter confirming the discussion, particularly if they find you not at fault.”
Scott said most DOL audits are resolved at the completion of the investigation, and require payment of back pay and the assurance that issues will be corrected.
“The FLSA restricts settlements for less than the amount owed,” he said. “They tell you what the back pay is. You will explain at this point, ‘This is why we feel the fine is incorrect.’ They either agree or disagree with it. If they agree, they might re-open the investigation or drop it. If they disagree with it, they will say, ‘This is what is owed.’”
Litigation in federal court is the other option, he said.