Your Federal Government is Here to Help—Anatomy of a DOL Audit

Under the Obama administration, the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) has become re-energized and is the most active it has been for many years. While the WHD still lacks a permanent administrator, Acting Wage and Hour Administrator Nancy Leppink has been in the forefront with a number of enforcement initiatives. Recently, Leppink stated that her mission was “to rebuild, refocus, and re-engineer the Wage and Hour Division as an effective enforcement agency.”

WHD has hired more than 300 new investigators, revised its training programs, and made various technological improvements allowing compliance officers to spend more time conducting investigations. In fiscal year 2011, the agency opened 13 new offices and expanded six others. More expansion is anticipated. During the same time period, the agency collected greater than $224 million in back pay, the largest amount of back pay ever collected by the agency in one fiscal year. One very high profile initiative is the misclassification enforcement initiative—focusing on workers who may be wrongly classified as independent contractors. This misclassification initiative is being coordinated with the Internal Revenue Service (IRS) and various state enforcement agencies.

In light of such enhanced enforcement activity, it is even more important to identify and correct potential wage and hour issues and to otherwise prepare for a WHD investigation. This series of blog posts will focus on how to conduct an effective internal wage and hour audit, plan for an actual WHD investigation, and otherwise minimize potential exposure under the Fair Labor Standards Act (FLSA).

Conducting an Effective Internal Wage and Hour Audit: Preliminary Considerations

Prior to conducting an audit, several key points must be addressed.

First, an audit should be conducted only under circumstances in which a company’s management is fully willing to authorize the resources and time necessary to conduct the audit and is committed to taking appropriate corrective action on issues identified by the audit as areas of concern. Failure to do so could simply increase potential liability. In particular, a company may not be able to use certain good faith defenses available in wage and hour actions, and the company’s violations may be deemed willful. Moreover, an incomplete or ineffective audit can create a road map for disgruntled employees. Once a company undertakes an audit, it may raise employees’ expectations that problems will be addressed. If they are not, employees may decide to seek assistance from an outside source, including the DOL or an attorney. In short, unless management provides its imprimatur for an internal audit and fully intends to resolve any issues uncovered by that audit, the time and money would be better spent on hiring more attorneys to defend the lawsuits that are sure to come!

Second, a decision must be made on whether to involve counsel in the audit. The option of using an attorney to assist in coordinating or conducting audits should be considered for two reasons: (1) to avoid liquidated (double) damages, a defendant company must prove that it had a “reasonable” or “good faith” belief that its actions were compliant, and evidence that the audit actions were taken in reliance on an experienced attorney’s advice and counsel can support that assertion; (2)  the use of an attorney may create an attorney-client privilege for certain (although, typically, not all) communications involved in the audit.

Third, a decision must be made as to whether the company should utilize in-house or outside counsel. Generally, it is not advisable for in-house counsel to conduct an audit or engage in interviews of possible witnesses as part of the audit process, if the company wants to: (1) shield some of the material from disclosure in litigation under the attorney-client privilege; or (2) use in-house counsel as the company’s lead attorney in litigation. The company cannot use audit information as an affirmative defense in litigation while simultaneously blocking portions of the same information from disclosure under the attorney-client privilege. An employer “cannot have it both ways” showcasing the audit as a defense, yet block full exploration of its adequacy through a privilege. In such situations, the attorney-client privilege will be waived. In-house or outside counsel who serves as the internal investigator typically will be called to testify at trial and, thus, will be disqualified from serving as the company’s lead advocate at trial. In most state and federal courts, the “lawyer-witness” rule does not allow lead trial counsel also to act as a fact witness for obvious reasons of undue jury prejudice. In-house counsel who participated in an audit and who will be a trial witness are not precluded from engaging in other pre-trial activities on behalf of the company. Notably, audits conducted by outside counsel generally enjoy broader protection than audits conducted by in-house counsel.

Fourth, the scope of the audit needs to be determined. For example, if a wage and hour audit has not been conducted in recent years, the company may want to conduct an organization-wide review to ensure that it addresses all relevant wage and hour compliance issues. Conversely, if an audit has been conducted in recent years, a company may be more selective and focus on specific issues and practices, for example, the exempt status of certain workers and determining whether all non-exempt employees are paid for all hours worked. It is also important to consider exactly what records to review, including but not limited to, payroll and other timekeeping records and job descriptions, and which employees will be interviewed.  Notably, once an audit has commenced, its scope may very well change based on certain preliminary findings.

Stay tuned next week for tips on conducting an audit.