How to Report Audit Results and Resolve Issues Identified in the Audit

In this, our fourth installment in our series on the “Anatomy of a Department of Labor Audit,” we address both how to report audit results and how to resolve issues identified in the audit.

How to Report Audit Results

Normally, audit results are reported in both a written format and an oral presentation, although this may vary depending upon the severity of the problems uncovered. The guidelines for preparing the report and presentation follow:

• Base the report on objective facts that have been verified in the audit. Avoid impression, speculation, and needlessly incriminating statements. Do not exaggerate.
• Provide a description of the audit process, including who conducted the audit, how it was conducted, who was interviewed, and what categories of documents were evaluated.
• Identify issues addressed and recommend solutions.
• Prepare a complete, balanced report by including what the company has done correctly.
• In drafting a written report, recognize that it could very well be used as an exhibit against the company in a subsequent lawsuit despite efforts to protect the confidentiality of audit results.
• Assure that corrective action is taken and then documented. All issues identified in the report should be addressed and documents should be prepared confirming that all problems uncovered have been corrected.
• Each copy of the final audit report should be destroyed after it is read by the chief executive officer or members of the board of directors. Corporate counsel should keep one remaining original copy of the report in a private file under lock and key and ensure that others who have no legitimate reason to see it do not have access to it (this is to preserve, to the extent possible, whatever attorney-client privilege may apply to the report).

Resolving Issues Identified in the Audit

The most important part of the audit process is correcting the problems uncovered in the audit itself. As noted above, if the company is not willing to correct the problems it finds, it should not undertake the audit in the first place.

Although there is no risk-free way to correct problems a company uncovers in the course of an audit, there are simple steps a company can take to manage that risk, minimize the potential that further damages will occur, and make itself a less attractive target to plaintiffs’ counsel.

The first rule is to make no admissions. In most cases the “problems” that are uncovered are close calls regarding legality, so it is important not to take any action that makes it appear the company did something wrong. To illustrate additional steps, let’s use as an example a group of employees that the company believes may have been misclassified as exempt. As a first step, the company may reclassify the employees as non-exempt, however, this obviously may result in litigation, so it must be handled with care. One strategy is to make this change as part of a larger reorganization, including a shifting of job responsibilities within the company’s operation, so that the change from exempt to non-exempt status is not highlighted. Alternatively, the company might, in the course of the same operational restructuring, enhance the job responsibilities of the group of employees that it believes may be misclassified so that their exempt status is solidified.  In either event, making this change in the context of a corporate restructuring is desirable.

The company might also consider, in cases where liability is clear, informing employees that it has conducted a review of the duties of the position at issue and determined that in the future employees holding that position should be paid on an hourly basis instead of a salary basis. The company should then calculate how much back overtime the employee would be owed using a two-year statute of limitations with no liquidated damages, no interest, and applying the fluctuating work week method to calculate the back pay owed. The company can enclose a check in that amount to the employee, advising the employee of the basis for its calculation of overtime hours worked, and that if the employee has any information to suggest that he or she worked a different number of hours, the employee should provide it to the company.

This approach should reduce the risk of litigation which could involve significantly more liability including attorneys’ fees, a third year of liability, and liquidated damages. In addition, it illustrates to employees that if the company makes a mistake it takes corrective action and there is no need for them to involve third parties, such as plaintiffs’ attorneys, labor unions, or government agencies.

Although a release is not generally valid for claims under the Fair Labor Standards Act, unless the settlement is obtained through the U.S. Department of Labor Wage and Hour Division, this is not the case for many other claims. Depending upon the nature of the claim under federal or state law, the company may consider requiring the employee to execute a release, or at least an acknowledgement that he or she has been fully compensated or is fully satisfied with the remedy, in exchange for the payment.