What to do Before the Wage and Hour Division Comes Knocking

This letter is to inform you of the Wage and Hour Division’s plan to visit your establishment…

Many employers receive letters that begin just like this from the Wage and Hour Division (WHD) of the U.S. Department of Labor. The WHD investigates to make sure employers are meeting their obligations under the Fair Labor Standards Act (FLSA), which is the law responsible for the federal minimum wage and federal overtime rules. Here’s what you need to know (and steps you should consider) before the WHD comes knocking.

Although the WHD can, and sometimes does, investigate at random, that often isn’t the case. WHD audits may result from complaints filed by disgruntled or former employees. Even if a complaint is unfounded or fabricated, the WHD will still investigate to determine the veracity of the complaint and to assess FLSA compliance. Sometimes the WHD even targets specific industries based on national or regional Department of Labor directives.

This sort of federal investigation, of course, causes a lot of stress and anxiety for an employer, especially for small and medium-sized businesses. If you receive a notice from the WHD, you should contact an attorney knowledgeable about wage-and-hour laws. However, the purpose of this article is to educate employers about the steps they can take before it gets that far. An ounce of prevention is worth a pound of cure, as they say.

(1) Understand the Record-Keeping Requirements

The FLSA requires that employers keep the following records for at least 3 years:

  • Employee’s full name and social security number.
  • Address, including zip code.
  • Birth date, if younger than 19.
  • Sex and occupation.
  • Time and day of week when employee’s workweek begins.
  • Hours worked each day (including start and end time).
  • Total hours worked each workweek.
  • Basis on which employee’s wages are paid (e.g., hourly, weekly, etc.).
  • Regular hourly pay rate.
  • Total daily or weekly straight-time earnings.
  • Total overtime earnings for the workweek.
  • All additions to or deductions from the employee’s wages.
  • Total wages paid each pay period.
  • Date of payment and the pay period covered by the payment.

Some employers handle these records in house but others outsource their HR and payroll functions. In either case, employers should be certain the above records are accounted for. For more information on record-keeping requirements, check out WHD Fact Sheet #21.

(2) Conduct a Self Audit

Once you’ve familiarized yourself with the FLSA record-keeping, minimum wage, and overtime requirements, you may be ready to conduct a basic self assessment. You should check time and payroll records for each hourly employee and make sure that you have (1) the start and end days of the work week (e.g., Monday – Friday), (2) the start and end time of each work day, (3) the employee’s hourly rate, (4) the total number of hours worked in the week, and (5) supporting payroll records showing wages and overtime paid.

Understand that it may be wise to work with an attorney during this process. Importantly, any documents that you create could be subject to an investigative subpoena by the WHD during an investigation, or by an employee or other adverse party in some type of litigation. However, if you work with an attorney, communications and documents may be privileged under various rules protecting attorney-client communications and work product.

Another reason why it may be wise to use outside help is that there are other FLSA pitfalls not addressed here, such as employees that are mistakenly classified as overtime-exempt (salary), or workers that are misclassified as independent contractors. DOL regulations can be time-consuming and difficult to digest. It may be wise to have someone in your corner who can explain the law as it pertains to your situation.

There is no per se “penalty” for violating the FLSA, but you will owe unpaid wages or overtime, and the WHD will assess “liquidated damages”, a fancy way of saying that you’ll owe double the amount of back wages and overtime pay.

In 2018, the DOL instituted the Payroll Audit Independent Determination program (PAID). Under the PAID program, qualifying employers may voluntarily self-report and work with the WHD to correct their mistakes. Employers who participate in good faith will avoid the costly double payment but must still pay 100 percent of the back wages owed.

Before volunteering for the PAID program, though, you should contact a labor and employment attorney who can discuss the possible risks and benefits of the PAID program as it pertains to your specific situation.

(3) Wage and Hour Insurance

Many businesses carry Employment Practices Liability Insurance (EPLI). This type of commercial insurance typically covers claims for things like sexual harassment, wrongful termination, and employment discrimination. In other words, if you get sued for an employment-related claim, your insurance carrier will often pick up the tab, either by paying an attorney to represent you or by paying the cost to settle the case, or both.

In fiscal year 2019, the WHD recovered over $319 Million in back wages for employees across the country. In order to avoid big ticket lawsuits, insurance carriers almost always exclude claims for wage and hour violations in EPLI policies. Yet for an additional premium, employers can add coverage as an endorsement to their policies.

As you can imagine, wage and hour violations, with their associated liquidated damages, can create significant liability depending on the number of employees owed back wages. On top of that, if a wage and hour claim goes to litigation, you may be found responsible for the adverse party’s costs and attorney fees.

After conducting a basic self assessment, businesses should consider their potential exposure and weigh the additional cost of insurance with the possibility of being found responsible for a violation.

Confused? You’re not alone! Many employers are completely blindsided by the Wage and Hour Division. But you can get ahead of it by taking the 3 steps outlines above. If you have questions or comments, send me a message.

P.S. If you’re thinking of buying a business, whether as an asset purchase or stock purchase, find out what to look for so you don’t have to pick up the tab for violations of federal labor and employment laws.

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