Tax day is past, and now everyone can start worry about being audited. And while you may be worried about an IRS audit, you shouldn’t forget about the Department of Labor. The Fair Labor Standards Act gives the DOL’s Wage and Hour Division broad investigative authority to review employer records and conduct on-site inspections. Luckily, you can take some steps to prepare for a DOL audit and avoid a great deal of trouble (and expense) down the line.
Review Job Descriptions
You should be reviewing job descriptions periodically, just to make sure that the description matches the position. When conducting your wage and hour audit, you need to ensure that the people you are classifying as exempt are actually exempt. As part of the audit, you will not only want to review employees that are currently classified as exempt to ensure they are exempt under the FLSA, you should also review non-exempt employees to see if any of them can be re-classified.
You should begin by reviewing all of your 1099s to determine who was classified as independent contractor. Remember, while there are a number of factors that go into determining whether a worker is an employee or an independent contractor, your control over the worker’s activities can help reach a determination on classification. Classification is very important, because errors could lead to significant wage, tax and penalty liabilities.
In-House or Outside Counsel Should Direct Audits
When conducting a self-audit, it should occur at the direction of either in-house or outside counsel. Counsel can assist with the various legal questions that will inevitably arise, given the difficulties with determining worker classification and FLSA exemption. More importantly, the use of counsel will allow anything you discover during the audit to fall under the attorney-client privilege, helping to protect your organization. It may be tempting to undertake an audit using the human resources department or use an outside human resources consultant, you won’t be afforded the same protections, and you could be required to disclose any findings or documentation.
Establish a Plan for a DOL Audit
You should prepare a plan in the event of a DOL audit. First, you should have a list of those who need to be informed of the start of an inspection, including senior management, senior human resources personnel and legal counsel. You should designate a team leader and point person, who will usually be legal counsel. You should also designate which team members will participate in the opening and closing conference and act as:
- on-site representatives
- contractor liaison
- union liaison
- interview representative
A well-executed plan and a well-run team can ensure that an audit occurs with minimal interruption and fewer difficulties.
If you follow these steps, you can not only prepare yourself for a DOL audit, but also ensure that your employees will not have grounds to bring an FLSA lawsuit against you for misclassification or unpaid overtime.