Let the Audits Begin

US Department of LaborTax 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.

Independent Contractors

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.

Dnt Txt N Drv

While many states, including Pennsylvania, have implemented laws the ban texting while driving, the federal government has also thrown its hat into the ring. The Occupational Safety & Health Administration (OSHA) has implemented a Distracted Driving Initiative, which will focus on texting while driving.

OSHA calls upon all employers to ban texting while driving and remove any practice or policy that requires or encourages workers to text while driving. The first part of OSHA’s call to action is certainly easy to implement. Simply add a section in your employee handbook prohibiting texting while driving (and maybe take it a step further by prohibiting cell phone use in general while driving) and ensure that all of your employees are aware of the policy.

The second part, removing practices or policies that require or encourage texting while driving, is a little more confusing and, possibly, more difficult to implement. If your policies and practices require texting while driving, create incentives that encourage it or if work is structured so that texting is a practical necessity for workers to carry out their job, you may be subject to an OSHA fine.

For example, if your employee is required to make a certain number of deliveries each day and must stay in contact with other employees or customers via text message or email, you could be fined by OSHA And in this case, the employee would not even need to have an accident for you to be fined, OSHA could find the violation due to an employee complaint or an inspection.

If OSHA does find a violation, it will issue a General Duty Claus citation, which carries a maximum penalty of $70,000 per Willful or Repeat violation or $7,000 per Serious Violation. Given the announcement of this Initiative, expect OSHA to respond aggressively to any accident where distracted driving may have been a factor or if an employee complaint is lodged.

Employers should implement policies that clearly prohibit texting or emailing while driving any company vehicle or while driving on the job. The policies must be communicated to all employees. Any practice that requires or encourages employees to text or email while driving, even if the encouragement is indirect, should be removed or rewritten so that it clearly forbids texting while driving. Erring on the side of caution now may save you thousands of dollars, and potentially employee lives, in the future.

Anatomy of a Wage and Hour Complaint

When an employee believes that he or she has not been properly paid the minimum wage or overtime they may file a complaint for back wages under the Fair Labor Standards Act with the Department of Labor. The federal government set the minimum wage at $7.25 per hour. And when an employee works more than 40 hours in a week, he or she must be paid at a rate of 1 ½ times the regular rate of pay.

However, it is important to note that not all employees are subject to the wage and hour rules of the FLSA. The FLSA only applies to non-exempt employees. The FLSA exempts an employer from both minimum wage and overtime pay for certain categories of employees (executive, administrative, professional, computer and outside sales). In order to qualify for the exemption, the employee must meet certain requirements set forth by the FLSA and make a salary greater than $455 per week.

An employee exempted as a bona fide executive must primarily manage the enterprise or at least a department or subdivision of the enterprise, supervise and direct at least 2 or more full-time employees, and have the authority to hire and fire employees (or have their recommendations as to hiring and firing be given particular weight).

T o qualify for the administrative exemption the employee’s primary duty must be performing office or other non-manual work related to the management or business operations of the enterprise, and the employee must be allowed to utilize discretion and independent judgment with regard to significant work-related matters.

The FLSA recognizes two types of professional employees subject to the exemption. A learned professional must perform work requiring advanced knowledge in the field of science or learning which is acquired by attending a prolonged educational instruction. A creative professional must perform work requiring invention, imagination, originality or talent in a recognized filed of artistic or creative endeavor.

In addition, any employee who performs office or non-manual work and is paid total annual compensation of $100,000 or more is exempt if they regularly perform at least one of the duties of an exempt executive, administrative or professional employee.

A computer employee will be exempt if he or she is employed as a skilled worker in the computer field performing the application of systems analysis techniques and procedures or designing, analyzing, creating, documenting, modifying or testing computer systems, machine operating systems or programs.

The outside sales exemption requires the employee’s primary duty to be making sales or obtaining contracts or orders for services and the employee must be customarily and regularly working away from the employer’s place of business.

Once a complaint is filed with the DOL, the staff will review the complaint to determine if the employee was a non-exempt employee performing work covered by the FLSA and whether they were not properly paid in violation of the FLSA. If the DOL finds a reasonable belief that a potential violation occurred, an investigation of the employer will be conducted. In the event that the DOL is unable to find a violation, or if they cannot secure the back wages, the employee may then bring a lawsuit in federal court.

Once you have been notified of a wage and hour complaint, your first action should be alerting or securing legal counsel. Wage and hour lawsuits are often conducted collectively, allowing a number of employees to bring a suit together, which makes it easier for employees to bring the suit and can lead to a larger award of back pay overall. If legal counsel is brought in early, counsel can evaluate the employees’ claims and determine if settlement is your best option, particularly if settling will reduce costs and publicity.

Anatomy of an EEOC Charge

When an employee believes he or she has been discriminated against at work because of race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information under a number of federal laws, they can file a Charge of Discrimination with the Equal Employment Opportunity Commission. All of the laws enforced by the EEOC, except the Equal Pay Act, require an employee to file a charge before filing a job discrimination lawsuit.

The employee must bring the charge within 180 days from the day the discrimination took place, or within 300 days if a state or local agency enforces a law that prohibits employment discrimination on the same basis. With allegations of age discrimination, the filing deadline only extends to 300 days if there is a state agency enforcing the law. The filing deadline applies to each incident of alleged discrimination, unless continuing harassment is alleged, in which case the employee must file within 180 or 300 days of the last incident of harassment.

Once the employee files the charge with the EEOC, you will receive a notice and copy of the charge within 10 days. At this point, it is advisable to retain legal counsel to represent you. Make sure that you, and any other employees, do not take any adverse action against the employee filing the charge, as retaliation can lead to additional liability. The EEOC will encourage you and the employee to attend a mediation session, where a mediator will try to help you reach a voluntary statement.

If mediation is not used or is unsuccessful, then the EEOC will investigate the employee’s allegations. The length of the investigation depends on the allegations and the amount of information needed. Depending on the charge, the EEOC may visit you in order to interview employees and gather documents. If you refuse to cooperate (which is not recommended), the EEOC can obtain a subpoena to require you to provide access to company property, obtain documents and compel testimony.

After the investigation is completed, if the EEOC finds a violation, it will attempt to reach a voluntary settlement with you. In the event that the settlement negotiations are unsuccessful, the agency will refer the case to its legal staff to file a lawsuit. The EEOC has limited resources, and only tends to file lawsuits in very serious cases. If the EEOC’s legal staff decides not to file a lawsuit or if the EEOC does not found a violation, it will send the employee a Notice-of-Right-to-Sue, which gives permission to file a lawsuit on their own. Once the employee receives a Notice-of-Right-to-Sue, they will have 90 days to file a lawsuit, which will begin the normal civil litigation process.

Where a violation is found, the employee may be entitled to reinstatement, promotion or back pay, and you will be required to remedy the discriminatory practices and take steps to prevent discrimination in the future. Employees are also eligible to recover attorney’s fees, expert witness fees and court costs. However, there are limits on the compensatory and punitive damages that an employee may recover depending on the size of your business:

  • 15-100 employees = $50,000
  • 101-200 employees = $100,000
  • 201-500 employees = $200,000
  • More than 500 employees = $300,000

And for intentional age discrimination or intentional sex-based wage discrimination, while compensatory and punitive damages are not available, the employee may be entitled to liquidated damages equal to the amount of back pay awarded.

The most important thing to remember is to seek legal counsel as soon as you receive the EEOC Charge. You may be able to have the charge dismissed quickly with an attorney’s assistance, which can discourage an employee (and more importantly the employee’s potential attorney) from filing a lawsuit in court.

Classification Crackdown

The United States Department of Labor estimates that 30% of employers are misclassifying employees as independent contractors, which results in billions of dollars in lost revenue every year. Citing a desire to minimize losses in contributions to unemployment insurance funds, protect workers’ rights and “level the playing field” for employers that abide by the law, the DOL has launched the Federal Misclassification Initiative, where they are partnering with the IRS and a number of state governments to share information. The memoranda of understanding contain an agreement to share information, in order to determine when workers are being misclassified.  The cooperative efforts will likely lead to multi-pronged scrutiny and enforcement proceedings.

The initiative will ensure that a worker classified as an independent contractor does not have to bring a claim against his or her employer to allege misclassification.  Instead, the DOL, IRS and/or state agency may initiate directed investigation which could lead to an audit of the employer’s payroll practices.  The DOL expects this initiative will increase the percentage of DOL-directed investigations to approximately 35% of all its investigations.  In particular, the DOL stated that they will be targeting certain industries, including delivery companies, construction companies, companies with installation workers, sales organizations, companies that provide on-site computer technicians and those companies that hire them, and cleaning franchises.

The difficulty comes in defining an independent contractor, because no unified definition exists. Despite the difficulty in defining independent contractor, the pitfalls are significant. Employers who misclassify their employees as independent contractors risk numerous potential claims including tax claims (state, federal, and FICA); wage (e.g., overtime), indemnification, and benefit claims, claims for civil penalties, including penalties for failing to withhold taxes or pay final wages, or failing to provide itemized wage statements; unanticipated tort claims to third parties and wrongful discharge claims; and criminal investigations.

There are a number of steps that employers can take to prevent misclassification. Most importantly, employers must show that they do not exercise direction or control over their independent contractors. Employers should negotiate the rate of payment, require a signed agreement stating the independent contractor status, and require the worker to provide transportation, tools and equipment. Employers should never require reporting, issue handbooks, provide evaluations or prohibit the worker from working for or with others.

If you believe that employees may be misclassified, or you have any questions regarding classification in general, you should contact legal counsel as soon as possible.