Executive Summary: According to recent studies, companies paid $400 million in 2014 and $39 million in the first three months of 2015 to settle wage and hour lawsuits exclusively. Aside from the ever-increasing threat of private wage and hour lawsuits, business owners must be knowledgeable and prepared for investigations by the Wage and Hour Division of the U.S. Department of Labor (DOL), the New York State DOL, Attorney Generals' offices, and other investigative and enforcement governmental agencies, who have ramped up their independent (and often joint) investigations of business owners for wage and hour violations. The following key principles will help business owners succeed if confronted with such an investigation:
1. Understand the discretion involved in an investigation and be proactive.
Too often, employers underestimate the severity of a potential investigation. Attitudes range from, "it won't happen to me" to "but everyone does it this way in this business." These misplaced attitudes and the inaction associated with them can be an employer's downfall.
No matter how hard employers may try to comply, it is inevitable that wage and hour laws are misinterpreted or ignored through flawed existing payroll practices. The expression "nobody is perfect" certainly holds true here. Rather than ignoring the threat of a potential investigation, we recommend that employers be proactive. Such an approach ensures payroll practices are reconciled before an investigation begins and further protects the business from frivolous litigation. For example, the DOL has discretion to investigate and reinvestigate employers as frequently (or infrequently) as it desires. Respecting an agency's discretion and engaging in earnest discussions during the investigative process can combat the potential for escalation of the investigation to an administrative hearing or to enforcement proceedings in court.
2. Cooperate fully: do not lie, hide information, or manipulate records.
Once an investigation is underway, investigators defer to the employer's representations of information and expect that the records they request will be provided completely, accurately, and without deception. Any perception by an agency that the employer is hiding information or delaying in providing information will aggravate the investigator and may escalate the investigation unnecessarily.
The issue is not whether the agency will ultimately find out the truth about an employer's records, but rather when. If an agency has any concern about an employer's voluntary cooperation in the investigation, it may decide to take matters into its own hands and issue subpoenas for records and/or individuals for questioning. Playing hardball (or "hide the ball") with an agency can leave the employer at the whim of (often unsubstantiated) employee allegations for purposes of determining underpayment liability. Therefore, it is most cost-effective to cooperate.
3. Take control over the underpayment calculation and compliance.
Employers who gain control over the audit process increase their chances of resolving the investigation favorably. Since the employer bears the burden of proving compliance with wage and hour laws, a cooperative employer's negotiation of the scope of production of documents and the self-audit of any underpayment liability helps keep the ball in the employer's court. An agency is more likely to accept an employer's underpayment proposal if it is supported by carefully reviewed payroll documents.
Instead of viewing an investigation through the lens of "Chicken-Little the Sky is Falling," employers should embrace an existing investigation as an opportunity to identify and correct problematic payroll practices and prevent greater exposure to liability going forward. For example, employers should ensure compliance with posting and notice requirements and updated wage schedules, and confirm their methods of calculating wages and supplemental benefits. Undertaking compliance measures will facilitate good will with the investigator, which may help negotiate down discretionary penalties and interest. Resistance to an investigation and/or denial of areas for improvement are recipes for greater disaster. An agency is more likely to settle favorably with a cooperative, responsible employer than a defiant, irresponsible employer.
4. Prepare your line of defense: retain an experienced labor lawyer.
When it comes to an injury, people go to the appropriate doctor. When it comes to responding to an investigation, the employer should always engage the help of an experienced labor lawyer. Employers should never respond to government investigations on their own; every response potentially carries legal consequences. Experienced counsel will enable an employer to get a full picture of the true cost of an investigation, which includes: (a) a competent evaluation of the employer's actual exposure; (b) an assessment of the quality of the employer's existing payroll practices; (c) recommendations to improve the employer's payroll practices to limit their liability going forward; and (d) identification of responsive documents needed to resolve the investigation quickly and cost-effectively.
Directionless production of documents in response to agency inquiries often creates greater liability exposure and may trigger the involvement of other governmental agencies. Although accountants are specialized in responding to IRS audits, they are inexperienced in identifying, foreseeing, strategizing, and counteracting the hidden legal ramifications of producing flawed payroll documents to the agencies.