Executive Summary. On March 6, 2018, the Wage and Hour Division (W&HD) of the U.S. Department of Labor (DOL) rolled out a new nationwide pilot initiative, called the Payroll Audit Independent Determination program—or “PAID.” This initiative is designed to streamline the resolution process of potential overtime and minimum wage violations of the Fair Labor Standards Act (FLSA). Such potential violations as “off-the-clock” work violations, failures to pay overtime wages, or employee misclassification would expressly fall within the ambit of PAID. According to the W&HD, PAID’s objectives are expeditious resolution of FLSA claims without litigation, improved employer compliance with its overtime and minimum wage obligations under the law, and a fast delivery of owed back wages to workers.

While PAID is expected to benefit both employees and employers, questions remain regarding the program’s practical effect and the potential for more worker lawsuits resulting from companies’ voluntary decision to self-audit their pay practices and bring them to compliance. PAID lacks clarity on many fronts, and companies should closely monitor this pilot program as it takes shape over the next several months.

The Projected Benefits of PAID. According to the W&HD, all FLSA-covered employers are eligible to participate in PAID. But, companies may not use this pilot program to resolve claims that the DOL is already in the process of investigating, or which are already being litigated, arbitrated, or otherwise resolved in another forum. Nor may companies initiate the self-audit if their representatives or counsel have already announced an interest in litigating or otherwise settling the dispute with the affected worker(s).

PAID is expected to benefit both employees and companies. The projected benefit to workers lies in the program’s assurance that workers will receive 100 percent of owed back wages faster than they would through litigation, arbitration, or in any other proceeding. This will eliminate the associated litigation expenses and attorneys’ fees. Under the program, employees can choose whether to accept or reject the payment of back wages, and employers may not retaliate against employees for either choice. If the employee rejects the payment, s/he will preserve any private right of action s/he may have. Even if the employee accepts the payment, the company cannot get a comprehensive release of all potential FLSA claims from the employee, but only the release of the specifically identified FLSA violations, limited to the timeframe for which the company pays the back wages. The W&HD expects that PAID will prompt companies to become better apprised of the W&HD’s compliance assistance materials and audit their pay practices, which will lead to fewer violations overall. This is another projected long-term benefit to workers.

The presumed benefit to companies is that companies will become compliant with pay obligations under the FLSA and protect the rights of workers. PAID is expected to expeditiously resolve minimum wage and overtime violations, which will also save companies litigation expenses and attorneys’ fees. Although PAID would require payment of all back wages due to employees, additional payment of liquidated damages or civil monetary penalties, otherwise available in FLSA suits, would not be on the table so long as employers voluntarily participate in the program and proactively work with the W&HD to address the non-compliance.

How Is PAID Expected to Work? According to the DOL’s website, to participate in PAID, employers must first review the requisite information about PAID and the W&HD compliance assistance materials, available online. Employers must then self-audit their pay practices for potential non-compliance. If the employer discovers a non-compliant practice, or believes its pay practices may be compliant but wishes to proactively resolve any potential claims, the employer must take these four steps:

  1. Specifically identify the potential violations;
  2. Identify affected employees;
  3. Identify the timeframes in which each employee was affected; and
  4. Calculate the back wages the employer believes are owed to each affected employee.

After the employer completes these four steps, it should then contact the W&HD to discuss the discovered non-compliance. If the W&HD approves the employer’s request to participate in PAID, it will inform the employer of the manner of transmitting the required information to the W&HD, including:

  1. The back wages calculations along with evidence and explanation of the calculations;
  2. A concise explanation of the scope of the potential violations for possible inclusion in a release of liability;
  3. A certification that the employer reviewed all pertinent information, terms, and compliance assistance materials;
  4. A certification that the employer is not already litigating the identified pay practices in court, arbitration, or otherwise, and the affected employee’s representative or counsel has not already expressed interest in litigating or settling same; and
  5. A certification that the employer will adjust its practices to avoid the same violations in the future.

After the company provides this information, the W&HD will evaluate it and contact the employer with the next steps. After assessing the back wages, the W&D will issue a summary of unpaid wages, along with forms describing the settlement terms for each employee (again, limited to violation(s) for which the employer has paid the back wages). Employers must issue prompt payment directly to the affected employee(s), by the end of the next full pay period after receiving the summary of unpaid wages, and provide proof of payment to the W&HD without delay.

The trial run for the pilot program is approximately six months. After this initial period, the W&HD will assess the effectiveness and success of PAID, determine if any improvements should be made, and decide on the next steps.

Questions Remain Regarding PAID’s Practical Effect. Questions remain regarding the W&HD’s self-audit initiative’s practical implications for companies that consider taking advantage of the program. For example, what are the criteria for participation in PAID? What happens if the W&HD rejects a company from participation? If there is a rejection, will the W&HD preserve the right to investigate the company’s self-reported violations? By allowing employers to participate in PAID, the W&HD has expressly reserved the right to investigate the same employers in the future. Based on that, is it possible the W&HD will retain the right to investigate the program “rejects” for their self-reported violations, as well?

Participation in PAID may also expose companies to liability for worker lawsuits that otherwise may have not happened. As discussed above, PAID expressly gives the affected employee the choice to accept the payment limited to the back wages, or reject the payment, in which case the employee can file an FLSA lawsuit and be eligible to recover liquidated damages as the prevailing party, equal to the amount of back pay.

Another concern is whether the DOL’s expedition of outstanding back wage payments to employees will always cut off the employer’s liability for the same violations. As seen from a recent decision from the U.S. District Court for the Middle District of Florida, Lopez v. Real Monarca Inc., Case No. 2:17-cv-442-FtM-38CM (M.D. Fla. Mar 2, 2018), an employee may be able to receive the back wages due and sue the employer for the same violations. In Lopez, the court found that, by merely being “involved” with the settlement process, the DOL did not “supervise” the payment to the worker pursuant to 29 U.S.C. § 216(c). In the alternative, court held that the worker’s acceptance of the back wages was not knowing or voluntary. As a result, the plaintiff had not waived his right to sue under the FLSA, and could sue on his claims even though he had cashed the check for back wages.

Further, it is unclear if PAID is limited only to the federal FLSA violations or would also encompass any analogous state wage and hour claims. Potentially, an affected employee could accept the back wages for the identified non-compliant practices under the FLSA, and still bring a lawsuit under his or her respective state wage and hour laws. The W&HD has not made this issue clear. Assuming PAID does not extend to state claims, companies may feel deterred from volunteering their non-compliance information to the DOL.

Assuming, on the other hand, that companies can secure general releases of both the federal and state claims, the presumed benefit to companies is much more tangible. Moreover, the PAID program most likely presents the most expeditious, cost-effective manner to resolve a potential FLSA issue.