You may have read about the U.S. Department of Labor’s new “Payroll Audit Independent Determination” or “PAID’’ pilot program. Under this program, the DOL invites employers to voluntarily audit their payroll practices and disclose any “non-compliant practices” to the DOL. The DOL then reviews the employer’s records and calculations of what is owed to employees, and tells the employer what it thinks the employer should pay. The employer then pays its employees, and employees sign a release of any FLSA claims against the employer. Participating employers are not subject to civil monetary penalties and are not required to pay liquidated damages to employees. (Available details on the program are included in the DOL’s press release and a FAQ page on the DOL’s website.)

Sounds like a pretty painless way to clear up any FLSA violations, right?

Well, as you can imagine there are a few provisos.

First, the whole point of the program is that the DOL will conduct an independent review of any issues identified by the employer and determine what it thinks the employer owes in back wages. The DOL’s FAQs don’t say what happens if the employer disagrees with the DOL’s assessment. Will an employer then be subject to further enforcement action? Will the DOL threaten to impose additional penalties? Perhaps the DOL will answer these questions at some point, but for now, we don’t know.

Second, even if the DOL is willing to accept an employer’s proposed settlement, affected employees remain free to reject the settlement, and even retain counsel and file suit. In some cases there may be significant incentive to do so. The default statute of limitations under the FLSA is two years, but this can be extended to three years for “willful” violations. The DOL’s FAQs don’t specify what time period will be involved in any settlement. Judging from the DOL’s typical enforcement practices and the fact that the program is intended to allow correction of “inadvertent” noncompliance, we can assume that settlements under the PAID program will typically go back two years. However, the bar for establishing a “willful” violation is not high, so employees who know the law or receive legal counsel may be tempted to reject a PAID settlement so that they can receive a third year of pay. Or, they may accept the settlement, but file suit to collect that third year of back pay anyway. Because the PAID program release will be limited to “potential violations for which the employer had paid back wages,” it likely will not preclude employees from pursuing claims arising outside the period covered by any back wage payment.

In addition to back wages, employees who file suit under the FLSA can typically recover an equal amount as “liquidated damages.” Employees who are offered a PAID settlement might well decide that, as nice as an immediate payment would be, they would prefer to receive double whatever they are being offered. This may be less tempting when the amount of back pay due to any given employee is small, but where employees stand to receive hundreds or thousands of dollars from a settlement, doubling their recovery might sound pretty good.

Another potential pitfall of the PAID program is that although employees who sign a release will be giving up their claims under the FLSA, it is not clear that the releases would cover wage claims under state law. Many states provide longer statutes of limitations than the FLSA and impose their own statutory penalties for minimum wage and overtime violations. An employer that settles with employees under the PAID program may turn around the next day and find that the settlement is being used as an admission of guilt in state court as employees seek to recover additional wages and penalties under state law.

Finally, the PAID program is not available to resolve issues already being investigated by the DOL or raised in a lawsuit or threatened litigation. So, while it might help in cases where an employer identifies problems on its own, it offers no solution to employers seeking to settle current disputes over alleged FLSA violations.

Because of these limitations, the PAID program is far from a “get out of jail free” card for employers. Participating in the program may have some benefits, particularly where the FLSA compliance issues are relatively small, well-defined, and unlikely to result in litigation. Unfortunately, those are the issues where a program like PAID is least necessary. An employer facing more serious FLSA compliance issues, such as systemic problems with off-the-clock work or misclassification, will have to think very carefully about participating in the PAID program, as doing so may amount to putting up a big neon “Sue Me!” sign in the employee lunch room.