No one wants a U.S. Department of Labor (DOL) audit. Just the thought makes us sweat. However, it’s important to know that these audits are becoming increasingly common. In 2017, the DOL conducted audits of several businesses and found that they owed employees $270 million in back wages. While DOL audits may be more common in industries like food services, construction, and healthcare, any business can undergo an audit. All it takes is one employee complaint to attract the agency’s attention. It’s important to always be on guard.
DOL audits can take place unannounced or with notice. Either way, you need to be prepared. Good preparation can mean the difference between a clean bill of health after an audit and incurring heavy financial penalties.
Facing an audit can be a daunting prospect. It can also be overwhelming as it’s hard to determine which documents and records you need to produce for the auditor. But it doesn’t have to be. We have to put together a guide that walks you through what a DOL audit is, what you can expect, and how to prepare for them.
What is a DOL audit?
The DOL conducts many different audits, but the most common one is the Wage and Hour audit. The purpose of the Wage and Hour audit is to check that your business complies with the Fair Labor Standards Act (FLSA). FLSA requires that all non-exempt employees are paid a minimum wage for all hours worked. Businesses must pay employees at the rate of time and a half for any hours worked in the same week above and beyond 40 hours.
What can I expect during a DOL audit?
In most cases, audits take no more than a few days. But, if there is a significant problem, it could take several days or weeks to complete an investigation. The audit itself involves a physical or virtual visit to your workplace by an investigator or team of investigators from the DOL. They will request to see employment records for the past two years and interview employees during the investigation. Auditors will use these means to determine if you’ve violated FLSA legislation or other pertinent labor regulations.
More specifically, they’ll look out for:
- Incorrect timekeeping and recordkeeping
- Unpaid wages
- Ensuring all hours worked are recorded, including those outside regular working hours
- Child labor compliance
- Family and Medical Leave Act (FMLA) compliance
- Improper wage deductions
- Correct classification of exempt and non-exempt employees
- Compliance with The Employee Retirement Income Security Act (ERISA), which requires businesses to make employees aware of their rights, as well as the company’s payroll and employment records
Auditors consider failure in any of these areas as violations, resulting in penalties. These include unpaid wages and civil penalties ranging from $1,000 to $12,000 per employee per violation. In some cases, DOLs audits can lead to criminal prosecutions if you’ve deliberately broken the law.
How do I prepare for a DOL audit?
The consequence of not complying with FLSA can be severe. It’s worth preparing for a DOL audit to minimize penalties or avoid an audit altogether. You can save yourself much stress by following these three steps:
Build compliance into your organization
The best way to prepare for a DOL audit is to remain FLSA compliant from the start. You can achieve if you:
- Set up an employee recordkeeping system – This includes keeping accurate timekeeping records of hours worked. Ensure employees record accurate times in their sign-in sheets and submit their timesheets to confirm their hours. Better still, you can set up an automated system to allow employees to punch in and out of work. Keep employee timesheets for at least three years.
- Establish an internal audit process – It’s a great way of identifying problems (before the DOL investigators do) with your recordkeeping systems and labor practices. Consider asking your attorney to conduct the internal audits. They will be able to produce an objective report on your business’ FLSA compliance
Identify potential risk areas for non-compliance
Keep in mind there are many grey areas within wage and hour regulations. Compensation for time spent on training, rest breaks and traveling to and from work can be confusing. For example, traveling to work does not count as paid travel time. But, traveling to the office may be compensable if the employee is a home-based worker. Wage and hour regulations also vary by state. So, your HR, payroll, and legal teams must work together to identify these risk areas and get to know what federal, state, and local labor laws say about them.
Keep all your documents and records handy for the audit
You should quickly produce the required records and any other relevant information to the investigators on the day of the audit. You can also ask the investigator about the audit scope beforehand. However, if the audit happens unannounced, you can ask the investigators when they arrive at your office.
How do I interact with investigators during the audit?
It’s essential that you cooperate with the investigators throughout the audit process. Preventing and hindering a DOL audit in any way can negatively affect the outcome. Typically, an audit has three main stages:
1. Review of employment records and documents
In the first part of the audit, the investigator will request access to records and documents to analyze and verify them. You need to submit these to them promptly. Allocate a quiet, well-lit, and well-ventilated room where they can work undisturbed. Don’t interrupt them unnecessarily.
2. Interviews with employees and the management team
Depending on the nature of the specific audit, the investigator may want to interview your employees. In which case, they usually question them on separate days after they complete their review of your employment records. It’s important not to coach or coerce employees about what to say to the investigator before the interview. You can let the investigator know about any shift or scheduling issues to minimize disruption to your business. You will not sit in on these private employee interviews but may be permitted to sit in management-level discussions.
3. Completion of investigation and audit report
At the end of the investigation, the auditor will leave a copy of the report on their findings. It should contain an explanation of any violations and how to correct any problems. You’re likely to be asked to sign it. Remember that your signature is not an admission of guilt or an agreement to pay back wages or civil penalties. Before agreeing to pay any fines and penalties, take time to read the report.
After the audit
You can ask for an informal meeting with the DOL’s local wage and hour administrator to discuss the audit’s findings and negotiate a reduction in fines and penalties. Have your lawyer present and a company representative that has the authority to assure that corrective action has been or will be taken. You can then resolve the case by agreeing to pay the fines or appeal against the report’s findings. If you appeal, the administrator will refer the matter to the DOL solicitor’s office for enforcement. This can be expensive, so it’s better to resolve the case before it reaches that stage.
All indications are that DOL audits are rising, so any organization that keeps inaccurate employment records or doesn’t observe compliant labor practices could be a target. So, it’s vital that you make every effort to understand and comply with labor regulations at federal, state, and local levels. This includes creating a well-organized and accurate recordkeeping system. These proactive measures strengthen your business and keep the DOL auditor from knocking at your door.