Highlights
- DOL audits, while more common in certain industries, can happen to any business due to various triggers like employee complaints. So it’s crucial to be prepared.
- During a DOL audit, expect a thorough review of employment records and potential interviews with your staff; be cooperative without interfering in the process.
- To minimize DOL audit risks and ensure compliance, implement a strong recordkeeping system and understand labor laws; Tandem HR can help – schedule a call to learn more.
No one wants a U.S. Department of Labor (DOL) audit. Just the thought makes us sweat. However, they are becoming increasingly common. While DOL audits are more frequent in industries like food services, construction, and healthcare, any business can undergo one — it only takes one employee complaint to attract the agency’s attention.
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 a DOL audit can 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. This guide walks you through what a DOL audit is, what you can expect, and how to prepare for them.
What is a DOL audit?
A DOL audit is an official examination to assess your company’s compliance with federal labor laws and regulations.
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.
Other types of audits include:
- Benefit plan audits, focusing on ERISA compliance for retirement and health plans
- OSHA inspections, examining workplace safety and health standards
- Immigration-related audits, verifying compliance with employment-based immigration laws
What Triggers a DOL Audit?
A DOL audit can be triggered for various reasons, including:
- Employee complaints. An audit may be initiated if an employee files a complaint alleging a violation of labor laws.
- Random selection. The DOL conducts periodic random audits as a standard procedure to ensure compliance across various industries.
- Industry focus. If your company belongs to an industry with a history of compliance issues— such as restaurants, construction, healthcare, hospitality, agriculture, or garment manufacturing — it might be a target for an audit.
- High turnover rates. A high rate of employees leaving could signal potential issues with working conditions or pay practices.
- Errors on Form 5500. Mistakes on annual reports for employee benefit plans can trigger an audit.
- Referrals from other agencies. The IRS or other government agencies may refer cases to the DOL.
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.
Preparing 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 a lot of 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. To achieve this, you should:
- 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’s FLSA compliance
Identify potential risk areas for non-compliance
Keep in mind that 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 provide 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.
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:
Stage 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.
Stage 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.
Stage 3: Findings 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 who has the authority to assure you that corrective action has been or will be taken. You can then resolve the case by agreeing to pay the fines or appealing 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.
Keep Your Business Prepared and Compliant with Tandem HR
DOL audits are on the rise, so organizations failing to maintain accurate employment records or compliant labor practices could be a target. To keep your business safe, make sure you understand and comply with labor regulations at the federal, state, and local levels. Implementing a well-organized and accurate recordkeeping system is a key proactive measure.
Tandem HR can empower your business, ensuring you always stay compliant and minimizing the risk of a DOL audit. Schedule a call to get started.
