By Donn C. Meindertsma
The U.S. Department of Labor's new Payroll Audit Independent Determination (PAID) Program encourages employers to self-audit their compensation practices for compliance with the Fair Labor Standards Act (FLSA). PAID is a voluntary, pilot program, available to almost all employers. Each employer will need to assess the potential benefits and drawbacks of participating in the program. The following discusses some of the key features of the program that employers may wish to consider in deciding if PAID is right for them.
Potential FLSA violations are generally resolved in one of two ways, each costly and inefficient: 1) the DOL's Wage and Hour Division (WHD) may investigate the employer's pay practices and force remediation; or 2) employees may bring actions for unpaid wages, which frequently take the form of expansive class action lawsuits.
Of course, employers that self-identify FLSA violations can voluntarily fix their pay practices. When an employer privately corrects a non-compliant wage payment practice, however, it cannot force employees to release the
employer from claims for backpay or other damages. The FLSA forbids agreements between employers and employees that modify FLSA obligations unless the agreement is supervised by the DOL or a court. Accordingly, private resolution is not an effective way, or at least not a surefire way, to forestall litigation. PAID offers a carrot that addresses this problem. PAID enables employers to coordinate with the WHD in the resolution of self-identified FLSA violations and, if the WHD supervises the employer's self-correction, the employer will have an effective release against individual worker or class action FLSA claims.
Employers interested in PAID may register on the PAID website. The first step--after the employer has made the important initial decision whether to use the program in the first place--is to review 12 compliance references (FLSA summaries, videos, etc.) that the WHD has posted online. After reviewing these 12 items, a "certificate of completion" is automatically generated. According to DOL, the agency does not collect any information on who registers at that step, so signing in to review the compliance references does not have a downside.
The next step is for the employer to self-audit FLSA compliance. The DOL has made clear that employers may retain counsel to assist in that review.
Essentially, employers are to determine whether they have properly compensated employees during the past two years, including by properly paying them minimum wage, properly paying required overtime pay, properly classifying employees as exempt versus non-exempt, and properly classifying workers as employees versus independent contractors. For example, some employers may not be aware that paying certain types of bonuses to hourly workers effectively increases their "regular rate" of pay, which in turn affects the hourly overtime rate of pay, and that they therefore may have underpaid workers. If no violations are discovered, the employer obviously need not take further action under the PAID program.
Otherwise, after calculating amounts due for FLSA violations, the next step in the program is for the employer to contact the local district office of the WHD. The district office will then direct the employer to submit relevant information, such as the names and addresses of employees who were underpaid, payroll records, and the employer's calculations for corrective payments. Note that these submissions will become subject to public disclosure under FOIA.
Finally, after obtaining the WHD's concurrence on the remediation payments, the WHD will send the affected workers agreements to sign in exchange for receiving improperly
Employers that identify and correct FLSA violations necessarily aim to foreclose future wage litigation. An objective of the PAID program is, of course, to facilitate voluntary FLSA compliance and remediation, rather than subject employers to more draconian investigations and litigation. However, PAID cannot guarantee final resolution of FLSA problems. Workers might not accept the employer's calculations on what backpay is owed, even if the WHD does, and those workers might refuse to sign the agreement proposed by the WHD. Moreover, having been alerted to apparent FLSA violations, those employees might file lawsuits in the hope of
obtaining a greater recovery than the employer offered.
Also, PAID participation does not prevent wage claims under state laws.
While PAID has some benefits, employers have other ways to address potential FLSA non-compliance. Employers should consider these alternatives before making a determination to use the PAID program.
Note: This alert should not be construed as legal advice and its receipt does not create an attorney-client relationship.