Labor and Employment Audit Can Save Your Business in the Long Run

Have you had a check-up lately? No, not a personal physical check-up, but a comprehensive review or "audit" of your company's personnel policies and practices? Most businesses can expect to be visited by a government agency at some time during their existence, and the result of that type of audit can result in substantial fines or penalties or possibly costly litigation.

Remember all of those headlines a few years back when a certain government agency, the U.S. Occupational Safety and Health Administration (OSHA) collected millions of dollars for "record-keeping" violations? Employers should also keep in mind that certain violations of child labor laws can lead to the imposition of "civil money penalties" up to $10,000 for each violation. Many of these types of violations are entirely preventable -- and are best dealt with long before a government inspection is scheduled.

A labor and employment audit covers all of an employer's personnel policies and practices. In this review, an experienced labor lawyer conducts an on-site review of a company's personnel records, payroll records and personnel policies, and interviews executives and managers concerning practices that appear to be out of compliance with applicable laws and regulations. The reviewer then issues a detailed, confidential report to management in which the status of the company's compliance is discussed and, where necessary, recommendations are made for necessary corrective action.

The audit is conducted in a manner similar to what an employer could expect if a government inspector walked through the door. The big difference is that the results of this audit are reported only to management, which then has the opportunity to take appropriate, corrective action before any government agency learns of the potential problems.

Let's take some examples. Three of the government agencies that are most likely to contact an employer are the U.S. Department of Labor, Wage and Hour Division; the U.S. Equal Employment Opportunity Commission (EEOC); and the U.S. Occupational Safety and Health Administration (OSHA), or their state counterparts. If an employer is a contractor with the federal government, the Office of Federal Contract Compliance Programs (OFCCP) may request a compliance audit. Usually, these contacts are in response to a specific complaint filed by an employee or group of employees, although both OSHA and the OFCCP have in the past selected employers for review at random.

Wage-Hour Laws. An employer subject to the Fair Labor Standards Act (FLSA) is required to pay at least the federal minimum hourly wage to most of its employees, pay overtime compensation at one and one-half times an employee's "regular rate" for all hours worked in excess of 40 in a workweek, and to keep appropriate pay records.

  • The FLSA is a fairly complex statute, which contains many categories of "exempt" employees -- some of whom are exempted from both the minimum wage and overtime provisions, and some of whom are exempted only from the overtime provisions of the statute.
  • It is the employer's responsibility to classify its workforce by making an initial determination of "exempt" and "nonexempt" employees. Sounds simple, until you remember that, having made that determination, the employer will begin paying its employees accordingly. If, some two or three years later, the Department of Labor investigates and finds that the employer classified its workers incorrectly, an employer may owe thousands of dollars in back wages, "liquidated damages" (i.e., an additional amount equal to the unpaid wages), and civil money penalties.
  • Recordkeeping under the FLSA is another potential problem. Employers are required to maintain pay records of all hours worked. The use of a time clock or electronic device can simplify the record-keeping function; when paper time sheets are used, it's important, for example, to use a form that clearly sets out the unpaid lunch breaks. It's important to ensure that employees are completely released from their duties during their meal breaks to avoid claims years later that they were required to "work through" lunch. That brief lunch period, 30 or 60 minutes, can add up to a lot of hours -- and money -- if the Department of Labor determines that the time is "compensable" under the FLSA.
  • Child labor violations are on the rise as the unemployment rate has plummeted and employers are reaching out to younger workers to fill entry-level positions. Employers should keep in mind that there are restrictions on the hours of work and type of work that may be performed by minors (workers under the age of 18). More common are violations of the hours-of-work and maximum hours provisions of the child labor laws. Under the federal law, employees under the age of 16 cannot work past 7:00 p.m. on a school day during the school year (note, Friday is a school day; Sunday is not), or work more than three (3) hours on a school day, or more than eighteen (18) hours in a workweek. Some states further restrict the hours of work of young workers. And, minors under the age of 14 cannot be employed, except directly by their parents or guardians (note: this does not apply to a corporation unless the parent is the sole shareholder). Child labor violations can result in civil money penalties up to $10,000 for each violation.

Occupational Safety Issues. A review of OSHA issues would include a review of the "OSHA 200" or injury log book that many employers (i.e., those not exempted by law) are required to maintain. If an employer is required to maintain the log, a copy is required to be posted in the work place each year for a period of 30 days in February. Information regarding hazardous chemicals or agents in the workplace ("Hazcom") known as Material Safety Data Sheets (MSDS) is required to be kept on the premises. Employers are required to have appropriate safety measures, such as first aid kits, water rinsing stations and, in some cases, a safety plan in place to protect workers. An audit would include a review of the employer's past OSHA experience and methods of abating hazards that are discovered in the course of the audit.

EEOC Issues. Employers having 15 or more employees are subject to the provisions of many federal employment discrimination laws, including Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, and the Americans with Disabilities Act. An audit would review a company's personnel policies, forms (such as its employment application), make certain that all legally required posters are posted on the premises, and evaluate personnel practices to determine whether any compliance issues are presented. An audit of this nature can be particularly useful in discovering pay discrepancies among male and female workers who are performing substantially the same work (regardless of job titles) that may violate the Equal Pay Act.

Fortunately, many of these compliance issues can be addressed in a private labor and employment audit conducted in advance of a compliance audit by government agents. While it is not possible to eliminate the risk of a government agency or a private litigant from finding some violation of a federal or state law, this is one area where the proverbial "ounce of prevention" can pay big dividends. An employer can save itself thousands of dollars and avoid the time and expense of litigation by taking prompt corrective action before the government comes calling.