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The United States Department of Labor recently announced a six-month pilot program to help employers and employees more quickly resolve Fair Labor Standards Act (FLSA) wage and hour issues. The Payroll Audit Independent Determination (PAID) program, expected to begin next month, gives employers an opportunity to audit and resolve potential wage and hour underpayments with a level of protection not previously offered. While the program may not be advantageous for all businesses, it does signal a significant change in the federal government’s approach, as this Administration promised to focus on compliance rather than enforcement.

While the details are currently limited, the program’s concept is that an employer could self-audit, identify violations and employees affected, compute the back pay owed, dollar for dollar, and contact the Department of Labor for approval. The employer will need to certify how the audit was conducted and its accuracy, and agree not to repeat the violations. However, not all employers will be eligible to participate in the program, such as those under active audit and litigation, or threats of litigation, or who have a history of violations. Also, the audit period required, if any, is currently unclear.

Previously, employers who uncovered FLSA mistakes corrected them at their peril. There existed a real threat of liability for double damages and civil penalties, without assurance of release of the FLSA claims from the government. Under the PAID program, the Department of Labor will provide a form for employees who receive payment to waive their FLSA rights for the violations corrected. Employees can choose not to accept payment or waive their rights but, historically, many employees will do so. In return, the Department of Labor will approve the resolution and not seek double the amount due or any penalties.

There are obvious shortcomings for employers who choose to participate in the PAID program. Proactively contacting a federal agency to admit liability could expose an employer to further scrutiny by that agency. Any information provided to the Department of Labor will also be subject to discovery under the Freedom of Information Act by those employees, and former employees, who may not participate. Moreover, possible violations not covered by the period of the employer’s audit, mistakes not detected, state wage and hour claims, and other related wage payment claims would not be impacted. It is also currently unclear if the Department of Labor will waive its right to re-audit the same period covered under the PAID program.

Periodic auditing of payroll and classifications is considered as best practice from the employment law perspective, particularly when coordinated through counsel to try to obtain the benefits of the attorney-client privilege. That privilege is not absolute in the auditing area. However, it may be applicable to some of the data requested by counsel, as well as legal conclusions made, which may, arguably, be shielded from third-party review. Any employer considering a wage and hour audit should discuss the issues with counsel, and now may be the time to do so.

Learn more about the PAID program and read the Department’s announcement.