Denise M. Blommel 2014-06-03 03:09:04
11 Steps Before, During & After an Audit There is dissonance between the 21st-century knowledge economy and the 1938 federal Fair Labor Standards Act (FLSA). The FLSA was born in the Great Depression during the Industrial Age and governs minimum wage, overtime and child labor. Due to its sometimes arcane requirements and the predominant local culture of rugged individualism, the FLSA is the most disobeyed law in Arizona besides the speed limit. The U.S. Department of Labor (USDOL) Wage and Hour Division, which has added staff and become aggressive under the Obama administration, investigates compliance with the FLSA by performing wage hour audits. These audits are usually triggered by a disgruntled ex-employee, although some are based upon USDOL’s interest in a particular industry. USDOL has an Arizona Initiative due to the vast number of employees misclassified as independent contractors in our state. Investigators can notify your client about an impending audit in writing or by a telephone call or by simply show up at your client’s door to look at the payroll records. They do not need a warrant. They are looking for (a) whether your client correctly classifies workers as employees or independent contractors; (b) whether employees are working off the clock; and (c) whether salaried employees are properly classified as exempt from overtime. In other words, USDOL is looking to put overtime pay into employees’ hands and tax revenues into federal coffers. You can take four steps before an audit is announced or threatened, to help your client avoid liability for FLSA violations. 1. When you first help your client establish the business, be sure that workers are properly classified – both with respect to independent contractor/employee and FLSA exempt/non-exempt. For example, if your client uses independent contractors, there needs to be a written business-to-business contract with these workers. The FLSA does not use the IRS right-to-control test, but has its own economic realities test for whether a worker is an employee. Most employers do not realize that not all salaried employees are exempt from overtime under the FLSA. Your client needs to evaluate each position to determine whether overtime will be required. 2. If your client asks a question about employee wages and salaries, obtain the basic FLSA information from www.dol.gov/whd. Always have your client consider whether terminating an employee can lead to legal problems like a wage and hour claim. Be sure your client has a human resources consultant or counsel to handle complex matters. 3. When reviewing your client’s payroll records, question your client about whether they want to pay salaries to non-exempt employees and whether any employee is entitled to overtime. Working off the clock is common as is failure to pay overtime to salaried non-exempt employees. 4. When you are reviewing your client’s tax information and you see a lot of 1099s, question your client about whether the 1099 worker is truly an independent contractor. Check the FLSA economic realities criteria against the IRS right-to-control test for each 1099. You can take seven steps during and after the audit to add value to your client. 1. COLLABORATION BETWEEN ACCOUNTANT & COUNSEL – Call each other to get immediately involved in the process and work hand-in-hand with your client. Admonish your client not to make statements and admissions or show records to USDOL without you present. Place your client in the position of being a resource and not a target. 2. POSTERS – Remind your client to ensure that the federal FLSA and the Polygraph Protection Act and Arizona minimum wage posters are clearly visible to the investigator. They are available for free online at: • http://www.dol.gov/whd/regs/compliance/posters/ minwagebwp.pdf • http://www.dol.gov/ofccp/regs/compliance/posters/ pdf/eppabw.pdf • http://www.ica.state.az.us/Labor/Forms/Labor_ MinWag_MinimumWagePoster_2014_English.pdf 3. COOPERATION – Emphasize to the client that being nice matters when it comes to dealing with a government investigator. Be firm, civil and polite while not volunteering information. 4. RECORD KEEPING – If your client has poor records, help them fill in the blanks for the investigator. They should never appear as if they are trying to hide information. Work with your client to provide the appropriate payroll records only for the time period (never to exceed three years) in question. 5. NO RETALIATION – A current employee may have complained, triggering the audit. You may discern who this is during the investigation. Admonish your client not to retaliate in any way against this employee. 6. SUPERVISORY INTERVIEW – You must let the government talk to the non supervisory employees. However, supervisory employees have authority under numerous labor and employment laws to bind your client. Do not permit the government to speak with these employees without you present. 7. REALITY CHECK – Following the audit, it is very likely that your client will owe some back wages to employees. Go through the numbers supplied by your client and the government. There may be room for negotiation. At the end of the process your client may be best served by paying the wages, revising and updating its pay practices and moving forward into its future. Here again, collaborate with an accountant to help the client face its new business reality. Denise M. Blommel is a solo private practice attorney in Scottsdale. She represents employers and employees in employment and labor matters. Denise is first vice chair of Girl Scouts – Arizona Cactus-Pine Council. She is a member of the State Bar of Arizona, Scottsdale Area Chamber of Commerce, Scottsdale Bar Association and the Arizona Employment Lawyers Association. Denise is a frequent presenter for government, business, educational and community groups. For more information, visit www.azlaborlaw.com or call (480) 425-7272. Her mailing address is 7150 E. Camelback, Suite 415, Scottsdale, AZ 85251. Her email address is firstname.lastname@example.org.
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