This summer we noted the 80th anniversary of the passage of the Fair Labor Standards Act (FLSA). This landmark legislation established several long-standing pillars of the modern workplace, including the minimum wage, the 40-hour work week and overtime. Despite the fact the FLSA has been around since 1938, employers continue to struggle with paying their employees correctly. These struggles include issues such as whether an employee is exempt or non-exempt for overtime purposes, what constitutes “hours worked” under the FLSA, and how to calculate overtime correctly. In 2017, DOL investigations found more than $270 million in back wages were owed to employees. The number of wage claims and lawsuits filed by individuals and attorneys continues to grow at an alarming rate.

The Trump Administration has created new strategies and tools for employers to help with compliance of FLSA and correct inadvertent violations. For example, the Wage and Hour Division (WHD) has created a number of training videos and posted them on the DOL website. In addition, the Department of Labor (DOL) has continued to place helpful fact sheets and other educational materials on its website.

One significant program DOL has instituted this year is the Payroll Audit Independent Determination pilot program (PAID). This is a program where DOL invites employers to voluntarily audit their payroll practices and disclose any non-compliant practices to the DOL. The DOL then reviews the employer’s records and calculations of what is owed to employees and tells the employer what it thinks the employer owes. The employer then pays its employees and employees sign a release of any FLSA claims against the employer. The employer must also correct the practice moving forward. Participating employers are not subject to civil monetary penalties and are not required to pay liquidated damages to employees.

Why is DOL attempting this PAID program?

DOL believes the PAID program has benefits for employers and employees. This program should help employees receive their overtime and minimum wages quicker. Employees will receive 100 percent of the back wages paid without having to pay any litigation expenses or attorneys’ fees. DOL recognizes it cannot adequately enforce the laws against all employers. Therefore, DOL believes encouraging more employees to accept payments will help a greater number of employees get money they may be owed.

For employers, the benefits are resolving potential overtime and minimum wage violations expeditiously and without litigation. Additionally, although employers will be required to pay all back wages due, employers will not be required to pay “liquidated damages” or civil monetary penalties. Liquidated damages, or the doubling of the amount owed, is standard practice under the FLSA.

DOL also believes the PAID program will be a win for taxpayers because it will improve overall compliance and allow the WHD to focus more of its resources on bad actors who intentionally violate the law.

How can employers participate in the PAID program?

All FLSA covered employers are eligible to participate in the pilot program. However, if a claim is already being investigated or litigated, those claims cannot be resolved under the PAID program. Employers who have been repeat or recent violators cannot use the PAID program. The program is designed to allow employers to correct common violations such as “off the clock” work, failure to pay overtime at one- and one-half times the regular rate of pay, or misclassification of employees as exempt from the FLSA’s minimum wage and overtime requirements. It is not designed to address more complicated issues such as prevailing wage violations or pay issues with employees working under Visa programs.

How does the program work?

An employer who wishes to participate in the program must first review the required information and compliance assistance materials on the DOL’s website. After reviewing the materials, employers must then audit their compensation practices for potentially non-compliant practices. If the employer discovers any non-compliant practices, the employer must then

  1. Specifically identify the potential violations;
  2. Identify which employees were affected;
  3. Identify the timeframe in which each employee was affected; and
  4. Calculate the amount of back wages the employer believes are owed each employee.

After compiling that information, the employer contacts WHD to discuss the issues it seeks to resolve. WHD will inform the employer of the information it must submit, including the calculations accompanied by supporting evidence and an explanation of how the calculations were made. Any action under the PAID program must include former employees in the back-wage calculations.

WHD will then evaluate the information and determine whether it needs additional information from the employer to assess the back wages. If WHD accepts the employer’s proposal it will tell the employer its proposed scope of the release of liability for the potential violations presented. If WHD discovers additional minimum wage or overtime issues outside the scope of the employer’s proposal, WHD will ordinarily attempt to resolve these as part of the audit.

After WHD assesses the back wages due, it will issue a summary of unpaid wages and forms describing the settlement terms for each employee. Employees must sign release forms in order to receive payment, but the release will be limited to the potential violations for which the employer has paid back wages. Employers are responsible for issuing the payments, as WHD will not distribute the back wages. If an employer refuses to pay back wages after WHD makes it determination, WHD could use its enforcement authority to recover the wages due. The process should take fewer than 90 days to complete.

Should employers participate?

While the program seems like a fairly painless and efficient way to clean up any FLSA violations, the employer may be aware of and may allow it to do so without paying any liquidated damages or penalties, there are some issues employers may want to consider before jumping in.

First, while an employer may identify certain pay practices it is aware of that violate the law, the DOL will conduct an independent review of any issues identified. DOL could broaden the scope of the issues. If the employer doesn’t agree with DOL’s position, will DOL then take independent enforcement action or threaten to oppose additional penalties? This also does not prevent WHD from conducting future investigations.

Second, employees are not required to accept DOL’s proposed settlement and release. Some employees who think they are owed a larger amount of money may not want to limit themselves to just getting their back wages paid. They may wish to get liquidated damages. In addition, while the default statute of limitations under the FLSA is two years, this can be extended to three years for “willful” violations. An employee may believe that an employer’s actions are willful and may decide that it is better to obtain their own legal counsel and get more money they think they are owed. In this case, the employer has already provided a roadmap for the employees and their attorneys.

Third, employees who accept money under the PAID program will sign a release giving up their claims under the FLSA. The release does not cover wage claims that could be brought under state law. Some states provide a longer statute of limitations and impose their own statutory penalties for minimum wage and overtime violations. So, an employer could settle with employees under the PAID program and may still face a state court lawsuit. A number of attorneys general across the United States have objected to DOL’s program as being unfair to employees because it does not get them all the benefits they would get if they pursued a lawsuit.

Closing Thoughts

Employers can already correct self-discovered FLSA violations without involving the DOL. That is, if you discover you have been making an improper payroll practice you can pay the employee back wages. While any release you sign with an employee for those back wages would not necessarily prevent further litigation by an employee seeking penalties or for a longer period of time, the employer generally will be given credit for any back wages it has paid. Such voluntary payments would also reduce the likelihood that a court would determine a violation was willful and could be a consideration with respect to whether liquidated damages are due.

While the possibility of avoiding potential lawsuits, liquidated damages, and civil penalties is certainly appealing, participating in PAID may not make sense for all employers in all cases. If you suspect you may be out of compliance with the FLSA, you may wish to consult with experienced legal counsel to discuss the benefits and risks of participating in PAID as a way to avoid potentially costly and time-consuming litigation. These cases are not easy. An employer must consider not only legal liabilities, but also the employee and public relations aspects.