“There’s a DOL Investigator at My Place of Business … What Do I Do?” Five Tips on How to Deal When the DOL Comes Knocking

Every year, the Wage and Hour Division of the U.S. Department of Labor and its state counterparts (which we will collectively refer to here as the “DOL”) amplify their efforts to enforce wage and hour laws, such as the Fair Labor Standards Act, the Davis-Bacon and Related Acts, the McNamara-O’Hara Service Contract Act, and corresponding state laws and regulations (e.g., Articles 8 and 9 of the New York Labor Law). These agencies typically commence their enforcement efforts by sending written notices to employers requesting that they produce payroll and other business records. In addition, agency investigators often visit the employer’s place of business for inspection of the premises, to interview employees, and to review payroll and other business records that the employer has on site.

An investigation by the DOL can be a protracted process that can cause even the most prepared team to be pulling its hair out. If not navigated carefully, an investigation by the DOL may result in a determination that the company has violated the law and a finding that may result in complete financial devastation to the employer and its principals. Here are five tips that an employer can use to lessen the aggravation and frustration when dealing with a DOL investigation.

Tip No. 1:

Never underestimate the seriousness of the investigation and always be cognizant of the possibility of a problem with the employer’s payroll practices.

Employers’ attitudes towards DOL audits generally fall on the spectrum somewhere between “helpless panic” and a “head in the sand.” Regardless of this reaction, employers must take all DOL investigations seriously. Unlike the Internal Revenue Service (IRS), the DOL has the discretion to reinvestigate an employer as frequently as it chooses. The finding of a wage and hour violation often requires an employer to pay wage restitution, interest, and liquidated damages (which may be as high as 100 percent of the principal underpayment amount). Moreover, the DOL may not only impose an underpayment liability on the business; under the Second Circuit case, Irizarry v. Catsimatidis, it may also impose personal liability on its management staff and owners.  Individual owners and managers who are found to have violated wage and hour laws are also exposed to criminal liability under both federal and some state laws (for example, New York Labor Law §§ 198-a & 662(1)).

To fully appreciate the seriousness of the investigation, the employer must come to grips with the fact that it has likely violated wage and hour laws. It should then engage the DOL in earnest discussions to resolve the investigation before the matter is referred for an administrative hearing or escalates into an enforcement proceeding in court. Administrative law judges and courts generally defer to the DOL’s findings against employers absent any proof of arbitrariness, capriciousness, or a complete lack of rational basis substantiating the DOL’s finding. Thus,  employers are less likely to achieve a more favorable result in a judicial or quasi-judicial proceeding, and in fact, in many instances, the underlying liability escalates as a result of the matter being referred to an administrative law judge or a court.

Employers should also be aware that their seemingly most loyal employees may be the ones who file claims with the DOL. During the investigation process, employers must exercise the utmost caution in their day-to-day dealings with employees, particularly when it comes to enforcing workplace rules and policies and applying disciplinary measures.

Tip No. 2:

Employers must fully cooperate in the investigation.

DOL investigators possess a tremendous amount of discretion and authority over the investigative process. Employers must be mindful that being uncooperative in the investigation will only aggravate the investigators and render the entire investigation process a costly nightmare for the employer. Therefore, if the investigator perceives the business as failing or refusing to cooperate, severe consequences will ensue. An uncooperative business should expect to be served with subpoenas from the DOL requiring the production of documents or appearances for questioning. Failure to cooperate may further invite court proceedings seeking to compel the business’s cooperation with the investigation. Finally, in response to an uncooperative employer, the DOL is authorized to take the claimants’ allegations alone at their face value for purposes of determining the employer’s underpayment liability.

Employers must engage the DOL with the full intention of cooperating with the investigation. The DOL will be more willing to negotiate with an employer that is fully cooperative—not just on ultimate liability issues, but also in the agency’s willingness to limit the scope of the investigation and in its requests for payroll documents. In the end, employers may find that they will save a lot of money in costs, attorneys’ fees, and restitution payments if they cooperate with the DOL.

Tip No. 3:

Employers should retain counsel.

When it comes to responding to a DOL investigation, the target business should always engage counsel. An employer should never attempt to respond to a government investigation by itself, and a DOL investigation is no exception.

Experienced practitioners can assist the employer in determining its exposure to liability, in assessing the quality of its existing payroll records, and in determining which of its payroll records are responsive to the DOL’s request. Counsel can also assist the employer in negotiating with the DOL on the scope of the DOL’s inquiry and guide the employer in complying with the wage and hour laws at issue. More importantly, able counsel can serve as the employer’s line of defense in the face of the DOL investigation. This is particularly important for employers that are less than fully compliant in their payroll practices.

While we love certified public accountants (CPAs) and accountants and appreciate their expertise, a DOL investigation is not an IRS audit, so they should only play a supporting role in an employer’s investigation defense. Since CPAs and accounting staff are typically entrusted with preparing or maintaining payroll records in the first place, circumstances of the investigation may compel the CPA or accountant to produce documents or information that may expose the employer to further and unanticipated liability. We have encountered too many situations in which a company’s CPAs or accounting staff were designated as the primary representative in a DOL investigation, and their lack of experience in handling DOL investigations often deprived the company of a meaningful opportunity to rebut the DOL’s allegations of underpayment.

Tip No. 4:

Use the investigation as an opportunity to come into compliance.

Employers should do their best to view the DOL as a resource for compliance and to view the investigation as an opportunity to wipe clean all their underpayment liability exposure. Resisting the investigation or continuing to maintain an attitude of denial (that the company did not commit a violation or that compliance is too expensive) will only expose the employer to escalating liability. Coming into compliance is a way to mitigate the employer’s damages: the day that the employer ceases its non-compliant practices is the day its liability is cut off. Moreover, the DOL is more willing to negotiate a settlement with an employer that has demonstrated its willingness to come into compliance.

Tip No. 5:

To the extent possible, gain control over the audit process.

Gaining control over the DOL’s underpayment audit process—to the extent that it’s possible—will increase employers’ chances of resolving the investigation. One way to gain control over the investigation is to limit the scope of payroll records that the employer must provide to the DOL. Since the employer bears the burden of proving compliance in a DOL wage and hour investigation, a finding of violation is largely dependent on the quality of its payroll records. If an employer cooperates in an investigation process, the DOL will generally be willing to negotiate on the scope of production of documents.

Submitting a self-assessment of underpayment to the DOL will also help in guiding the DOL’s audit process. DOL investigators are generally receptive to considering an employer’s own underpayment assessment that is substantiated by its payroll records. In many instances, having such an underpayment assessment may shift the dynamics of the investigation, and move the burden to the DOL, to prove that the employer violated wage and hour laws.

Employers that follow these five tips are much more likely to minimize their wage and hour liability and, perhaps more importantly, to use the audit as an opportunity to reassess their payroll practices. A well-positioned employer may have no reason to fear a DOL investigator’s visit to its workplace.

Eric Su is a shareholder in the New York City office of Ogletree Deakins.

P. Kramer Rice is a 2013 graduate of the Notre Dame Law School and is currently awaiting admission to the state bar of New York.

Oxana Matveeva is a fraud examiner in the New York City office of Ogletree Deakins.

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Every year, the Wage and Hour Division of the U.S. Department of Labor and its state counterparts (which we will collectively refer to here as the “DOL”) amplify their efforts to enforce wage and hour laws, such as the Fair Labor Standards Act, the Davis-Bacon and Related Acts, the McNamara-O’Hara Service Contract Act, and corresponding state laws and regulations (e.g., Articles 8 and 9 of the New York Labor Law). These agencies typically commence their enforcement efforts by sending written notices to employers requesting that they produce payroll and other business records. In addition, agency investigators often visit the employer’s place of business for inspection of the premises, to interview employees, and to review payroll and other business records that the employer has on site.

An investigation by the DOL can be a protracted process that can cause even the most prepared team to be pulling its hair out. If not navigated carefully, an investigation by the DOL may result in a determination that the company has violated the law and a finding that may result in complete financial devastation to the employer and its principals. Here are five tips that an employer can use to lessen the aggravation and frustration when dealing with a DOL investigation.

Tip No. 1:

Never underestimate the seriousness of the investigation and always be cognizant of the possibility of a problem with the employer’s payroll practices.

Employers’ attitudes towards DOL audits generally fall on the spectrum somewhere between “helpless panic” and a “head in the sand.” Regardless of this reaction, employers must take all DOL investigations seriously. Unlike the Internal Revenue Service (IRS), the DOL has the discretion to reinvestigate an employer as frequently as it chooses. The finding of a wage and hour violation often requires an employer to pay wage restitution, interest, and liquidated damages (which may be as high as 100 percent of the principal underpayment amount). Moreover, the DOL may not only impose an underpayment liability on the business; under the Second Circuit case, Irizarry v. Catsimatidis, it may also impose personal liability on its management staff and owners.  Individual owners and managers who are found to have violated wage and hour laws are also exposed to criminal liability under both federal and some state laws (for example, New York Labor Law §§ 198-a & 662(1)).

To fully appreciate the seriousness of the investigation, the employer must come to grips with the fact that it has likely violated wage and hour laws. It should then engage the DOL in earnest discussions to resolve the investigation before the matter is referred for an administrative hearing or escalates into an enforcement proceeding in court. Administrative law judges and courts generally defer to the DOL’s findings against employers absent any proof of arbitrariness, capriciousness, or a complete lack of rational basis substantiating the DOL’s finding. Thus,  employers are less likely to achieve a more favorable result in a judicial or quasi-judicial proceeding, and in fact, in many instances, the underlying liability escalates as a result of the matter being referred to an administrative law judge or a court.

Employers should also be aware that their seemingly most loyal employees may be the ones who file claims with the DOL. During the investigation process, employers must exercise the utmost caution in their day-to-day dealings with employees, particularly when it comes to enforcing workplace rules and policies and applying disciplinary measures.

Tip No. 2:

Employers must fully cooperate in the investigation.

DOL investigators possess a tremendous amount of discretion and authority over the investigative process. Employers must be mindful that being uncooperative in the investigation will only aggravate the investigators and render the entire investigation process a costly nightmare for the employer. Therefore, if the investigator perceives the business as failing or refusing to cooperate, severe consequences will ensue. An uncooperative business should expect to be served with subpoenas from the DOL requiring the production of documents or appearances for questioning. Failure to cooperate may further invite court proceedings seeking to compel the business’s cooperation with the investigation. Finally, in response to an uncooperative employer, the DOL is authorized to take the claimants’ allegations alone at their face value for purposes of determining the employer’s underpayment liability.

Employers must engage the DOL with the full intention of cooperating with the investigation. The DOL will be more willing to negotiate with an employer that is fully cooperative—not just on ultimate liability issues, but also in the agency’s willingness to limit the scope of the investigation and in its requests for payroll documents. In the end, employers may find that they will save a lot of money in costs, attorneys’ fees, and restitution payments if they cooperate with the DOL.

Tip No. 3:

Employers should retain counsel.

When it comes to responding to a DOL investigation, the target business should always engage counsel. An employer should never attempt to respond to a government investigation by itself, and a DOL investigation is no exception.

Experienced practitioners can assist the employer in determining its exposure to liability, in assessing the quality of its existing payroll records, and in determining which of its payroll records are responsive to the DOL’s request. Counsel can also assist the employer in negotiating with the DOL on the scope of the DOL’s inquiry and guide the employer in complying with the wage and hour laws at issue. More importantly, able counsel can serve as the employer’s line of defense in the face of the DOL investigation. This is particularly important for employers that are less than fully compliant in their payroll practices.

While we love certified public accountants (CPAs) and accountants and appreciate their expertise, a DOL investigation is not an IRS audit, so they should only play a supporting role in an employer’s investigation defense. Since CPAs and accounting staff are typically entrusted with preparing or maintaining payroll records in the first place, circumstances of the investigation may compel the CPA or accountant to produce documents or information that may expose the employer to further and unanticipated liability. We have encountered too many situations in which a company’s CPAs or accounting staff were designated as the primary representative in a DOL investigation, and their lack of experience in handling DOL investigations often deprived the company of a meaningful opportunity to rebut the DOL’s allegations of underpayment.

Tip No. 4:

Use the investigation as an opportunity to come into compliance.

Employers should do their best to view the DOL as a resource for compliance and to view the investigation as an opportunity to wipe clean all their underpayment liability exposure. Resisting the investigation or continuing to maintain an attitude of denial (that the company did not commit a violation or that compliance is too expensive) will only expose the employer to escalating liability. Coming into compliance is a way to mitigate the employer’s damages: the day that the employer ceases its non-compliant practices is the day its liability is cut off. Moreover, the DOL is more willing to negotiate a settlement with an employer that has demonstrated its willingness to come into compliance.

Tip No. 5:

To the extent possible, gain control over the audit process.

Gaining control over the DOL’s underpayment audit process—to the extent that it’s possible—will increase employers’ chances of resolving the investigation. One way to gain control over the investigation is to limit the scope of payroll records that the employer must provide to the DOL. Since the employer bears the burden of proving compliance in a DOL wage and hour investigation, a finding of violation is largely dependent on the quality of its payroll records. If an employer cooperates in an investigation process, the DOL will generally be willing to negotiate on the scope of production of documents.

Submitting a self-assessment of underpayment to the DOL will also help in guiding the DOL’s audit process. DOL investigators are generally receptive to considering an employer’s own underpayment assessment that is substantiated by its payroll records. In many instances, having such an underpayment assessment may shift the dynamics of the investigation, and move the burden to the DOL, to prove that the employer violated wage and hour laws.

Employers that follow these five tips are much more likely to minimize their wage and hour liability and, perhaps more importantly, to use the audit as an opportunity to reassess their payroll practices. A well-positioned employer may have no reason to fear a DOL investigator’s visit to its workplace.

P. Kramer Rice is a 2013 graduate of the Notre Dame Law School and is currently awaiting admission to the state bar of New York.

Oxana Matveeva is a fraud examiner in the New York City office of Ogletree Deakins.