DOL Entices Self-Reporting of Wage and Hour Violations, But Employers Should Be Cautious

By Rex P. Fennessey - McMahon Berger, PC

March 12, 2018

On March 6, 2018, the U.S. Department of Labor (DOL) announced it will launch a new pilot program – called the Payroll Audit Independent Determination (PAID) program – designed to allow employers to self-report violations of the Fair Labor Standards Act (FLSA).  Although the program’s details remain to be fleshed-out, the DOL’s current description of the program would allow employers to self-report violations or potential violations of the FLSA to the DOL.  Potential FLSA violations include failure to pay minimum wage for all hours worked or to pay overtime for non-exempt employees, and misclassification of employees as exempt or independent contractors.  If the DOL agrees to allow the employer to participate in the PAID program, the employer would pay employees the wages it has determined to be due.  In exchange, the DOL’s Wage and Hour Division – which investigates and enforces the FLSA – would not seek liquidated (double) damages or civil monetary penalties.  Further, in order to obtain unpaid wages under the program, employees would be required to sign a waiver of their right to sue their employer under the FLSA in court.

The program is the latest in a string of actions by the Trump Administration that are viewed as more friendly to employers after what many viewed as a hostile Labor Department under the Obama Administration.  Other recent changes include updates to the Wage and Hour Division’s position on independent contractors under the FLSA and a return to the practice of issuing opinion letters to employers; which can be used as a defense in wage and hour litigation under the FLSA. The Trump Administration touts the PAID program as an incentive for employers to proactively address potential violations of the FLSA while minimizing the fear of additional penalties from the DOL or costly litigation by employees.  The Administration also highlights the benefit to employees, who will receive the full amount of their unpaid wages without having to wait for protracted litigation or paying private legal fees.

While employers can welcome the spirit of the PAID program, they should consider carefully whether to participate.  First and foremost, self-reporting violations of the FLSA should only be done after consideration of the potential consequences.  As the DOL’s description of the program makes clear, the DOL is not required to allow an employer to participate in the PAID program.  Indeed, the DOL has indicated that it will not permit an employer to participate if they are already under investigation by DOL or if the employer is being sued for FLSA violations in court or other proceedings.  If the employer is denied participation, the DOL can – and likely will – investigate not only the violations self-reported by the employer, but other FLSA violations as well.  Without the protections of the PAID program, the DOL is free to assess liquidated damages and civil monetary penalties for any violations found.  The uncertainty about whether participation will be allowed may be enough to deter many employers from self-reporting.

Second, employees are not required to accept the wages offered under the PAID program, which means that an employer is not guaranteed releases of FLSA claims from all employees.  Given that an offer of wages under the program is a tacit (if not explicit) admission that the employer may be in violation of the FLSA, it will likely signal to employees that they were being paid incorrectly.  That may cause some employees to consult with an attorney; who may use the employer’s self-report under the program against the employer in litigation where employees who did not sign releases can claim double their unpaid wages and attorneys’ fees.  The prospect that participation may cause, rather than prevent, litigation is also a reason for employers to think carefully before participating in PAID.

Moreover, many have noted that it is unclear whether the release employees will be required to sign in exchange for their wages covers state wage-and-hour violations as well.  As employers should be aware, most states have their own laws requiring payment of wages.  Some of those state laws require a higher minimum wage and have different overtime rules than the FLSA.  If the release employees sign does not cover state claims, employers may be forced to defend wage and hour claims based on state law; claims that were prompted by the employer’s decision to self-report under the PAID program.  If the employer obtains a release of FLSA claims, but has to defend a lawsuit based on state wage and hour laws, an employer’s incentive to self-report violations is greatly diminished.  Given the very real possibility that self-reporting may prompt litigation, employers would be well advised to wait and see what is covered by a release before making a decision to self-report.

Further, the PAID program’s release only covers the specific violation reported by the employer.  Thus, if an employer self-reports only failure to pay minimum wage, even an employee who signed a release under the PAID program can later bring claims for other FLSA violations, such as the employer’s failure to properly pay overtime.  Thus, employers should be aware of the scope of claims being released prior to participation.

One additional unanswered question is what will occur if a lawsuit is initiated while the employer is in the process of participating in the PAID program.  The DOL’s current description of the program is silent about whether it will allow continued participation in PAID if an employer is sued after self-reporting.  Employers will often be most interested in self-reporting when litigation over FLSA violations is imminent.  If an employer will be “kicked-out” of the PAID program when a lawsuit is filed, the risk of potential admissions of violations of the FLSA through self-reporting may outweigh the benefits offered by the PAID program.

Finally, the prospect of a less employer-friendly DOL under a future Administration should be considered.  The administration of George W. Bush offered a similar program in which employers could self-report FLSA violations in exchange for employee releases and a guarantee that the DOL would not conduct a full investigation into the employer’s pay practices.  When President Obama took office, the DOL still allowed employers to self-report, but refused to guarantee that it would not conduct a full audit of the employer’s pay practices.  Self-reporting predictably plummeted, but those who had done so under the Bush Administration found themselves in the cross-hairs of the Obama Administration’s more aggressive DOL.  Many employers are understandably concerned that a future DOL may use their self-reporting against them.

Despite the concerns and unanswered questions, the PAID program is nevertheless a valuable tool for employers seeking to become compliant with the FLSA while avoiding the prospect of costly litigation.  The PAID program offers employers committed to paying employees for past violations the benefit of a DOL-approved release of claims.  That is a significant benefit given that many courts will not honor private settlements of FLSA violations.  Further, FLSA plaintiffs’ lawyers may be less interested in bringing a private FLSA lawsuit if they believe many employees who would be included have already released their claims.

The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for over sixty years, and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.