Proactivity May Enhance Response to Labor Department Audits

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By Howard Perlman

Employers should do whatever they can to maximize compliance with laws and regulations relevant to payroll, not just for ethical management of employees but also for reducing the chance of audits that could be costly with regard to time and money.

However, if employers are notified by the federal Labor Department that they are to be audited, they should respond promptly by contacting the department's team that is to conduct the audit and establishing a productive rapport, a payroll director said Feb. 16 at a meeting of the Washington Metropolitan Area Chapter of the American Payroll Association.

It is wise for employers, as part of being prepared long before an audit is announced, to designate employees to serve as points of contact with an external audit team and who would be responsible for gathering relevant data for an audit and writing reports based on the data, said Lori Brown, CPP, director of payroll at CACI International Inc.

Communication With Audit Team

When communicating with a Labor Department auditor, as with many aspects of life, the first impression matters, said Brown, who also is president of the Washington Metropolitan Area Chapter of the APA.

“That relationship with an auditor can be really helpful, especially as you're starting to pull documents and details,” Brown said. “The first impression you make when contacting the auditor can show that you're willing and able to get the documents and stay in contact.”

After the Labor Department sends notification that an audit is to occur but before presenting relevant records to auditors, payroll personnel should review the relevant records to be audited, identify aspects for which corrections are necessary, ethically correct those aspects and create a report detailing the corrections that would be presented with the requested records, Brown said.

Labor Department audits generally last from three to six months but sometimes may last for more than a year, with payroll personnel often spending several hours a week complying with the audit instead of performing their primary job functions, Brown said.

Developing a detailed plan for what to do if an audit occurs may be prudent, given an audit's potential to consumer employee time and prevent payroll personnel from resolving other issues and promoting compliance.

Awareness of Key Issues

Preparedness in advance of audits also could be augmented through recognizing key issues that the Labor Department focuses upon during audits and consequentially bolstering compliance regarding those issues, Brown said.

Labor Department audits often focus on whether workers classified as independent contractors should have been classified as employees, with additional wages potentially owed because of the improper classification, Brown said. Audits that focus on employees might examine whether those classified as exempt from the Fair Labor Standards Act's minimum wage and overtime requirements should have been classified as nonexempt, she said.

Ensuring that the regular rate of pay applicable for calculations of overtime premiums for employees nonexempt from FLSA overtime requirements was properly calculated is an especially prominent compliance issue that arises in Labor Department audits, Brown said. The process for demonstrating that the regular rate of pay was properly calculated for applicable employees may be cumbersome, so payroll personnel as part of audit preparation should ensure they can efficiently demonstrate the accuracy of their overtime premium calculations, she said.

Assessments of the degree to which off-the-clock work occurred but was not recorded, and why such work was not recorded, also may occur during a Labor Department audit. Employers should ensure long before an audit occurs that all employees are aware of their policies regarding telecommuting or performing off-site work through the Internet during hours other than their regularly scheduled work hours. This reduces the chance that work is being performed for no pay, Brown said.

Additional Preparedness Aspects

Payroll personnel may benefit from conducting self-audits to determine before an external audit occurs whether they can sufficiently comply with expected audit demands and whether any problems exist that should be corrected before being prompted to do so by an external auditor, Brown said.

Creating a standard plan as to how relevant payroll, compensation and benefits data would be gathered for a federal audit, especially if the data are stored in different systems with restricted data-sharing or the data are maintained by different departments, would increase the efficiency by which the data could be amassed for an auditor's review, Brown said.

An employer's familiarization with the history of audits to which the employer was previously subject may empower the employer with additional context with which to prepare for a future audit, Brown said.

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