Any business that has employees is liable someday to become the target of a Department of Labor wage and hour investigation. As scary as an investigation can be, it’s even more frightening when you don’t know what to expect.

Here are five things you may not know about wage and hour investigations, along with a few simple steps you can take to minimize your risk:

1. You May Get No Advance Warning.

Most times you will be notified ahead of time that an investigation is being opened. However, Wage and Hour Division investigators can simply show up unannounced on your doorstep. They sometimes like to take an opportunity to observe normal business operations before target companies have had a chance to “clean up their act.”

2. You’ll Probably Never Know Why You Were Selected for Investigation.

In almost all cases, the investigator will not tell you why you’re being investigated. Often, it’s a complaint from one of your own workers. Sometimes a competitor may file a complaint if they believe a company is underpaying its workers and using those savings to gain an unfair advantage.

Since complaints to the Labor Department are confidential, the investigator won’t tell you who complained or what they said… or if there even was a complaint in the first place. Sometimes the investigation wasn’t initiated by a complaint. From time to time, the Department sweeps businesses in certain “low-compliance” industries, or simply decides to blanket a particular geographic area to check for compliance.

Recently, for instance, they’ve investigated gas stations in New Jersey, hotels in Ohio, car washes in California and restaurants all over the country.

3. Get Ready To Go Digging Through Ancient History.

The investigator will need to see business records to help determine which laws and regulations apply to your business. But the investigator doesn’t just want to see what you’re doing right now. He or she will also want to look at general business, time and payroll records going back up to three years.

What they’re looking for:

  • Have you been paying overtime-eligible employees at least minimum wage? Have you been paying overtime exempt employees at least $455 per week?
  • Have you taken any unauthorized deductions from anyone’s paycheck?
  • If you employ or have employed any independent contractors, were they truly independent, or were/are they employees?
  • And so forth…

4. The Investigators Don’t Just Rely on a Paper Trail.

As part of the examination, the Wage and Hour investigator will likely interview some (or all) of your employees. These interviews will likely be in private, without you present. In some cases, they may even talk to former employees, meet with your workers at locations away from work or conduct interviews via email or telephone.

What they’re looking for:

  • To determine employees’ actual job duties. The investigator wants to ensure your workers are properly classified as exempt or non-exempt.
  • To see that you’re observing all the applicable child labor laws and restrictions.
  • To make sure there aren’t any “hidden” violations. For example, a Chinese restaurant in San Jose, California was caught recently issuing paychecks to their wait staff that made it appear on paper as though the employees were being paid correctly. However, the restaurant owner then forced workers to sign the paychecks back over to him, allowing workers to keep only their tips as pay. Interviews with the workers uncovered the ruse.
  • Any other information that might help them in their investigation.

5. Your Liability Insurance May Not Cover You.

Many companies have purchased Employment Practices Liability (EPL) insurance, thinking their policy will protect them in any wage and hour cases that might arise. However, in many instances insurance companies will attempt to deny coverage based on one or both of these arguments:

  • The “Fair Labor Standards Act exclusion” prohibits coverage of the claim. This exclusion bars coverage for “alleged violations of the Fair Labor Standards Act… or any similar federal, state or local statute.”
  • The policy only covers “loss,” and the back wages owed are not “losses” but “restitution.” That is, the company is simply catching up with what they should have paid workers from the start, not suffering a “loss.”

Companies do challenge these denials and win — sometimes. But mounting a challenge takes time and resources and isn’t guaranteed to be a success. In December 2011 in California, the U.S. Ninth Circuit Court of Appeals ruled an insurance company was not required to cover any claims arising from a wage and hour lawsuit (California Dairies, Inc. v. RSUI Indemnity Company).

Even in cases where courts have sided with the insured, the judges often only mandate payment for partial claims, leaving the company on the hook for the rest.

So, What Should You Do?

  1. First and foremost, make every effort to pay your workers correctly. Use a reliable time and attendance system to track everyone’s time accurately. Be sure to pay overtime-eligible employees for all the hours they work, including overtime. This is not the time to guess, estimate or settle for “close enough.” The goal is to do what you can to avoid an investigation or lawsuit in the first place.
  2. Keep accurate, organized, well-maintained time and payroll records that can be accessed quickly, going back for at least three years. When it takes a long time to produce records, or the records you provide are sloppy or incomplete, it could appear you’re trying to hide something.
  3. If you’re investigated, contact legal counsel right away. Your lawyer can act as a knowledgeable and unemotional liaison with the investigator. The lawyer should review all requested documents before they’re handed over, to ensure you aren’t inadvertently revealing more than was asked for. The goal is to wrap up the process quickly and smoothly, with a minimum of hassle for you and your employees.
  4. Play by the rules. Do not try to prevent or discourage employees from cooperating with the investigator. Don’t “get even” with any employee you suspect of having filed a complaint. Interfering with the investigation or retaliating against employees will only make matters worse.

Nothing can promise 100% immunity from wage and hour investigations or guarantee investigators will never find any issues. However, with a bit of advance planning and solid business practices — including making sure to always track employee work time accurately — you can minimize your risk.

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