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U.S. Department of Labor Rolls Out FLSA Voluntary Compliance Program – Will it Pay Off for Employers U.S. Department of Labor Rolls Out FLSA Voluntary Compliance Program – Will it Pay Off for Employers

U.S. Department of Labor Rolls Out FLSA Voluntary Compliance Program – Will it Pay Off for Employers?

Regularly auditing your business's minimum wage and overtime pay practices for compliance with the Fair Labor Standards Act (FLSA) is key to avoiding costly and disruptive investigations and collective action lawsuits, as well as the negative publicity that accompanies being labeled a wage and hour violator. More than ever, employers caught violating pay laws (whether willfully or through an honest mistake) face intense scrutiny in the press, on social media, and from politicians.

That said, dealing with the results of a self-audit can be a painful process. Correcting past errors isn't just about changing practices going forward, it also entails grappling with lingering back-pay liabilities. In some cases, there are no easy answers, especially when the noncompliant practice has resulted in significant underpayment. In such cases, an employer must consider not only legal liabilities, but also the employee and public relations aspects.

Unfortunately, employers who discover a noncompliant practice are often hesitant to voluntarily pay back wages for fear of red-flagging their past noncompliance and increasing the risk of a lawsuit or Department of Labor investigation. This is a risky gambit. If affected employees realize they are due back wages before the employer addresses the issue, they are unlikely to be in a forgiving mood and are more apt to aggressively pursue all available remedies, legal and otherwise.

The good news is the process of dealing with FLSA noncompliance may become substantially less painful for employers who seek to correct past errors proactively. Recently, the U.S. Department of Labor's Wage and Hour Division (WHD) has rolled out a pilot program dubbed P.A.I.D. ("Payroll Audit Independent Determination"), which provides employers with an option for self-reporting and remedying past errors without incurring liability beyond the actual underpayment. The WHD and the White House argue the program is a win-win for employers and employees, as it incentivizes employers to self-audit and correct compliance issues, which in turn should result in more employees receiving the back wages they're owed.

However, while this program may prove to be a good fit for some employers, there are a number of potential downsides, unresolved questions, and complicating factors (including overlapping state laws) that need to be carefully considered. More on that below.

Before digging into the nuances of the P.A.I.D. program, it's important to consider what's at stake when overtime and minimum wage practices are noncompliant. The FLSA's statute of limitations allows recovery of any unpaid minimum wage or overtime going back two years, with an additional third year of liability tacked on where the employer's violation was willful. In other words, if a violation is uncovered, the employer will owe employees back wages for every paycheck over the past two to three years that reflects the unlawful practice. In an FLSA lawsuit (which may be brought on a collective basis) or a WHD investigation, the employer is also likely be on the hook for "liquidated" (i.e., double) damages, civil penalties, and/or attorney's fees. When litigation is extensive (and it often is, even to achieve a reasonable settlement), the attorney's fees (including those the employer pays for its defense) may dwarf the original underpayment.

Theoretically, under the P.A.I.D. program, eligible employers who self-report are on the hook only for the actual back wages owed. No liquidated damages, no penalties, and no attorney's fees. In return for self-reporting and making employees whole, participating employers would be insulated from further action from the WHD regarding the pay practice at issue and would receive a limited release of claims from willing employees.

However, as noted above, there are a number of limitations, potential pitfalls, and unresolved concerns regarding the program. The following are just three of the most obvious:

  • First, not all employers will be eligible for the program. Among other things, if the practice at issue is already the subject of investigation, litigation, or even internal complaints, P.A.I.D. is probably not an option.
  • Second, many states and localities (including Illinois, California, and others) have minimum wage and overtime laws that are stricter than the FLSA and provide higher minimum wage rates. A limited waiver of FLSA claims obtained through the P.A.I.D. program would not release claims under such laws. Indeed, a number of states' attorneys general have voiced concern about how the P.A.I.D. program intersects with their states’ laws and have made clear they will not consider participation in the program any protection against state law enforcement. They and other critics view the program not as a "win-win," but rather a free pass for wage and hour violators. It's a safe bet the program's opponents will challenge its lawfulness in the courts.
  • Third, it is unclear to what extent the federal courts will enforce waivers obtained under the P.A.I.D. program. In the past, the courts have placed considerable scrutiny on similar waivers obtained by employers through WHD compliance agreements. Once again, this may vary from jurisdiction to jurisdiction.
Given these substantial concerns, it is critical that employers considering the program contact wage and hour counsel before taking any action. Otherwise, participation may result in more problems than it solves, and may cut off better alternatives.

If you have questions about the P.A.I.D. program or any other wage and hour concern, contact Manolis Boulukos or any other member of Ice Miller's Labor and Employment Practice Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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