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Is a Department of Labor Audit in Your Future? Is Your Compensation Plan Ready?

April 20, 2015

Navigating employee compensation can be complex and overwhelming. And when you add the specter of compliance nightmares and increasing numbers of Department of Labor (DOL) audits and Fair Labor Standards Act (FLSA) suits… Well, it can get downright scary. Of course it can be a lot less frightening if you are confident your company’s Employee Compensation Plan can stand up to regulatory scrutiny. Perhaps a DOL audit is not in your near-term future, but can you be sure? Can you be certain that a claim filed by an employee – current or former – would not trigger an investigation? Are you confident that your employee compensation plan is up-to-date and in compliance with ever-changing regulatory mandates? Let’s take a look at some of the factors that could place your company at risk, and what you can do about them:

Laws, Laws, and More Laws

Federal (and State) regulations are not neatly contained in one document or one rulebook. Having been drafted and crafted, debated and mandated over many decades reaching back into our country’s past, these worker protection laws are a complex and tangled web. The Fair Labor Standards Act is, perhaps, the granddaddy of them all, first enacted in 1938 during the Franklin Roosevelt administration as the Great Depression continued to affect the livelihoods of workers. The 1960s and the Johnson administration brought another wave of worker protection regulations: The Equal Pay Act in 1963, Title VII of the Civil Rights Act in 1964, the Age Discrimination Act in 1967, and the Consumer Credit Protection Act concerning Wage Garnishment in 1968. Since then, two more landmark regulations have entered the corporate compliance landscape: the Americans with Disabilities Act in 1992 and the Lily Ledbetter Fair Pay Act in 2009. Despite your best efforts to walk safely through this regulatory minefield, you could find your company facing a DOL audit.

Escalating Risks

The number of FLSA cases filed against employers has risen steadily, amounting to a nearly 33% increase since 2009/2010. These claims must be investigated by the Department of Labor. Even if your compensation plan is found to be fundamentally sound, your company could be found liable for violations if the implementation and administration of the plan is inconsistent.

If your company deals with Federal contractors, you will be subject to scrutiny under the Office of Federal Contract Compliance Programs. Again, the risk can be significant. According to the DCI Consulting blog, financial settlements under this program in Fiscal Year 2013 alone included findings against companies for hiring discrimination (42%), compensation cases (19%), and accommodation cases (18%). Can your company afford to be found in violation of these rules?

Risk Factors

What are some of the reasons for the escalating numbers of FLSA lawsuits? They appear to fall into 7 key areas:

  • Outdated Federal statutes written decades ago
  • Poorly-defined and ambiguous terms in regulations that impact compensation plan understanding and administration
  • State laws
  • Large lawsuit settlement payouts that encourage more litigation
  • A general increase in public awareness about employee rights and regulations
  • Talk of raising the minimum wage making employees more conscious of wage and hour laws and their rights under these laws
  • The President’s Executive Order to the Secretary of Labor in March of 2014 directing the Secretary to modernize and streamline the existing overtime regulations

Each of these could be a lengthy topic for discussion. Suffice to say that there is tremendous diversity in the reasons for FLSA lawsuits. And this diversity can make it hard to establish your compliance priorities and maintain the focus necessary to keep your organization in the clear.

FLSA Classification Pitfalls

One big risk factor increasing the likelihood of an FLSA suit and DOL audit can be found in your employee classifications. For example, if you have full-time and part-time employees with the same job title classified differently, you could be in violation of the FLSA. Hourly vs. salary pay designations can get you into trouble, too. So can classifying management trainees or interns as exempt. Or forgetting to include non-discretionary bonuses in overtime pay. Whether or not an employee is engaged with your computer systems also comes into play, as does the Bachelor’s degree “auto qualifier.”

Common staff misclassifications include:

  • Secretaries and Administrative Assistants
  • Help desk personnel
  • Inside salespersons
  • Mortgage Originators
  • First-level supervisors
  • Event Coordinators
  • Any positions you don’t want to pay overtime

Reducing the Risk of a DOL Audits

So what can you do to help reduce the likelihood of a DOL audit of your company? First, do an employee classification audit yourself. Conduct a position-by-position review to make sure your classifications and policies regarding the position and its compensation are in compliance with applicable standards and regulations. Document each job’s qualifying exemption classification, and write a brief description that clarifies and justifies why the position qualifies under the designated classification. Be sure to do this at least every 2 years.

Next, do a Discrimination Analysis. Use a spreadsheet to help you uncover any large differences in compensation for protected classes, including those based on age, gender, and race. Do this at least annually.

Perform an Equity Analysis, too. Make sure that employees in the same classification, job title and/or pay grade are being paid equitably. Make sure that any wide variations can be supported by mitigating factors such as performance ratings or time in the job. Do this at least annually.

Next, make sure your Compensation Plans are well-documented. Do they clearly and simply communicate employee incentives? Do you include position eligibility? Do you include an “at-will” employment statement? How about your plan objectives, or how you determine incentives, and how often (and when) payouts happen? Does your Comp Plan document terms and conditions regarding transfers and terminations, disability and death, payment reviews or reversals? Does it spell out how and when plan modifications are made?

Finally, make sure you keep your documentation – including the above as well as any from past audits – easily findable and retrievable. Train your managers to take all compensation inquiries seriously, and to commit to timely communication and resolution. Keep all documentation for 15 years or even longer (a 7-year retention plan is no longer sufficient).

Bottom Line:

Your compensation program is an essential part of attracting talent and running your business. If you keep it well-defined, clear, up-to-date and in compliance with the web of regulations, you will be well-positioned to withstand a DOL audit. If you are not certain that your compensation program is in good shape, or if you know that you need help determining and correcting areas of risk, contact Total Reward Solutions today at 317.589.8529.

Posted Under: Compliance