A new pilot program announced by the U.S. Department of Labor just last week provides employers with renewed hope that the agency is changing its approach from one of strict regulatory enforcement to one that seeks to encourage voluntary compliance and minimize litigation.  Employers, however, should proceed with caution before voluntarily disclosing their possible violations of the Fair Labor Standards Act (FLSA).

The Payroll Audit Independent Determination (PAID) program is touted by the DOL as a way for employers to cooperatively work with the federal agency to resolve “inadvertent” wage and overtime violations in an expeditious manner and without litigation.  The types of violations covered include unpaid “off-the-clock” work, failure to calculate and pay overtime at the required rate of 1.5 times the regular rate of pay, and misclassification of exempt employees.

How employer participation works

During the six-month pilot period, employers who discover potential wage and hour violations as the result of a self-audit have the option of requesting to participate in the program.  If the DOL accepts the employer’s request to participate in PAID, the employer is then responsible for disclosing the results of its self-audit to the DOL. This specifically includes the nature of the violation, the affected employees, the timeframes in which each employee was affected, and the amount of back wages that is believed to be owed to each employee.  The employer must also certify it is not currently litigating the potential violation at issue and that it will change its pay practices to comply with the law. The agency then reviews the information, assesses the correct amount of back wages due, issues forms describing the terms of the settlement, and then supervises the payments to the employee in exchange for a legal release of liability claims.

Benefits to employers

The primary benefit for employers participating in the PAID program is that they can potentially avoid the time, hassle and expense of defending a federal wage and hour claim in court.  Another benefit is that the DOL will not assess liquidated damages – that is, double damages – or civil money penalties if it allows an employer to participate in PAID. In short, PAID can potentially allow employers to resolve federal wage violations faster and for less money, all while ending up with a valid release.

Proceed with caution

Sounds great, right?  Not so fast.  The biggest potential drawback of participating in PAID is there is a lot of uncertainty over how DOL will operate the program in practice. For example, it is not clear if the DOL will allow employers to negotiate and receive releases from state wage and hour laws in addition to the federal Fair Labor Standards Act.

Additionally, it is not clear what would happen if an employee contacted by the DOL as part of the PAID program decides to file a lawsuit after learning of potential wage violations. While the DOL allows an employer to voluntarily participate in PAID, it does not require employees to accept the settlement terms. Should the DOL refuse to exercise jurisdiction of the potential violations at issue, employers could potentially be both admitting a violation and inviting employees to file suit.

Further, it is not clear what will happen if the DOL denies an employer’s request to participate in PAID.  Is immunity on the table in these situations?  More likely – at least for egregious violations – the DOL may deny the employer’s request to participate in PAID and then file a lawsuit against the employer and seek liquidated damages or civil money penalties.

The takeaway

While the prospect of avoiding a wage and hour lawsuit is appealing, employers must realize that any request to participate in PAID is a request to have the DOL audit their company’s records.  While that is rarely a wise choice, there may be limited circumstances where it makes sense for an employer to participate, particularly if the potential violation was truly inadvertent and defensible, the amount of back pay exposure is low, and there is high morale among employees.  And, once some of the uncertainty over PAID is resolved, it may turn out that PAID is a useful tool for employers to resolve potential wage and hour violations.

Wage and hour issues are notoriously technical, and any employer facing potential violations should seek counsel to explore all options, including PAID.