Be prepared for employment audits

Stephen A. DiTullio

Yet audits can be performed by many governmental agencies other than the IRS.

For business owners, governmental audits of employment practices can be just as intrusive and time consuming and may result in potentially large penalties.

Businesses are subject to myriad federal and state governmental audits of their employment relations and employee benefits practices.

Federal agencies such as the Department of Labor, the Equal Employment Opportunity Commission and the Office of Federal Contract Compliance (for governmental contractors) conduct audits often with little warning.

The Wisconsin Department of Workforce Development also conducts audits of payrolls and other employment practices.

One of the more active agencies regarding audits is the federal DOL.

The number of DOL audits regarding wage and hour practices has steadily increased. In 2003, the DOL settled enforcement actions in the amount of $212 million. Perhaps just as significant as the monetary penalty is the potential adverse publicity that goes along with enforcement actions by the DOL and other governmental agencies.

While random audits occasionally occur, employment audits are more commonly caused by a specific employee complaint.

The government agency will not disclose the identity of the employee who has filed the complaint triggering the audit.

What are these audits looking for? Violations ? unintentional or otherwise ? of employment laws.

What do they look at? Job descriptions, job duties, payroll records, employee benefit records and more.

If the DOL audits your business, you will be contacted by an investigator who will inspect your facility and interview employees.

They also will review pay records, work permits and other records.

The audit may not be confined just to the subject matter of the employee complaint. For example, if an employee complaint involves an hours-of-work issue for a minor, the auditor almost certainly will also investigate safety issues pertaining to child labor.

The audit likely will take several visits and follow-up interviews.

Upon completion, the employer will receive formal notification of any violations, the reasons for the violations, potential penalties and other enforcement actions.

The business has the right to file an "exception" and request a hearing.

After the exception is filed, the DOL typically tries to resolve the dispute through a negotiated penalty. If settlement efforts are not successful, a proceeding will be scheduled before an administrative law judge who will render a decision (which could be appealed).

Other governmental agencies have similar processes for their audits that could result in penalties and other enforcement actions.

Regardless of the agency, there are common steps a business can take to avoid a government employment audit or minimize the risk:

• Understand and comply with the laws and regulations that apply to your business.
• Conduct a comprehensive internal audit of your employment practices (e.g. job descriptions, payroll practices, employee benefits practices, actual job duties of employees, and the display of posters that are required under federal and state law).
• Ensure that your human resources professionals and managers fully understand the aspects of applicable law.
• Ensure that your employment documents are well organized, complete and up to date.
• Review state and federal laws and understand there may be differences between the two, particularly in the wage and hour areas. An employer is obligated to follow the law that is most beneficial to the employee.

Unlike federal tax audits, which have decreased in recent years, employment audits by certain governmental entities have increased. Taking steps now to prepare your business is just as important as taking steps to prepare yourself in regard to your own personal tax returns.

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