New Friends in the Lion’s Den

Call the U.S. Labor Department before it calls you.

By Lisa A. Schreter Dec 1, 2008
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It’s 6 p.m. Friday and just as you get ready to leave, the phone rings. Suzie, an hourly employee in one of your company’s manufacturing plants, tells you, the director of human resources, that she has to talk to someone.

“Please don’t tell anyone I’ve called. I just know my boss will fire me. It’s Bob—he tells us we’re not working hard enough and we could lose our jobs if we don’t work harder. He says we have to come in early and stay late, but he won’t let us clock in until 9 a.m., and makes us clock out at 5 p.m., even though we are working before and after those hours. We don’t mind working hard but we ought to get paid. He told us if you don’t like it there’s the door. I like my job. I can’t afford to go anywhere else. I don’t like to complain but this isn’t fair. Some people have talked about going to a lawyer. I don’t think you want a lawsuit. We just want to get paid.”

You assure her you’ll look into her complaint right away. After completing your investigation the results are clear: Since Bob joined the company six months ago, at least 30 employees have been working off the clock. You call your in-house counsel and tell him the bad news.

While you both agree that Bob should be fired and the off-the-clock work must stop immediately, you can’t decide what to do about back wages. He thinks the best thing to do is fix it going forward. He thinks the employees will exaggerate their back wages and then sue for even more money. You think they’ll sue if you don’t pay them. It’s a stalemate. What do you do?

Unconventional Solution

Every year, more employers find themselves confronted with individual and class claims under the Fair Labor Standards Act (FLSA) and state wage-and-hour laws. In 2007 alone, more than 7,300 FLSA claims were filed in federal district court.

In response, employers have rushed to audit their compensation practices, often discovering violations. Employers then struggle to remedy any violations without prematurely alerting employees and triggering the type of lawsuit the audit was designed to prevent.

Employers have used a variety of remedial measures to correct violations including, in the most serious cases, the time-tested strategy for eliminating employment claims: a release of claims. Unfortunately, some employers have been shocked to learn that these releases are unenforceable and have been left to ponder the question “what is an employer to do when it discovers a clear FLSA violation and thinks a lawsuit is imminent?”

High-risk problems call for unconventional solutions. One such solution, increasingly employed by forward-thinking employers, is a voluntary compliance agreement with the U.S. Department of Labor, Wage and Hour Division (DOL).

You Want Me To Do What?

In the past, when I have suggested that clients consider approaching the DOL to self-disclose FLSA violations, my advice has been met with disbelief and occasional questions about my sanity. As business people, we’ve been trained to mistrust the government; the thought of voluntarily disclosing violations to the DOL and asking for assistance is contrary to our experience, honed instincts and collective business wisdom regarding the federal government.

Understandably, employers often worry that if they invite DOL officials in the door, they might overstay their welcome and broaden their inquiry to other matters. While that’s a legitimate concern, in my experience DOL officials are committed to working cooperatively with compliance-minded employers and typically will not expand an inquiry into other matters unless they receive a complaint from an employee.

Nevertheless, approaching the DOL is not for the faint of heart. Indeed, it is not unlike the biblical story of Daniel’s trip into the lion’s den. Fortunately, that story had a happy ending, and numerous employers have likewise discovered that you can walk into a den of regulators and come back alive and ahead in the race toward compliance.

Why Turn Myself In?

A voluntary compliance agreement offers an important advantage unavailable in private negotiations—the DOL can negotiate a valid release of affected employees’ claims. An employer cannot.
The second important benefit of a voluntary compliance agreement is that the DOL will generally only seek to recover two years of back wages instead of three years and it will not seek liquidated damages (under the FLSA, equal to back wages), attorneys’ fees or interest. In contrast, in private litigation, a plaintiffs’ attorney will ordinarily pursue a willful violation and three years of back wages, an equal amount in liquidated damages and attorneys’ fees.

Thus, a settlement with the DOL may involve less than a third of the potential liability an employer might otherwise face in private litigation. An added advantage for affected employers is that the DOL does not seek any kind of contingency fee or portion of employees’ back-wage recoveries.

Not for Everyone

In recent years, the DOL has focused resources on providing employers with compliance assistance.

The DOL offers employers a variety of compliance tools including the National Call Center for telephone assistance, e-mail responses to employer questions and the interactive First Step Employment Law Advisors. To encourage employers to use these resources, the DOL has adopted the Confidentiality Protocol for Compliance Assistance to alleviate any concerns that an employer might become the target of an enforcement action after contacting the DOL for compliance assistance and materials.

The DOL also offers voluntary compliance agreements to appropriate em ployers who have discovered FLSA violations and wish to voluntarily correct them with the DOL’s assistance and supervision. These arrangements allow an employer to correct FLSA violations, issue back-wage payments and obtain valid releases from employees who accept the payments.

Typically, voluntary compliance agreements are used to resolve FLSA violations that an employer discovers and brings to the DOL’s attention. Voluntary compliance agreements are not used to resolve claims already in litigation or identified during a DOL investigation. Voluntary compliance agreements are not extended by the DOL to every employer. Instead, the DOL considers a variety of factors before entering into a voluntary compliance agreement, including:

  • The employer’s compliance history, including whether the employer has worked cooperatively with the DOL in the past.
  • Whether the employer is currently involved in any FLSA litigation and, if so, the nature of those claims.
  • The nature of the alleged violations. Specifically, can the violations be confirmed from the “face” of the records or will the DOL need to conduct employee interviews to determine the extent of the violations?
  • Whether the employer has taken adequate steps to ensure similar violations will not occur in the future.

In general, there are two types of voluntary compliance agreements: stipulated consent judgments and administrative settlements. The key difference between these agreements is whether the parties have agreed to file a stipulated consent judgment in federal district court and seek judicial approval of the proposed settlement and release of claims. The use of a stipulated consent judgment involves the filing of a lawsuit by the DOL. In contrast, in an administrative settlement, no lawsuit is filed.

The advantage of voluntary compliance agreements is that employers can use them as shields against private lawsuits. Both types of agreements accomplish this goal, although a stipulated consent judgment is a more effective litigation bar than an administrative settlement.

So How Do I Negotiate With DOL?

As a general matter, voluntary compliance agreements must be approved by senior DOL officials, so it is important to involve the appropriate DOL representatives in your negotiations.
A typical negotiation of this kind will involve district and regional DOL representatives, as well as senior officials in Washington, D.C. It is helpful to use in-house or outside legal counsel with experience in such negotiations.

The following steps are recommended:

  1. Determine the extent of the problem, the cost of back-wage payments and the steps necessary to fix it. Before entering into negotiations with the DOL, an employer should thoroughly understand the scope of any compliance issues, including the number of employees impacted, the total amount of back wages needed to correct any underpayments and the remedial steps necessary to ensure the problem does not recur.
  2. Obtain approval and support of senior management to correct the problem. Before initiating contact with the DOL, obtain the commitment of senior managers to fix the identified problem on a prospective basis and to address the liability created by the past practice. During the past five years, senior business leaders have become increasingly familiar with the enormous liability posed by wage-and-hour violations. The more difficult issue is the risk analysis associated with the decision to pay back wages. A host of considerations should be weighed, including:
  • Is it clear that the company’s practice violates the FLSA or state law? The clearer the violation, the harder it will be to defend the company in subsequent litigation.
  • The company’s past practice in remedying wage-and-hour violations. Has the company issued back-wage payments in the past?
  • Is the risk of potential litigation imminent? Did the company receive an employee complaint or a threat of litigation?
  • What promises has the company made to its employees about payroll mistakes?
  1. Determine what system or policy failures led to the violation. One of the first questions typically asked by the DOL will be what caused the violation and how was it discovered. A thorough understanding of these issues will prepare the company for any meetings with DOL representatives.
  2. Contact DOL officials and request a face-to-face meeting. It is generally recommended that outside counsel contact the DOL regional administrator for the company’s headquarters location.
    During the initial call, the identity of the company should not be revealed. The discussion should center on the potential violation and whether the DOL would view it as suited to a voluntary compliance resolution. If the DOL official expresses any reluctance, there should be discussions within the company before pursuing any further discussions with the DOL. If the DOL official suggests that the agency would be receptive to this type of arrangement, a face-to-face meeting with DOL officials generally is recommended.
  3. Meet with DOL officials and negotiate a voluntary compliance agreement. During the initial meeting, the DOL officials will explore the background behind the potential violation and the company’s discovery of the problem. The meeting also provides an opportunity for company officials to outline the key terms on which they will insist as a part of any voluntary resolution. For example, these terms can include the length of the back-wage period, DOL’s agreement to forego recovery of civil money penalties and liquidated damages, and whether the employer would like to resolve the matter with a consent judgment or the more informal administrative settlement.

Depending on the complexity of the matter, several meetings may be necessary to fully inform the DOL of the nature and scope of the violation. The DOL officials typically will not agree to a voluntary compliance arrangement until they have the opportunity to complete an internal review.

Exchange information. During this phase of the negotiations, the DOL officials may request interviews and documents. The early meetings should be used to reach agreement on what type of due diligence the DOL will conduct to verify the employer’s description of the problem and back-wage calculations.

Obtain final approval and pay back wages. This phase of the negotiations will vary depending on the type of agreement to be used. If a stipulated consent judgment is used, the parties will need to agree on the nature of the claims to be included in the complaint and the stipulated consent judgment. The agreement will need to provide for DOL supervision of back-wage payments; the disposition of any funds that are returned as undeliverable; and whether back-wage payments will be subject to deductions including wage orders, garnishments, support orders or 401(k) deductions.

In contrast, if an administrative settlement is used, the company will need to confirm that any back-wage payments will be made under DOL supervision using the WH-58 receipt form and the disposition of any funds that are returned as undeliverable. The company also should determine what, if any, correspondence will be sent by the company to back-wage recipients and whether checks will be sent to current and former employees by the DOL or the company.

While voluntary resolutions of this kind require careful, well-planned negotiations with DOL representatives, a voluntary compliance agreement can be employed to effectively eliminate potential private litigation and reduce the financial risk associated with known wage-and-hour violations.

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The author, an attorney at Littler Mendelson in Atlanta, is a former HR executive with extensive experience in wage-and-hour issues, employee relations and general employment matters.

Web Extras

Online extra: No Private Waiver of FLSA Claims

Online extra: Stipulated Consent Judgment vs. Administrative Settlement

SHRM toolkit: FLSA Toolkit

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