With increasing frequency, clients are inviting me to meetings at which their legal team is present. These distributed workforce employers, often building service contractors, are facing a growing number of IRS audits and legal threats from class action lawsuits, unions, and the states.
In its annual report of class action lawsuits, Chicago-based Seyfarth Shaw LLP, observed that “wage & hour litigation continued to outpace all other types of workplace class actions” in 2011 and “this trend is likely to continue in 2012.” In fact, collective actions litigated under the Fair Labor Standards Act (FLSA) outstripped all other types of employment related cases heard in federal court, according to their report. In response to the uptick, the U.S. Department of Labor added 300 wage and hour investigators during fiscal 2011.
We have found that attending to a few key factors can significantly reduce the risk from labor litigation and IRS audits.
1. Properly training managers so that they manage employees well. This is a serious issue, which is closely related to good auditing controls. Recently, a client detected an inconsistency in their payroll; a field manager had changed a time card without the employee’s knowledge. Of course, they wanted to know if this was a systemic problem and requested reports from each of their work sites for the entire state. Bottom line: if employees are unaware of changes being made to their timecards, a backlog of erroneous payroll can occur, triggering legal action by the employee.
2. Meal breaks. In just about every case of litigation, calculating overtime properly and meal breaks were the two biggest risk factors. Any time and attendance system should accurately record the actual number of hours worked. To facilitate this, some employers build the standard meal breaks into the system, but this, although convenient, can be problematic. Employees who do not take the full break or work through it will be short-changed. It is important to ensure accurate payroll data from the outset to avoid fixing mistakes at the critical payroll processing time. Conversely, managers should be able to monitor tardiness and employees who are not complying with work schedules and lunch allowances, so that they can take corrective action.
3. Overtime. This is affected by and contingent on a number of factors. FLSA mandates that overtime be paid for any hours worked beyond 40 in one week. There are, however, more stringent restrictions imposed by states, as well as union and other contractual agreements. The law favors whatever requirement is most beneficial to the employee. Since in some cases the overtime pay rate is based on an average, in accurately computing the amount due the employee, whatever system is used must be able to calculate weighted average pay for those who work multiple jobs with varying pay rates.
4. Pay Differentials. As in overtime, rules need to be built into whatever time and labor management system is used to account for pay differentials, accurately recording and calculating them for each employee, so that payroll people don’t have to become compliance managers.
5. Security. Increasingly, private companies are finding that they need to act like public entities, ensuring that they have the same kinds of controls in place that public companies do to comply with the Sarbanes-Oxley Act, limiting access to and protecting confidential information, especially payroll data. They must also be able to produce proof of who has access to such highly confidential information, i.e., that the employee can see only his or her information and that managers can see theirs and that of those below them.
6. Accurate and easily accessible audit trails. Unless time and labor information is collected up front, there are going to be difficulties later. Most auditors understand that it may take some time to access the reports they need, but often unions want these statements immediately. In either case and in any way that it is accomplished, it is important to have clear records that document, at the very least, time and attendance; who made any changes, as well as how and when; what controls are in place; and who has access to what data.
Going forward, employers will increase their focus on compliance and must work closely with their time and labor management partners to stay current on new policies and legislation. The risk and cost of not complying is greater than the expense associated with ensuring that you are compliant. Managers at all levels will have to understand that compliance is everyone’s business.