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What Employers Should Know About Resolving U.S. Department of Labor Audits

by Judith E. Kramer, Esq.

As most employers know, the U.S. Department of Labor (DOL) is the federal agency charged with interpreting and enforcing the Fair Labor Standards Act (FLSA). The purpose of this article is to alert employers to issues they may face as they resolve DOL audits, with particular emphasis on obtaining releases from employees who receive back wages as the result of these audits.

Background on DOL Audits

An employee who believes that his or her employer has violated the FLSA by, for example, not paying the employee the minimum hourly wage, not compensating the employee for overtime hours or making improper deductions from an exempt employee's pay may file a complaint with DOL's Wage and Hour Division. Wage-Hour will investigate the complaint and determine whether it believes a violation has occurred.

Even without an employee complaint, Wage-Hour may initiate an investigation to determine whether the employer is complying with the FLSA. Typically, Wage-Hour will aim these targeted audits at certain industries. For example, in Fiscal Year 2005, Wage-Hour's Overtime Security Task Force's initiative focused on industries in which there were large numbers of salaried workers who earned less than $455 a week and who reported working over 40 hours in a week (see April 2006 newsletter, p. 8). Wage-Hour also typically targets industries, such as the garment industry, where there are large numbers of low-wage workers and a history of violations.

Both complaint-based and targeted investigations may result in the determination by Wage-Hour that the employer must pay back wages to affected employees. If the employer refuses to resolve the audit by paying back wages and taking other corrective action identified by Wage-Hour, the agency may refer the matter to DOL's Solicitor's Office, which may file suit in federal district court. Or, an affected employee, armed with Wage-Hour's determination, may bring a private suit seeking back wages, liquidated damages and other relief.

Agreeing to Pay Back Wages

To avoid litigation, an employer that has been the subject of a Wage-Hour investigation will often decide to resolve the audit by agreeing to pay back wages to the employees Wage-Hour has identified as being entitled to this relief. There are several issues that an employer should keep in mind when agreeing to resolve a Wage-Hour audit.

The employer should obtain the appropriate forms from the Wage-Hour investigator. On Form WH-56, "Summary of Unpaid Wages," the Wage-Hour investigator will list all of the employees whom the investigator has determined are due back wages, the period for which back wages are due, and the amount of the gross back wages due. The investigator will ask the employer's representative (an official of the employer or employer's counsel) to sign the form and return it to the investigator. By signing the Form WH-56, the employer is stating, "I agree to pay the listed employees the back wages shown due and to mail proof of payment to the Wage and Hour District Office shown above by __________." (The investigator will fill in the date).

Employers are occasionally concerned that the employer's signature on the WH-56 will constitute an admission of liability, which employees may then use in future litigation. But the form is a settlement document. The amounts listed on the form are those which, after discussions between Wage-Hour and the employer, the employer has agreed to pay; they may represent a compromise, rather than the full back wages the employee might receive if he or she brought a successful suit. Compare to Cuevas v. Monroe Street City Club, Inc., 752 F. Supp. 1405, 1415 (N.D. Ill 1990). As a settlement offer and acceptance, the form does not constitute an admission of liability.

Release from Future Claims

Once the employer has signed the Form WH-56, the Wage-Hour investigator will send the employer Form WH-58. This form is entitled "Receipt for Payment of Lost or Denied Wages, Employment Benefits, or Other Compensation." The employer fills out a Form WH-58 for each employee to whom the employer is offering back wages, and presents the form to the employee at the time a back-wage check is tendered. There is a place on the form for the employee to sign and date the form.

While Form WH-58 is useful to the employer and Wage-Hour as a receipt, its more important function from the employer's point of view is to serve as a release by the employee of future claims against the employer. The Form 58 provides the following notice to employees in FLSA cases:

Your acceptance of back wages due under the Fair Labor Standards Act means that you have given up any right you may have to bring suit for back wages under Section 16(b) of that Act. Section 16(b) provides that an employee may bring suit on his/her own behalf for unpaid minimum wages and/or overtime compensation and an equal amount as liquidated damages, plus attorneys' fees and court costs. The statute of limitations for Fair Labor Standards Act suits requires that a suit for unpaid minimum wages and/or overtime compensation must be filed within 2 years of a violation of the Act, except that a suit for a willful violation must be filed within 3 years of the violation. Do not sign the receipt unless you actually have received payment of all back wages due.

And herein lies what may be the most important aspect of the audit process. In 1945, the Supreme Court held that it was against public policy for an employee to waive his or her right to unpaid wages, overtime compensation or liquidated damages under the FLSA. See Brooklyn Savings Bank v. O'Neil, 324 U.S. 697 (1945). In 1949, Congress amended the FLSA to provide the Secretary of Labor with enhanced authority to obtain back wages for employees. Section 16(c) of the statute states:

The Secretary [of Labor] is authorized to supervise the payment of the unpaid minimum wages or the unpaid overtime compensation owing to any employee or employees under section 206 or section 207 of this title, and the agreement of any employee to accept such payment shall upon payment in full constitute a waiver by such employee of any right he may have under subsection (b) of this section to such unpaid minimum wages or unpaid overtime compensation and an additional equal amount as liquidated damages. 29 U.S.C. §216(c).

As the 5th U.S. Circuit Court of Appeals noted in Sneed v. Sneed's Shipbuilding, Inc., 545 F.2d 537, 539 (1977), this provision was added to provide an incentive to employers to accept settlements supervised by Wage-Hour by adding certainty that the employee with whom the employer settled would not later bring suit against the employer.

Thus, in the absence of a Wage-Hour audit, any release of FLSA claims an employer obtains from an employee is of no effect (unless, in the case of a lawsuit, that release is made as part of a court-supervised settlement). But if, as a result of a Wage-Hour-supervised audit and subsequent settlement, an employee accepts payment and signs a Form 58 provided by Wage-Hour, the employee will be deemed to waive his or her right to bring suit under the statute.

On occasion, an employee will endorse and cash a check for back wages but refuse to sign the Form WH-58. Even in this situation, however, the employee has waived the right to bring a private suit. Note that the language of the form, quoted above, states that the employee's "acceptance of back wages" due under the FLSA means that the employee has give up the right to bring suit. The employee's signature on the back-wage check constitutes the employee's acceptance of those back wages. See Bullington v. Fayette County School District, 2000 WL 1568726 (Ga. Ct. App. 2000); Heavenridge v. Ace-Tex Corp., 1993 WL 603201 (E.D. Mich. 1993).

Another court's decision, which the court in Heaven-ridge distinguished, illustrates the importance of giving the employee the Form WH-58. In Walton v. United Consumers Club, Inc., 786 F.2d 303 (7th Cir. 1986), the court of appeals held that the fact that the employee cashed a back-wage check as a result of a Wage-Hour audit did not, in itself, constitute a waiver of the right to bring suit. In that case, however, Wage-Hour did not give the employer or employee a Form WH-58 or other release form. Therefore, there was no inference that the employee knew he was waiving his right to bring suit when he cashed the back-wage check because he had not received a form explaining that acceptance of back wages would result in such waiver.

Recently, Wage-Hour district offices have been inconsistent in their use of the Form WH-58, i.e., some investigators have said that they were no longer authorized to use the form or that the form was being revised. The employer or employer's counsel should be able to prevail upon the district office to use the Form WH-58. But if this proves unsuccessful, the employer should obtain Wage-Hour's approval of a release prepared by the employer. In Niland v. Delta Recycling Corp., 377 F3d 1244 (11th Cir. 2004), the primary issue was whether Wage-Hour had, in fact, supervised the settlement of FLSA claims. Having held that the agency had supervised the settlement, the court of appeals ruled that the employees who accepted back-wage payments had waived their right to bring suit against the employer, even though no Form WH-58 was used. The evidence showed that Wage-Hour had approved a letter prepared by the employer, in which the employer explained that the employee was waiving his or her right to bring suit. The court held that under DOL's regulation at 29 C.F.R. §516.2(b)(2), the agency can either authorize an employer to use the WH-58 or authorize other waiver language.

It is also interesting to note that the letter prepared by the employer in Delta Recycling and approved by Wage-Hour included a release not only of claims under the federal FLSA, but also under any applicable state law (see Brief for the Secretary of Labor as amicus curiae in Niland v. Delta Recycling Corp. (fn. 4), found at http://www.dol.gov/sol/media/briefs/delta-1-04.htm).

Wage-Hour revised the Form WH-58 in June 2006 because of an issue that has recently arisen. The release language quoted above is found in the updated form. Many Wage-Hour offices, however, are still using the older form. Under the FLSA, an employee is normally entitled to up to two years of back wages for violations of the law. But if the violation was willful, the employee will be entitled to three years of back pay. Employers have argued that when an employee accepts back wages under a supervised settlement, the employee is waiving his right to sue for the additional year of back wages. The old Form WH-58 stated, "Generally, a 2-year statute of limitations applies to the recovery of back wages." The revised form explicitly refers to the three-year limitations period, as well, and spells out the fact that the three-year period is available for willful violations. While the revised form does not explicitly state that the employee is waiving the right to seek a third year of back wages, it may now be easier for the employer to argue that by being given explicit notice of the three-year period, an employee who accepts the tendered back-wage payment is waiving the right to bring suit for that additional year of wages.

Finally, it is often useful for the employer, when presenting the back-wage check and Form WH-58 to the employee, to explain the audit resolution to the employee. This may be done orally or through a letter or memorandum. Employers must not in any way intimidate or coerce the employee, of course. But the employer may use the opportunity to explain that the payment is being made as part of a DOL-approved settlement, and that the agency provided the form, with its release language, or approved the employer-generated release. It is also useful to send a memorandum to the employees' supervisors stating that back-wage payments are being made as part of a Wage-Hour approved settlement, prescribing how they are to make the payments to their employees, and stating that there must be no retaliation or negative comments to employees who receive the back wages.

By following Wage-Hour's approved procedures and making a record of its actions, the employer can protect itself against future claims by employees covered by the Wage-Hour audit.

Judith E. Kramer, Esq., is Of Counsel at the law firm Fortney & Scott, LLC, a labor and employment law firm located in Washington, D.C. Prior to joining Fortney & Scott, she served as Deputy Solicitor at the U.S. Department of Labor.