Coyote Blog

In part 1, we discussed general expectations you should have as a business owner in working with the Department of Labor. In this installment, I will discuss a typical audit and some of the things we did to protect ourselves. In part 3, I will discuss a specific example of how it is possible to win your case with the DOL, but it may take a LOT of effort.

Type of Audits

I am not an attorney and am by no means an expert on labor law. We bend over backward as a company to be in compliance with labor law, so we really don't run into the Department of Labor too often. However, our industry is the beneficiary of certain exemptions in the Fair Labor Standards Act. If you remember from part 1 of this series, the DOL really doesn't like it very much when anyone takes advantage of these legal exemptions, so this has led to some extra scrutiny that our careful history of compliance would not normally warrant.

We have had two different types of audits:

1. A regional audit, that covers all of our operations in one state or in one complex or contract
2. An individual audit, covering one or two employees who have specifically disputed their pay to the DOL

Presumably there are also whole company audits where the DOL takes apart the whole company, but we have not experienced this. Maybe we will if I keep making these posts ;=)

In the regional audit, the DOL specified an operational scope (e.g. your facility in Sheboygan) and a time frame. This time frame is usually not more than 2 years back, as I believe this is the statute of limitations for inadvertent violations. Willful violations have a longer statute of limitations.

In this audit, the DOL requested a data dump of the following (for the employees in this time frame):

1. Payroll check registers (we just dumped them all our ADP stuff). By the way, this is for a future topic, but if you have more than about 3 employees and are not using a payroll firm nowadays, you are nuts.
2. Time sheets
3. Vacation histories and pay (not normally relevant to the FLSA but is relevant if you are operating under the Service Contract Act or Davis Bacon.
4. Description of operations
5. Work week
6. a few other things I can't remember right now

In the case of the individual audit, we were only asked for this data for the individuals involved. We were also provided with a handwritten sheet of the estimated hours worked by these employees (this was a case of salaried employees making the case that they were underpaid based on the FLSA).

Our Response

In the case of the individual audit, we began by either accepting or disputing (a difficult task, as discussed in part 1) the employee's estimate of hours. Once we arrived at an agreed to number of hours worked, we created a spreadsheet to see if there were pay periods that the employees were paid less than minimum wage. In the most recent case, we agreed that over the past year we had underpaid them a few hundred dollars and agreed to repay the amounts. We sent a check to the employee, who signed a receipt for the Department of Labor, which closed the case. This kind of mistake on our part has happened to us innocently a few times, and we have always paid the employee promptly. We have never had a civil penalty (which seem to be levied only when willful and knowing law-breaking is found).

For the regional audit, we supplied all the materials they asked for. In retrospect, we should have supplied a few more things. For example, we should have supplied them with a well-written description of why we thought a couple of key exemptions applied to these operations. However, we felt so confident that we clearly fell right in the middle of the exemption language that it was not necessary. We were wrong. The reason that I think it was a mistake not to provide this right up front was that I sensed a real hesitation later in the process by the DOL to back off any of their preliminary findings. Once they had laid these findings out there, it seemed like somehow their "face" and institutional credibility would be surrendered if they reversed any of these findings. They decided, based on whatever evidence they had but certainly nothing from me, that certain exemptions were not going to apply and that was it in their mind. I think it is MUCH better to try to make your points early in the process, before the department has taken a stand.

DOL Response

Several weeks after we submitted all of our paperwork, the DOL came back with an employee by employee calculation of what they thought we owed employees in back pay. It turns out the number was staggeringly high. I was totally shocked. We were very careful about compliance. I could believe we missed some record keeping detail or a few dollars here or there, but this was crazy. Looking at the findings in more detail, they came in three parts:

1. The DOL found we owed a nominal amount of back vacation pay based on our using the wrong formula for certain employees covered by the Service Contract Act (SCA). Given the complexity of it, I was pretty sure we could have made a mistake, and the amounts were nominal, so we immediately agreed to make restitution.

2. The DOL found we owed a nominal amount of back overtime pay for certain employees who had worked a few hours over 40 a week. I won't go into it here, because it is the heart of part 3 of this saga, but as a seasonal recreation business operating in the National Forest, we are allowed, by law, a 55 hour week rather than a 40 hour week before overtime. The DOL disagreed, taking the stance that camping (our business) was not recreation and therefore we did not qualify. We thought this was absurd. In the end, rather than keep running up my own time and legal bills, I paid under protest. This turned out to be a mistake - the DOL tried to use this later as a precedent to deny us the exemption in another audit. We will relive this saga in part 3.

3. The DOL found that we owed a staggering amount of money for back "fringe benefit" pay. I will conclude this post by discussing our back and forth with the DOL over this issue, because it taught me a lot about how labor law and regulation works

The Fringe Benefit Issue

There are several special labor laws that apply to government contractors, known as the Service Contract Act (SCA) and Davis Bacon Act. Both of these Acts set minimum wages and other work rules for government contractors. In most parts of the country, these are way above the normal minimum wage (for example, in Washington State, even ordinary day labor can run over $30 per hour). Normally these labor laws do not apply to concessionaires like us, but they were applied to one of our contracts, and we have never been successful in, uh, un-applying it. This audit was for that contract.

One piece of background - in requiring a minimum wage, generally there are two parts to the requirement. There will be a minimum base wage per hour and there will be a minimum fringe benefit per hour, which we pay out in cash. So, a person's wage on this contract might be $8.23 per hour base wage plus $2.75 per hour fringe for a total of $10.98 an hour.

Where we got cross-ways with the DOL was that our employee's pay stubs just had the hourly total - in this example $10.98 an hour. The DOL investigator said that the base wage and fringe had to be shown separately on the pay stub, and since we did not, the DOL assumes we did not pay the fringe, so we owed $2.75 an hour (or whatever it was) times every hour every employee worked in the audit period. Thus the big bill.

Of course, we argued that this was ridiculous. First, we argued that $10.98 clearly met the minimum for the two combined, and therefore we were meeting the real intent of the law, that the employee get paid a statutory minimum. Second, we argued that the law does not say that the $10.98 has to be shown broken out on the pay stub - it only says that we have to keep clear and separate records of the base and fringe payments. Well, we had plenty of records (which we shared with the DOL) that showed the two parts of the payment - it just wasn't on the pay stub.

Hierarchy of Law

This is where I began to learn about the hierarchy of labor law. As I understand it (and remember, I am not a lawyer) it is something like this, from strongest to weakest:

1. The actual statute as written by Congress, e.g. the Fair Labor Standards Act
2. Court rulings and precedents
3. Approved regulations what have been through the public comment and approval process
4. Formal DOL rulings
5. Internal DOL guidelines and manuals
6. Informal DOL rules of thumb

Numbers 1, 2, and 3 have a lot of legal force. Five and six may or may not - they represent the DOL's opinion, but that opinion has not been vetted by a regulatory hearing or court decision. These get overturned by courts all the time.

When the DOL tells you can or can't do something, they likely will say it with equal authority if it comes from 1 or 6. For example, in this case, the DOL said with total authority that the wage and fringe have to be split on the paycheck.

Well, I knew from my own reading of the law - I read every relevant word myself in the SCA, that this requirement was not in #1 or #3 (Both the law and the approved regulations concerning it are on the DOL web site). My Internet search, and later a more formal search by my attorney, found no precedent for this statement in #2 or #4. From this, I knew I was on pretty safe ground.

So, I next did what I advise you to do every time with the DOL when they give you such a requirement - ask to see the source in writing. Tell them you want to see the part of the law or finding or manual this comes from. In my case, they never could produce anything.

Conclusion

One mildly scary postscript, the DOL never formally changed their mind about the fringe benefit issue. They never backed off their contention that the fringes had to be listed on the pay stub separately (despite the lack of any written requirement for this) and never backed off the contention that since they were not listed on the pay stub, and despite the evidence that I had paid people enough in total to satisfy all requirements of the law, that I still owed a bunch of fringes.

Eventually, I threw up my hands and told them that I would pay everything else (which I did) but that they would have to take the company to court if they wanted me to pay the fringes (a second time!) Both my attorney and I were confident that the DOL could never win this argument in court. Eventually, the DOL chose not to prosecute it further, which strikes me as different and somehow more open-ended than dropping the claim altogether.

By the way, ever since we have broken the two out on the paystub. It may not be required, but there is not point in getting back into this mess with future auditors.

Coming Soon, Part 3

While this part has been a story of fighting to a draw, it is possible to win even when the DOL initially rules against you. In part 3 I will tell the story of how we did this, and how we eventually got the DOL to reluctantly agree that camping can, sometimes, be recreation.