How to Handle a DOL Payroll Audit

When the Department of Labor's Wage and Hour Division (WHD) opens an investigation, payroll should notify management and counsel immediately, confirm the scope of the investigation, gather the requested records accurately, cooperate courteously, and provide what is requested — not more. Investigators review payroll and time records, interview employees, and meet with the employer at the end to explain any violations and back wages found. Preparation and accurate records decide most outcomes.

Why the DOL Opens an Investigation

A "DOL payroll audit" is formally a Wage and Hour Division investigation. Most start with a complaint from a current or former employee. Others are directed investigations, where WHD targets industries or practices it considers high-risk — see DOL enforcement priorities. WHD does not generally tell the employer who complained, and the employer should not try to find out.

Investigations can cover minimum wage, overtime, recordkeeping and child labor under the FLSA, and WHD also enforces other laws, including the FMLA. An investigation can be limited to one issue or cover the whole workforce for the period under review.

The First 48 Hours

• Inform management at once. Senior management should be involved from the first contact to the closing conference.
• Bring in legal counsel. In-house counsel should be notified the day contact is made and kept informed at each step; many employers also involve outside employment counsel.
• Confirm the investigator's identity and the scope. Ask which laws, which locations, which employees and which time period the investigation covers, and which records are requested.
• Agree on a schedule. Investigators will usually agree to a reasonable date for the initial meeting and document production. Ask rather than assume.
• Designate one point of contact. A single coordinator keeps requests, responses and copies consistent.
• Stop any record destruction that might affect the period under review.

What the Investigation Typically Involves

Opening conference

The investigator explains the process and asks about the business — ownership, structure, number of employees, pay practices, how hours are recorded, and which employees are treated as exempt.

Records review

Expect requests for payroll registers, time records, wage-rate information, job descriptions for exempt positions, records of deductions, and information on any independent contractors. These are the records the FLSA already requires you to keep; see FLSA record retention rules for the list and retention periods.

Employee interviews

Investigators interview employees, often privately and sometimes away from the workplace. Employers may not interfere with those interviews. Managers and supervisors may be interviewed as representatives of the company, and counsel can generally be present for those.

Site tour

The investigator may walk the workplace to see how work is done, where time is recorded, and whether required posters are displayed.

Closing conference

At the end, the investigator explains the findings, any violations, and the back wages computed. This is the employer's chance to point out errors in the calculations or facts, and to discuss how and when payment will be made.

Handling Records Requests

• Provide what is requested, within the stated scope. Do not add records nobody asked for, and do not speculate in writing about issues outside the investigation.
• Produce accurate copies. Keep a duplicate set, with an index of everything produced and the date.
• Do not create or alter records. Never recreate timecards, backfill missing data or edit historical entries. Doing so turns a pay dispute into a far more serious matter.
• Explain gaps honestly. If a record does not exist, say so and explain what you do have.
• Ask for clarification when a request is ambiguous, rather than guessing broadly.

Conduct During the Investigation

• Treat the investigator with courtesy and professionalism throughout.
• Answer questions factually. It is acceptable to say you will confirm an answer and follow up.
• Do not discourage employees from speaking with WHD or ask them what they said.
• Do not take any adverse action that could appear connected to the investigation. The FLSA prohibits retaliation against employees who file complaints or cooperate, and a retaliation finding can outweigh the original pay issue.
• Keep a log of every contact, request and response.

Possible Outcomes

If WHD finds violations, it will compute back wages owed to each affected employee, typically for the two years before the investigation, or three years where the violation is considered willful. Depending on the circumstances, the employer may also face liquidated damages equal to the back wages, civil money penalties for repeated or willful violations, and in some cases litigation by the Department. Most investigations resolve with an agreement to pay back wages and correct the practice going forward.

Before agreeing to findings, have counsel review the calculations and the classification conclusions, especially where exempt status or independent-contractor status is at issue.

After the Investigation

1. Pay any agreed back wages accurately and on time, with the correct withholding and tax reporting.
2. Fix the underlying practice — reclassify positions, correct the regular-rate calculation, or change the timekeeping process.
3. Update written policies and train the managers who approve time.
4. Check other locations or groups for the same issue.
5. Schedule a follow-up review to confirm the fix holds.

The Best Preparation Is Your Own Audit

Every issue WHD looks for can be tested internally first: exempt classifications against actual duties, contractor relationships, off-the-clock work, regular-rate calculations, deductions from pay, and recordkeeping. An internal payroll audit run on a regular cycle finds problems while they can still be corrected on the employer's terms.

Frequently Asked Questions

Do I have to let the investigator in?

Employers are expected to cooperate, and WHD has authority to inspect records and interview employees. It is reasonable to confirm credentials, ask for the scope, and arrange a convenient time with counsel.

Will the DOL tell me who complained?

Generally no. WHD keeps complainant identities confidential.

How far back can back wages go?

Generally two years, or three years for willful violations.

Should I give the investigator everything to show good faith?

No. Cooperate fully with what is requested and within scope. Volunteering unrelated records can widen the investigation without helping your position.

Can I discuss the investigation with employees?

You may tell employees an investigation is taking place and that they are free to speak with the investigator. Do not coach, discourage or question them about their interviews.

Related Reading and Training

See FLSA record retention rules and how to perform an internal payroll audit. The payroll audit webinar, our FLSA training, and the Certified Payroll Administrator program help payroll teams prepare before an investigation begins.