DOL Ends Employer Self-Reporting Program

The U.S. Department of Labor announced in a January 29, 2021 press release that it was immediately terminating its Payroll Audit Independent Determination (PAID) program, a pilot program that allowed employers to correct wage and hour violations by self-reporting and avoid liability and litigation. This article explains why the PAID program was significant and what ending it means for employers and employees.

The Fair Labor Standards Act

First, it is important to have a basic understanding of the Fair Labor Standards Act (FLSA).¹ Enacted by Congress in 1938, the FLSA created a federal statutory scheme of wage and hour regulations that applies to virtually all American employers.

While the FLSA has been amended and supplemented over the years, its key provisions have always included a minimum wage, overtime pay requirements, and prohibitions on child labor. Although there are several exceptions for specific industries and specific categories of employers, the FLSA generally requires employers to pay employees a minimum hourly wage (currently set at $7.25/hour for the federal rate) and also to pay employees “time and a half” (of 1.5x their hourly wage) as overtime for all time over forty hours in a given workweek.

When employers fail to compensate employees as required under the FLSA, either by not paying minimum wage or not paying sufficient overtime, the penalties can be quite severe. The FLSA gives employees a right to file a lawsuit against their employer to recover back pay and unpaid overtime compensation. Additionally, employees can also recover “liquidated damages,” which amounts to double damages. On top of this, employers have to pay not only their own attorney fees in defending against a FLSA lawsuit, they must also pay the attorney fees and legal costs for the employee plaintiff(s) if the lawsuit is successful. Employers can even be subject to civil penalties or fines imposed by the DOL Wages & Hour Division if the violation is shown to be willful or repetitive.

All of this means that there is a strong incentive to comply with the FLSA. However, FLSA compliance can be difficult for many employers, especially small businesses. Correctly calculating overtime pay can be difficult and employers often become aware of overtime violations long after they were unintentionally committed. For this reason, under the Trump Administration, the Labor Department let employers self-report when they had discovered inadvertent FLSA violations.

PAID as a Pilot Program

In March 2018, the DOL unveiled the PAID program. The program gave employers an alternative method to resolve potential overtime and minimum wage violations without being hit with private litigation or civil penalties.

PAID encouraged employers to conduct payroll audits and to self-report violations or potential violations that they discovered. They could submit a calculation of back wages and enter into an agreement to pay all backpay owed within two years. In return, the DOL would oversee the administration of backpay remuneration and would approve settlements in which employees released claims against the employer, which would not otherwise be permitted under the FLSA.

In addition to evading liquidated damages and civil penalties, employers were also promised that the DOL would not investigate the merits of matters the employer self-reported. Essentially, PAID enticed employers to come clean with FLSA violations in exchange for a corrective action instead of a punitive action. The program offered a less costly resolution of FLSA violations that also brought compensation practices into compliance without the need for litigation.

The DOL initially rolled out the PAID program for a sixth-month trial period, but after receiving positive results and feedback from the program, the DOL extended it for another six months and eventually extended the program indefinitely. On July 14, 2020, the DOL issued a news release about the benefits of the PAID program for both employers and employees.

PAID is Terminated

However, when the Trump Administration was succeeded by the Biden Administration in January 2021, the DOL was restaffed with officials who had a more aggressive regulatory philosophy with respect to FLSA. Shortly after the new administration came into power, the Biden DOL announced the termination of the PAID program, claiming that the program enabled employers to avoid accountability.

Commenting on the repealed program, DOL Wage and Hour Division Principal Deputy Administrator Jessica Looman stated, “[t]he Payroll Audit Independent Determination program deprived workers of their rights and put employers that play by the rules at a disadvantage.” Looman emphasized that in terminating the program, the DOL would “rigorously enforce the law,” and “use all the enforcement tools we have available.”

Implications for Employers and Employees

Terminating the PAID program means that both employers and employees now return to a legal scheme in which self-reporting of FLSA violations is disincentivized and resolving those violations without litigation is difficult. Absent the PAID program, the only way in which employees can release FLSA claims is by approval from a court or from the DOL. These rules make resolution of compensation issues unwieldy and inefficient.

Now that PAID is terminated, employers no longer enjoy a safe harbor of self-reporting when they discover violations during payroll audits. This means employers should be especially proactive in ensuring that their compensation practices are FLSA-compliant. Moreover, employees can no longer trust that their employers are incentivized to find and fix wage and hour violations. This means that employees must be diligent in monitoring their own pay and can generally only take an adverse course of action against their employers (litigation or administrative complaints) to correct any compensation problems.

Some may mourn a return to stringent penalties and disincentive for transparency, while others rejoice in ending an easy pass for unlawfully under-compensating workers. In any event, businesses have every reason to stay abreast of FLSA requirements and to conduct regular audits to ensure compliance and avoid liability.

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¹ See 29 U.S. Code § 203, et seq. It should be noted that the FLSA establishes wage and hour regulations on the federal level. State and local governments also enforce their own wage and hour regulations that are often more stringent than federal law.

Featured Image by Rebecca Sidebotham.