On March 6, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) announced a new pilot program through which employers may settle potential overtime and minimum wage claims under the FLSA by paying back pay owed to the affected employee(s), but without paying civil penalties or liquidated damages.  The Payroll Audit Independent Determination (PAID) program will be available for six months, after which the Department will evaluate the viability of the program.  This program is purely voluntary, both for employers, in that they would need to self-disclose the violation(s) to the WHD, and employees, who may choose to accept the back pay being offered by the employer as full settlement of the potential claim, or decline the offer and file suit, thus preserving the right to recover liquidated damages if successful.  If the employee chooses to accept the back pay, and thus settle the potential claim by signing a release of that claim, the WHD will only approve a release if it is tailored to the identified violations and the time period covered by the back wages payment.  Employers are not eligible for the program if they are already under investigation by the WHD, involved in litigation or arbitration regarding the particular claim, or the employee has already communicated an interest in litigating or settling the issue.  Claims that could be resolved through this program include misclassification of employees as exempt from overtime or failure to pay for “off the clock” work.

In announcing the PAID program, the Wage and Hour Division provided some general guidance as to how the program will work and what steps need to be taken in order for eligible employers to participate.  The first step in that process is for the employer to conduct an internal audit to determine which employees are affected by the violation, the time frame at issue, and how much back pay would be owed to the affected employee(s).  The employer would then submit those calculations to the WHD, with supporting documentation and a concise explanation of the scope of the potential violations.  The employer must also certify that it has reviewed the WHD’s compliance assistance materials; that it is not presently litigating the particular violation; that it has not been contacted by the employee or his/her counsel expressing an interest in litigating or settling the same issue; and that the employer will adjust its practices to avoid future violations.  At that point, the WHD will evaluate the back pay calculations and prepare release agreements, which, as noted above, an employee can refuse to accept.  Assuming the employee accepts the payment, the employer must pay the agreed upon amount to the employee within the time frame set by the WHD.

The announcement of this new program has left employers with a lot of questions about what effect the program will have on potential state law claims and whether self-disclosing violations could be worse than the risk of making necessary corrections themselves and then waiting as the statute of limitations runs.  Indeed, if an employer self-discloses a violation affecting a group of employees – e.g., a potential misclassification under the FLSA’s overtime rules – and the employee chooses not to accept the back pay being offered by the employer, this same employee could find an attorney who would jump at the chance to bring a collective action under the FLSA, which, if successful, allows for the recovery of attorney’s fees.  And even if the employee accepts the payment for that particular violation, the WHD may find other violations by the employer or put this employer on its radar for future audits.  Accordingly, the risks of participation are not inconsequential, but the reward – clearing up potential liability – may be worth it for some employers.  As with so many things, this business decision is best made after consulting with good legal counsel.  Stay tuned as more details become available about the PAID program.