Any business owner that has had the pleasure of enduring a Department of Labor audit can tell you the disruption this causes their business operations. Not only must the business owner stop what he/she is doing to address the issue, but it also takes down the entire organization as the auditor will want to interview most, if not all, employees of the company. The most common cause of a Department of Labor audit is a complaint from a disgruntled former employee, who likely has a revenge agenda against the company. What follows are examples of actual cases our firm has worked on in direct relation to this subject.
A former employee of a business had his unemployment claim denied when it was discovered and reported by his former employer that he was in fact working as a contractor for another company that was a former client of the now former employer. Because the former employee had severe anger issues, which was part of the cause of his termination in the first place, he and an acquaintance came up with a scheme to engage the Department of Labor in a false claim where he stated he was denied vacation pay upon being terminated.
The Department of Labor auditor was unfortunately, very inexperienced and had difficulty in communicating the English language, which made the audit more difficult than it needed to be. The auditor at times did not understand the information that was being presented to her. In fact, she seemed more interested in disrupting workflow at the business and spent considerable time interviewing management and employees, even those that had absolutely nothing to do with the claim or claimant.
After several days of disrupting the company the auditor released her findings stating that the employee was owed an additional $50.00 of vacation pay. The business could not write the check fast enough to make this unnecessary problem go away, even though the auditor could not provide specific evidence where her $50.00 figure came from.
Another example we have is from a medical clinic that was also investigated based on the unfounded claims of a former employee. However, this time the claimant filed their case in another State based on their own residence and not the State where the business was located. The residency State was more accommodating to employees versus employers.
The auditor focused specifically on payroll tax payments believing that the clinic was not filing their payroll tax payments correctly. It seems the former employee thought they were operating as a contractor, despite the fact that they were receiving payroll. After three days of business interruption the auditor determined that the medical clinic was in full compliance and had paid all their payroll tax appropriately. The case was immediately closed.
Auditors love to target companies in the construction industry mainly because many owners of these types of companies are not great at managing the back-office processes of payroll and tax payments. It is also a heavy cash business that utilizes and pays for work on a contractor/cash basis.
Our Department of Labor audit target had recently had a messy business break up between the owners. One of the former owners decided he wanted to punish the other former owner by initiating a DOL audit targeted at his former partner.
Little did the claimant realize that he too was going to be on the hook for the outcome of the DOL findings. The company did not keep any records and was severely not prepared for the audit. The auditor ran over them and determined they owed several hundred thousand dollars in back payroll taxes.
Since neither party had several hundred thousand dollars to pay in back payroll taxes, and the business was now dissolved both former owners filed bankruptcy and negotiated a lower penalty re-payment with the Department of Labor.
Department of Labor audits are messy, time consuming processes for business owners. Even owners that do the right things and are fully prepared for an audit can deal with unnecessary stress and problems from these audits. Successful businesses engage professionals to assist them and have all their backup documentation available. Unsuccessful companies usually have sloppy record keeping and are uncooperative during the audit process.