Government Audits: 3 Ways You’re at Risk

Every day, companies have a chance of being notified of a claim or government audits. 

Some may seem simple on the surface, but small and midsize companies can be more crippled if an audit or claim strikes. While a simple detail can trigger audit, the cost to resolve will not likely be simple.

While there are experts like HR consultants or employment law groups who can assist you, you can also conduct an audit yourself. 

Here we look at triggers for an audit, the risk of non-compliance, and three HR-related audits that should be done proactively to reduce any negative impact on your company.

Potential Triggers for Government Audits

An audit can be triggered for a number of reasons, including random samples, systematic review by an agency (DOL, EEOC, IRS, OSHA, DHS, to name a few), reporting by disgruntled employees or ex-employees, complaints from candidates not hired, market competitors, or concerns arising from other federal agencies or confidential informants.

Some examples to consider:

• A food production company is especially susceptible to I-9 audits, and “silent raids” by U.S. Immigration and Customs Enforcement (ICE) due to being a high-risk industry for labor issues. Also, multiple agencies are involved to keep public consumption safety standards, increasing potential exposure for audits.
• A medical technician starts a new job and is told her duties make her nonexempt. Yet she wasn’t paid overtime at her prior employer, where she held the same job. She files a wage claim free of charge with the DOL to seek missing compensation due from her former employer.
• An employee’s injury is not treated as workers’ compensation, and they seek advice from a plaintiff attorney to build a case against the employer for alleged negligence. 

There are plenty of potential triggers, but you don’t have to wait to protect your company. 

What Are the Penalties for Violations?

Penalties can be huge. But even if small, no one wants to pay a fine for sloppy paperwork. Employer penalties and fines for incorrect or missing I-9 forms continue to rise. 

It may seem ridiculous to think that paperwork errors on an I-9 can cost a company $25,000 — but they can. Common errors can prove to be costly and may involve former employees. An expensive example is an error where an employer representative accepted invalid/incorrect identification, which led the employer to unknowingly hire an unauthorized worker. 

Penalties assessed for paying improper wages can be crippling to a small company. Safety violation penalties are assessed with the lives of people in mind, with a greater risk imposing a greater penalty.

While there is no specific chart to itemize and calculate an exact penalty, an amount is determined based on several factors, including business size, overall good faith compliance effort, severity of the violation, pattern, and history of prior offenses. Employers are expected to follow the guidelines and ensure compliant practices consistently. Not doing so may carry steep financial impact.

Now let’s look at how you can make a good faith compliance effort that is strong enough to protect you and your company from reputational damage, unnecessary costs and potential jail time. 

1. I-9 Audit

This audit is conducted by the Department of Homeland Securities ICE unit. While most employers know they must hire only people eligible and authorized to work in the United States for work performed in the U.S., most fail to complete paperwork correctly — which leaves a company at great risk for hefty penalties. 

Many companies never get audited, but because of an increased risk in recent years, the potential for being audited is higher than you think. In addition, the process of making corrections is simple, and in light of potential penalties, it’s a worthwhile activity for HR professionals to take.

‘Watch Out’ Examples

A major issue is failure to properly inspect a document. In reviewing the I-9 completed by an employee, perhaps the person provided a driver’s license but does not have a Social Security card on them. If the employer has the Social Security number the employee provided, should they just write that they had a Social Security card? Never! 

You need to see that document. It is possible to have a Social Security card that does not allow work authorization and that would be stamped on the card. Without the actual card, you don’t know which of the three issuing agencies supplied the card, and guessing can result in a penalty.

What if someone provides proper work authorization but they do not have a Social Security number? In some cases, a nonresident worker can obtain an Individual Taxpayer Identification Number (ITIN) for tax purposes. There are many situations to consider, and companies may need to consult with a tax professional or employment lawyer for guidance if the contact feature on the U.S. Citizenship and Immigration Services (USCIS) website doesn’t provide a conclusive answer.

How Can You Avoid or Minimize Penalties?

All employees must complete an I-9 including the business owner and temporary day workers. Employees fill out one section and the employer fills out another – but the employee must also submit proof via documents that confirm their identity and their eligibility to work in the U.S. It sounds simple but many businesses do not fully understand the requirements, the risks, or how simple it is to avoid penalties by making an effort to correct past mistakes proactively.

Follow the correct guidance for completing the I-9 requirements by visiting the USCIS I-9 Central website. Here you can find the current form, acceptable documents to aid completion, and instructions. You can find help with sample IDs to assist in your verification of employee eligibility, instructions on how to conduct a self-audit, and how to make corrections. There is also guidance on how to store active forms and when to destroy the inactive ones.

2. The DOL/FLSA Audit

This audit is conducted by the Department of Labor, Wage & Hour Division enforcing the Fair Labor Standards Act (FLSA).

While most U.S. employers know there is a minimum wage, there are many pay-related laws at the federal, state and local level. There are strict (and sometimes grey and confusing) guidelines on how to properly classify employees and pay them properly. The instructions can be daunting but federal rules must be followed. 

‘Watch Out’ Examples

Are your people classified correctly? Many companies prefer to pay sales-generating employees a lower base salary and a higher commission, but often their duties mean they should be classified as hourly employees. Titles are not universal from one organization to the next. While there is an “outside sales exemption,” many sales jobs are overtime eligible. 

Are you paying your nonexempt staff’s wages correctly? If your state doesn’t have a specific overtime law or rule to follow, the federal one applies. Even with a signed form, no one can waive their right to overtime. Are you bonusing your hourly workers who earn overtime? Some bonuses must consider any overtime earned in their calculation. 

Some companies make deductions they are not aware can be illegal. In certain states and circumstances, having a policy is not enough to allow you to deduct from wages for lost or damaged equipment. You may need an employee’s written approval to make certain deductions from wages. Even if the deduction is legal, it may not result in payment of less than minimum wage.

For example, if you are legally able to deduct $400 for unreturned equipment or uniforms in a final paycheck, you still may not legally take the person’s wages below minimum wage (Note: Check your state rules on this). If their final check was for 15 hours and they earn $15 per hour ($225 gross), they must be paid at least the minimum wage for all hours worked. In this example, we will say $8 per hour is the minimum wage, for a total of $120. The employer can then only deduct $105 legally.

How Can You Avoid or Minimize Penalties?

Review your policies based on the pay laws. If something conflicts, address it and research it based on your state, industry and the specific criteria involved. In addition, conduct your own FLSA audit. Review all the positions in the company, documenting or updating job descriptions. Make sure the duties are accurate and then ensure compliance by reviewing the duties test.

An employee can supervise or manage others and still be eligible for overtime. Make sure your titles have not clouded your classification of the jobs themselves. Once you have examined the duties, next look at the salary amounts for those you have decided should be exempt and make sure you are compliant with the federal and state minimum salary threshold. Once you have all your data, it’s best to reach out to an employment attorney who specializes in wage and hour law to review each scenario. Any corrections to classifications should be made with legal direction.

The Safety Audit

This is conducted by the Occupational Safety and Health Administration (OSHA).

While most U.S. employers know they must tell employees to act and operate equipment safely, the employer has a great deal of responsibility in ensuring they do. The primary agency responsible for workplace safety in most industries is OSHA, and it will send inspectors to ensure standards are being met and identify any potential hazards.

‘Watch Out’ Examples

While OSHA prioritizes inspections of workplaces in industries with historically high rates of illnesses and injuries, employees may file complaints freely and confidentially. Complaints are usually triggered by a variety of issues viewed by an individual as being safety hazards. An accusation of minors handling certain equipment, lack of proper safety equipment, or safety manuals for machinery not being made available or accessible can result in a sudden inspection visit.

Recent changes were made to requirements and industries that were once exempt from following OSHA guidance may no longer be exempt.  

Reporting requirements have also been updated. If your industry should have been reporting electronically, and you haven’t been, you may wind up on an OSHA check-in list.

How Can You Avoid or Minimize Penalties?

Develop a robust safety program that includes a written plan. Your industry or facility may be required by OSHA to have an Illness, Injury and Prevention Plan and/or an Emergency Action Plan. 

Once compiled, provide safety training and conduct regular meetings for safety reminders, encouraging a culture of safety in the workplace. Conducting regular inspections of premises to identify and address potential hazards before an OSHA inspection is a good practice. In addition, keeping detailed records of trainings, discipline for non-compliance, and how accident threats were mitigated is also a strong proactive measure.

OSHA’s site has free resources that can be very helpful in designing a program for your organization. In addition, they also offer support for smaller businesses at no cost to improve safety and health programs.

What Now?

While it may take some time to review and correct your current practices and documents, if you do ever face an audit, the penalties would surely be less impactful to an employer who made a good faith effort to do things correctly and correct past mistakes before being caught. 

Agencies make a wealth of information available, and I assure you they expect companies to follow and play by their rules. Discuss your findings with your higher management so they’re aware of the potential risk and can support you in hiring experts and making changes where needed. Be the HR superhero that avoided the bad audit.