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Why an Employment Lawyer Should Represent Your Business in a New York Department of Labor Audit

Late last year, I testified as an expert witness before the New York Department of Labor (NY DOL) in a misclassification hearing.  The hearing was the result of a NY DOL audit in which the auditors determined that certain workers were inappropriately classified as independent contractors and, instead, should have been classified as employees.

The audited business objected to the NY DOL auditors’ findings and requested a hearing.  At the hearing, I offered testimony explaining why I thought the workers were appropriately classified as independent contractors.

The audited business won the appeal, but the entire process got me thinking about the underlying audit and the potential cost savings for the business had it been represented by an employment lawyer during the initial audit instead of relying solely on its accountant for representation.

All NY DOL audits begin the same way – via a letter with a request for financial records.  A sample of such a request is here.  These letters inform businesses that they are permitted to designate a representative for purposes of the audit.  Given the nature of the documents requested, many businesses logically choose to have their accountant act as their representative.  Typically, the following records are requested:

  • General ledger, supporting ledgers and journals
  • Payroll records such as individual earnings records, payroll journals, payroll books and summaries
  • Disbursement records such as the check register, cancelled checks, bank statements, check stubs, cash book, disbursements journal, petty cash journal, or any other record that shows payments made by cash and/or check
  • Founding documents such as a corporate minute book, certificate of incorporation (if incorporated), partnership agreement (if a partnership), DBA certificate, etc.
  • Records relating to the value of other remuneration such as meals, tips, lodging, automobiles, etc.
  • Federal income tax returns
  • Copies of federal and state payroll returns such as Form 941s, 940s, NYS-45, NYS-45-ATT, W-2s, W-3s
  • Records pertaining to services by individuals such as Forms 1096’s and 1099’s, contractor agreements, invoices, certificates of insurance
  • Current workers’ compensation policy
  • Poster that shows registration with the NY DOL for unemployment insurance
  • Sales records such as a sales journal, sales tax returns, and 1099s received

Having represented a number of businesses in these types of audits, it’s my view that businesses would be better served having an employment lawyer act as a representative during such an audit.

Here’s why: The audit does not end with these documents.  The documents listed above don’t paint a complete picture of the working relationship between a worker and a business and the proper classification of the worker.  Rather, the documents raise flags for the NY DOL – such as repeated 1099 payments to an individual over an extended period of time or over a certain monetary threshold.  If the business has those kinds of payments in their financial records, they will be subject to further scrutiny by the NY DOL.  The business will need to produce additional documentation to the NY DOL if it intends to convince an auditor that its workers are properly classified as independent contractors.  In order to do so, the business’s representative must be knowledgeable about the many legal factors that are considered by the NY DOL when classifying workers as independent contractors or employees.  With such knowledge, the representative will be in a position to advise the business on which additional documents to produce to the NY DOL and present that information to the NY DOL in the most favorable way to the business.

While legal fees can be costly, being able to present this information early in the audit process will often result in cost savings for the business.  A knowledgeable employment lawyer can also provide valuable guidance on when a business should cut its losses – especially in cases where workers have been misclassified – rather than continuing to invest time and money with low odds of a positive outcome.

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