The term audit typically carries a heavy, negative connotation. And it makes sense — especially for business owners. Being subject to an audit means taking your time and attention away from your daily operations and the things that matter most to you. However, it is possible to make an audit less painful and to take some measures to prevent one occurring in the first place. Let’s take a closer look at the basics of a Labor and Industries Audit — often referred to as an LNI audit or L&I audit — and how business owners should prepare for one.
What is an L&I audit?
In general, an audit is a formal inspection of an organization’s records and accounts. If you are chosen for an audit from the Washington State Department Labor (WADOL) and Industries (L&I), then the subject of the audit is practices that related to the safety, health, and security of workers in Washington State. L&I audits look at:
- Whether workers’ compensation premiums are properly assessed and paid or if fraud is being committed in connection with worker’s compensation.
- The safety of workers in your workplace, whether you’re paying your workers correctly (overtime, exemptions, minimum wage compliance) and giving them time off when sick.
- Whether you’ve properly classified your workers as employees or independent contractors.
- Whether you retaliated against employees for submitting workers’ compensation claims or safety complaints or complaints about wage and hour violations.
What causes a Labor and Industries audit?
The Department of Labor and Industries can randomly choose a business as part of its process of developing premium rates for industrial insurance. And L&I also has a history of focusing on specific industries. So in some cases, there is no way to prevent an audit. There are, however, less random, occurrences that may trigger an audit such as:
- An employee files a complaint in regard to pay, overtime, sick leave, safety concerns, or retaliatory conduct.
- Your business has filed reports with irregularities.
- You have large revenues but few employees or a large independent contractor workforce
- If you have an industrial insurance account with L&I and someone files an unusual claim or if an unusual injury occurs in your workplace.
- Because agencies share information so an audit from the Employment Security Department, for example, could lead to an audit by L&I
How can you avoid one?
As we just discussed, it can be impossible to completely avoid an audit because sometimes it’s just the luck of the draw. Also, even if you haven’t done anything wrong as an employer, that may not stop someone from filing an inaccurate claim. However, having your labor and employment processes down pat and compliant with the law certainly helps to avoid audits in the first place and if you are audited to get through them quickly. For example, making sure employees are properly compensated is probably the most commonly reported issue that you have nearly total control over.
What happens if a violation is revealed?
If the auditor finds that a violation (or violations) has occurred, L&I may assess monetary penalties. These penalties vary but can be extremely steep and include interest if applicable, for example, if employees were paid late.
What else should business owners know?
Facing an audit is stressful, but the decision is not always final. It’s possible to appeal an L&I assessment. Your legal counsel can help you decide if an appeal might be successful as well as helping you fix the problems that led to the audit and penalties in the first place.
It’s also important to remember that auditors are there to do their job and protect your employees. Even though being the subject of an audit can be frustrating, always be patient and treat the auditors with respect.
Your legal counsel can help to develop employee and workplace policies that are compliant with the law and mitigate liability. As an Equinox general counsel client, we review and develop these policies to minimize the chance of an audit.
The auditor will request contracts and service agreements, payroll information, banking information, timesheets, tax returns, financial records, and other information about the formation of your business. So, making sure these are accurate and accessible is important. Legal counsel can help to advise on what should be submitted and even negotiate with L&I as to what should be released. Get ahead of any kind of audit by working with Equinox to build a strong legal foundation for your business.