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In California, where class action wage-and-hour lawsuits flow in like the tide, employers should consider conducting employment audits. An effective employment audit serves multiple purposes: It can identify problems, encourage corrective action and keep an employer abreast of new developments in a field that is marked by constantly changing laws. The depth and complexity of any audit will necessarily vary. All worthwhile audits, however, require management’s commitment of resources and organizational support, a clear organizational process, mastery of basic legal principles and consideration of privilege protections. Consider the following as tips for conducting an effective audit. � Obtain buy-in from top management. You’ll be wasting time and money if you invest in an employment audit without securing in advance management’s buy-in for both the audit process itself and the correction of any problems that the audit might reveal. This process requires time — to strategize, organize, conduct and respond to the audit — and spending that time is pointless if the auditor does not receive full cooperation during the investigation or if problems do not receive the attention needed to correct them. Moreover, if privilege problems occur, as discussed below, the audit results ultimately may support claims that the employer is liable for willfulness penalties under Labor Code section 203 because it failed to correct violations. Accordingly, get a commitment up front from top management for time, money and the correction of possible violations. � Recognize that there is no single right way to conduct an audit. All audits should be tailored to meet an individual employer’s needs and resources. Audits can explore a variety of employment practices — hiring, diversity, record keeping, wage-and-hour practices including exemptions and compliance with pertinent statutes including the Family Medical Leave Act and the Americans with Disabilities Act. An audit also can target certain departments, facilities or groups or focus on specific positions — for example, on whether exemptions from overtime pay apply. The decision regarding the scope of an audit should depend on assessment of risks, priorities and available resources. Certainly, if the company has knowledge of practices that are in the employment litigation hotbed, it probably makes sense to start with those practices. Audits can be performed in phases, with specific timelines set for those phases. For example, phase one might target the exemption status of employees in a particular department. Phase two might target record keeping and timecard compliance. Phase three might move to exemption classifications in other groups. And phase four might focus on lunch breaks for non-exempt employees. At the start of the process, careful planning is advised regarding the scope of the audit and the commitment of resources necessary to accomplish any phases. If resources are limited, it may be wise to choose in-depth analysis of a particular high-risk practice over breadth. A superficial review due to inadequate resources typically causes more problems than it cures. � Maintain the attorney-client privilege. An audit can be a double-edged sword. While an effective audit may reduce future litigation by identifying and resolving compliance problems, careless distribution of sensitive audit information can substantially increase a company’s exposure in connection with those problems. As a result, it is important that all phases of an audit be properly protected, if applicable, by the attorney-client privilege and work product doctrine. The employer should clarify from the outset that its goal in conducting the audit is to ensure compliance with relevant employment laws. The initial audit authorization should typically be issued by top management or in-house counsel. In most cases, outside counsel should open a separate billing matter for the audit, and the employer should receive an engagement letter that authorizes the audit and makes clear that its purpose is to obtain legal advice concerning the company’s compliance with relevant employment laws. That letter should also authorize outside counsel to obtain the assistance of all necessary company personnel to obtain information and should stress the confidential nature of the inquiry. This added authorization and direction will help clarify that lower-level personnel are viewed as the client for purposes of maintaining the attorney-client privilege. The company should take all reasonable steps to ensure that the results of the audit are kept private and the privilege is protected. Once the audit begins, all communications concerning the audit should be disclosed only to those with a need to know and should stress the need for confidentiality. All documents created during the audit should be clearly marked as “privileged and confidential” and should be treated with the same confidentiality as other sensitive legal documents. No disclosure of audit results should be made beyond those with a need to know. � Collect all relevant information. As the audit begins, the audit team should compile all pertinent documents. The documents at issue, of course, will vary depending on the scope of the audit. In a wage-and-hour exemption audit, for example, relevant information may include written policies and procedures, job descriptions and performance evaluation forms. In addition to reviewing written materials, the audit team will need to assess how to conduct an independent investigation of actual practices. This information can be acquired through questionnaires, on-site inspections and/or interviews. The employer will need to determine who should provide the necessary information. Are human resource employees best equipped to understand and convey an employee’s actual job duties or would managers be more appropriate to fulfill that task? Or does the audit team need to speak with the employees actually performing the jobs at issue? It is also important to determine who will collect the information. In some cases, it may be appropriate for HR to elicit and compile the audit information. But depending on the circumstances, it may be more desirable for outside counsel to take the laboring oar directly. � Analyze all collected information. Once audit-related information has been obtained, it must be systematically analyzed for compliance with legal requirements and for conformity with other company objectives. Virtually every audit will benefit from the development and use of detailed audit checklists or intake questionnaires. These documents provide a step-by-step method of analysis for a discrete subject area. All such checklists or questionnaires should be prepared or carefully reviewed by legal counsel. The audit process should culminate with the preparation of a final report — either written or oral — for distribution to upper management. Ideally, legal counsel should author this final report or at least be closely involved in all stages of its preparation. The report should be thorough and include conclusions concerning the audited policies and practices, potential compliance efforts and practical problems. Inevitably, the final report will contain highly sensitive information. Therefore, all reasonable steps must be made to preserve its confidentiality. � Solve the problems you identify. Once the audit is complete, it is important to promptly remedy any problems that the audit has identified. Failure to resolve those violations can increase the company’s liability for penalties, possibly punitive damages and other claims. In addition, failure to address identified problems will have an impact on the morale of those employees who worked hard to ensure a successful audit. To respond to changing legal requirements and business changes, as well as to monitor progress made on prior audit recommendations, the audit should be renewed on a regular periodic basis. Lynne C. Hermle is an employment partner in the Silicon Valley office of Orrick, Herrington & Sutcliffe. Jessica Perry, an associate at the firm, assisted in the preparation of this column.

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