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Monday, 30 April 2012 08:37 |
Written by Phil Vivirito
Bond Beebe
P: 301.272.6090 E:
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In this series, I will explain several fundamental payroll auditing principles. This post discusses guidelines for determining the frequency of payroll audits.
When asked how often a payroll audit should be scheduled, the most common answer given is “every three years.” However, there is no requirement that an employer be audited at this frequency. A problematic employer may be audited every year, some very large Funds will only audit a percentage of employers each year, and then, of course, there are Funds that implement the common three-year audit cycle. Given these varying situations, it is my opinion that the auditor must adopt the payroll frequency that works best for each Fund’s unique situation.
Determining Payroll Audit Frequency
We often recommend that Funds either increase or decrease their payroll audit frequency based on the payroll audit findings (or lack thereof).
Decreasing Payroll Audit Frequency
One particular Bond Beebe client has reduced its payroll audit frequency, transitioning from a three-year to a five- year auditing cycle due to the lack of findings. After two consecutive three-year cycles, our data showed that for each cycle, 75% of the employers did not have findings. In the initial three-year cycle, 23 employers had audit findings totaling $135,000. However, more than half of that finding total ($85,000) was from three employers only. In the subsequent three-year cycle, 30 employers had findings totaling $80,000 and half of that finding amount was from two employers. Based on this audit finding information, the decision was made to change the audit cycle.
Increasing Payroll Audit Frequency
I know of a Fund that has entered their third consecutive three-year audit cycle. During their first three-year cycle, 33% of the employers had zero findings and during the second three-year cycle, 31% of the employers had zero findings. The findings for the first cycle totaled $2 million and the total findings for the second cycle were $1.7 million. Certain error types discovered for each cycle were as follows:
- During the first three-year cycle, 10% of the employer errors were a failure to report covered employees. This finding type jumped to 14% in the second three-year cycle.
- During the first and second three-year cycle, new hires were incorrectly reported 25% of the time.
- The employers under-reported employee hours 27% of the time during the first cycle and 40% of the time during the second cycle.
Three-year Audit Cycle vs. Five-year Audit Cycle
Because of the amount of findings in each cycle and the percentage of error types found above, it is understandable that the second Fund chose to maintain the three-year audit frequency in order to monitor audit findings and errors. The Fund on the five-year auditing schedule was able to decrease their audit frequency to every five years due to the lack of findings.
While each Fund is unique, by keeping the historical data of payroll audit findings, a payroll auditor can provide a Fund with a logical, cost- and time-effective recommendation as to how often payroll audits should be scheduled.
Previous Posts in the “How To” Series
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Wednesday, 25 April 2012 10:26 |
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Written by Andrew Staab
Felhaber Larson Fenlon & Vogt
P: 651.312.6023 E:
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At a recent International Foundation of Employee Benefit Plans conference, I was asked if I have noticed any increases in the number of delinquent employer cases. The questioner was prodding me to confirm that tough economic times have caused an increase in the number of delinquency matters. I am not seeing more cases; in fact I am seeing fewer cases. But, I am seeing more complex cases, and I am using more weapons in my arsenal to help the Funds collect the delinquencies. Let's take a look at some of these complexities.
Defunct Employers
Our Firm has indeed seen fewer delinquency cases. Many employers have gone out of business and many did so without having any delinquencies; they paid their last bills and shut down their business. That may trigger a new batch of withdrawal liability cases for underfunded pension funds, but most of my clients are in the construction trades. The special rules for construction trades withdrawal liability make it very difficult to assess, let alone collect, withdrawal liability if the employer shuts down operations entirely. Nevertheless, the payroll auditor is sent to the defunct company to assemble an “exit audit.” (For more information on auditing techniques for a defunct employer, see Payroll Auditing: A Guide for Multi-Employer Plans, a helpful book written by Payroll Auditing Portal contributors Larry Beebe and Phil Vivirito.)
Employers Shutting Down Mid-Project
Additionally, I have seen many employers shut down in the middle of projects. That leaves huge liabilities, but it raises new opportunities for the Funds seeking collection of unpaid contributions. In the District of Minnesota and in many other federal districts throughout the country, Taft-Hartley trust funds may use state law mechanic’s lien or public payment bond actions to collect contributions due and owing on the specific project. The payroll auditor is then thrust into the complexity of these cases, because the law requires precise statements of claim amount within a tight time deadline.
The Monthly Audit
A variation on the employer shutting down mid-project is the employer with terrible cash flow that asks to “partner” with the Funds to manage fringe benefit payroll obligations with the general contractor or owner on each project. This puts the payroll auditor in the unfortunate situation of having to audit the employer’s projects on a monthly basis to verify the hours worked in order for the general contractor to process the draw payments to the delinquent employer. Nobody really enjoys this process, but our Firm has seen it as the best (and only) way to maximize recovery for the Funds.
Payment Bonds and Mechanic's Liens
The difficulty arises when the Funds are asked to tender a mechanic’s lien waiver or release upon receipt of payment from the general contractor or owner. The only way the waiver or release can be done by the Funds is after the payroll auditor completes the review of the records and assesses independently the amounts due on each project. We ask the payroll auditor to include liquidated damages on the total due on each project. Each time the payroll auditor completes the project audit, we find discrepancies, which justifies our continuous demand to do ongoing job-by-job audits. Cases that involve public payment bond and mechanic’s lien enforcement are complex and tedious, but they have increasingly become a part of the Taft-Hartley collections process for attorneys and payroll auditors.
The Non-Signatory Employer
Other complex cases include the non-signatory employer who has signed a Project Labor Agreement. In that case, the employer is not accustomed to keeping records, and the payroll auditor often returns home empty-handed. We have seen these cases require the Funds to come up with more elaborate ways to determine the extent of the employer’s delinquency, either by estimation or by recreating time records. In estimating a delinquency, trust funds are free to do so, but only if the methodology is reasonable and can be supported by testimony in a courtroom.
It is clear that things have changed during these tough economic times. So my questioner at the conference was on to something, but was asking the wrong question. Attorneys and payroll auditors are not working on more delinquency cases. We are simply dealing with complexity. |
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Friday, 23 March 2012 08:16 |
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Written by Phil Vivirito
Bond Beebe
P: 301.272.6090 E:
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In this multi-part series, I will review the intricacies of payroll audit disputes, explaining the many different types of disputes, providing insights for how to establish the validity of a dispute, and delineating the various options for resolving a payroll audit dispute.
Can the Payroll Auditor Resolve the Dispute?
The first post in this series discussed how to determine the validity of a payroll audit dispute. Once an employer documents their dispute in a manner that details both what their dispute is and why it is considered a dispute, it is up to the payroll auditor to determine whether or not it is a viable dispute, but also more importantly, who can resolve the dispute. Many times, a dispute can be resolved at the auditor level, but occasionally, the dispute must escalate to the Fund or to the Board of Trustees for their consideration and decision.
When to Resolve
Payroll auditors can resolve employer disputes that concern the amount of units recorded on the audit report or the validity of hire or termination dates. In addition to referencing their documented work papers and notes, the payroll auditor can request that the employer provide supporting documentation for his/her dispute.
Additionally, the payroll auditor can resolve the dispute if it arises from waiting or probation periods or job classifications of employees on the audit report. In these instances, the auditor should site and reference the terms and clauses of the Collective Bargaining Agreement (CBA) to support their conclusions. With regard to job classifications, the employer must provide the auditor with the employee-in-question’s personnel information before the auditor can make any determination on the validity of the dispute.
When to Escalate
When the dispute reaches the point where the auditor is no longer able to address the employer’s concerns, such as if the employer is disputing language found in the CBA, the dispute should be escalated to the Fund or Board of Trustees. For example, if the employer makes statements such as “that was not our intent,” “this is the way we interpret that clause,” or simply that they were instructed by the Fund to report in this manner or that they have an agreement with a local union outside of the CBA, the payroll auditor should refer the matter to the Fund, the Fund’s counsel, or the Board of Trustees.
Once the auditor determines that they cannot resolve the dispute on their own, it is essential to know:
1) Who to contact at the Fund or Board of Trustees about the dispute;
2) How far the auditor is allowed to go in pursuit of resolution before handing the matter over completely to the Fund or Board of Trustees; and
3) What documentation and/or other information needs to be provided to the Fund or Board of Trustees for their review and resolution of the dispute.
When these items have been determined and confirmed with the Fund and/or Board of Trustees, the payroll auditor can respond to the employer’s dispute and inform them of the next course of action. In the next post, I'll discuss proper payroll auditor response to the dispute.
Previous Posts in the this Series:
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Wednesday, 21 March 2012 10:09 |
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Written by Phil Vivirito
Bond Beebe
P: 301.272.6090 E:
This e-mail address is being protected from spambots. You need JavaScript enabled to view it
In this multi-part series, I will review the intricacies of payroll audit disputes, explaining the many different types of disputes, providing insights for how to establish the validity of a dispute, and delineating the various options for resolving a payroll audit dispute.
As payroll auditors, we like to think that our audits will never be disputed. Unfortunately, this is not always the case. Part of the payroll audit process is responding to and resolving disputed items with the employer.
Establishing the Validity of a Payroll Audit Dispute
Upon receiving the employer’s dispute, either in writing or verbally, the payroll auditor must decide if the employer’s discrepancy is valid. “The audit is wrong” or “I disagree with the findings” is not a valid dispute. In this case, the payroll auditor should inform the employer that their dispute needs to be specific: the disagreement should detail what about the finding they disagree with and why, not simply state a general disagreement. Just as the payroll audit report provides details for exceptions (ex: employees incorrectly reported with units by month), the employer needs to respond in similar fashion and with like detail.
It is important for the payroll auditor to convey to the employer that the only way a finding or dispute can be discussed is if the employer provides, in writing, specific examples supporting their disapproval of the finding. At this point, the payroll auditor can determine how to respond to the employer and how to proceed with the dispute.
There are many different types of disputes and a payroll auditor needs to know the appropriate response to each type. Over the next few weeks, I will discuss different disputes and the proper payroll auditor response. The next post in this series will review who can resolve the dispute - when the payroll auditor can resolve, and when it needs to be escalated to the Fund or the Board of Trustees. |
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Payroll Auditing: A Guide for Multi-Employer Plans