Periodic Audits of ERISA Plans and Employment Policies and Practices Can Prevent Costly Mistakes

June 10th, 2008

In today’s competitive business environment, employers and HR personnel are all too often put in the position of having to pay insufficient attention to employment and employee benefits legal compliance until problems arise – resulting in dire and costly consequences.  Failure to comply with the complex and ever-changing laws in these areas often results in one or a combination of: substantial penalties, steep fines, governmental agency audits, and / or litigation.  Unfortunately, all of these options usually have a very expensive price tag attached.

Consider the following:

Employment Practices

  • 67% of all employment cases that litigate result in a judgment for the plaintiff
  • 1/3 of employment case verdicts award punitive damages
  • 75% or more of the total judgment amount awarded in an employment case is usually for punitive damages
  • Based on 2000 data, median compensatory awards for employment cases were:
    • $268, 926 for age discrimination
    • $120,951 for race discrimination
    • $100,000 for gender discrimination
  • Median compensatory awards rose from $78,592 to $218,000 between 1994 and 2000

Employee Benefits Plans

  • From 2000 to 2001 the number of ERISA civil suits filed increased from 9,124 to 10,292 (almost 13%)
  • In 2001, the Department of Labor investigated 4,862 businesses and recovered $648 million in penalties and damages
  • In 2000, the average defense cost of a fiduciary liability claim was $124,000
  • In 2000, 47% of fiduciary liability claims were based on benefits disputes (including denial of benefits)

How can an employer protect itself:

Self-Audits are reviews that companies usually undertake with the assistance of benefits counsel to identify legal compliance gaps in their plans, policies and/or operational procedures.  The audit focuses on areas that could place the company at risk for governmental fines and penalties, as well as expose the company to an increased risk of lawsuits.  These audits can be done for either or both a company’s employment practices and employee benefits plans. 

The scope of an audit can vary from a basic overview of plans, policies and procedures with identification of possible compliance gaps, to a comprehensive assessment and analysis with specific recommendations for methods of correction of any identified gaps and drafting and/or updating any needed plans, policies and procedures.  By conducting these voluntary self-audits, a company can significantly reduce the costs of future problems – costs that can have a huge impact on the company’s bottom line.

Employers should consider performing self-audits at least annually.  Additionally, when there are major changes to the law or major changes to the business, a self-audit should be done.  Employers should work with professionals with experience conducting these audits.  Employment and benefits lawyers can assist employers in auditing their policies, practices and plans.  Proactively identifying and addressing issues can be the best protection from legal action for an employer.

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