California Supreme Court Holds Wage & Hour Audits Performed by Outside Counsel are Privileged
December 3, 2009
A continual fear in conducting a wage & hour audit of your company’s procedures and policies is that the audit will find violations or weaknesses that you will later be forced to reveal through discovery in a wage & hour lawsuit. Ironically, this concern sometimes prevents companies from conducting these important wage & hour audits which are a critical means of discovering areas in which changes are necessary, or where improvements to policies and procedures can be made to protect the company from future lawsuits. Fortunately, this week the California Supreme Court provided employers with reassurance that, if the company retains outside counsel to conduct such an audit, the information revealed and gathered during that audit, as well as any findings or recommendations made as a result of the audit will be protected by the attorney-client privilege. In Costco Wholesale Corp. v. Superior Court, Case No. S163335 (Nov. 30, 2009), the California Supreme Court held that the entirety of an outside counsel’s opinion letter containing the findings of her confidential audit of Costco’s classification of employees as exempt from overtime was attorney-client privileged. The privileged information included the portions of the attorney’s opinion letter which contained factual information about various employees’ job responsibilities and statements obtained in the attorney’s interviews of corporate employee witnesses. The Court also held outside counsel’s confidential discussions with company representatives concerning the audit’s interview responses are privileged. It was of no consequence that the outside counsel’s opinion letter had not been prepared in anticipation of litigation because “the privilege attaches to any legal advice given in the course of an attorney-client relationship.”
It was likely significant that everyone involved in the audit, including Costco and the managers who were interviewed, believed that the information they were providing was a confidential communication and would remain confidential. As such, a lesson learned from this case is that all involved in such an audit by outside counsel need to understand that the audit is a confidential and privileged attorney-client communication. Of further significance to the court’s finding was that Costco’s purpose in obtaining the outside counsel to conduct the audit was because the attorney was an expert in wage & hour law who was asked to investigate the facts she needed to render a legal opinion on the exemption issue.
This case underscores the importance of using outside counsel to conduct audits concerning wage & hour issues (issues related to overtime, exemption, off-the-clock work, etc.) so these audits are not used against companies in future litigations. Thus, contrary to many employers’ practices, such audits should not be conducted by internal Human Resource professionals if the company wishes to be able to claim the protection of the attorney-client privilege should the audit ever become an issue in a later litigation.
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