Why Conduct an HR Audit?

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All businesses must comply with a number of State and Federal employment regulations. If you don’t know about employment laws and regulations, or if you know and do not follow them, your business could be required to pay fees or be in danger of being sued. What can smart companies do? Proactively conduct a human resources audit.

A human resources audit is a comprehensive review of your employment policies and practices. The auditor will review areas like your employee handbook, your recruiting and hiring process, how you onboard new employees, compensation and benefits, safety, performance management, and training. In addition, the auditor will want to know about issues such as employee turnover, employee satisfaction, and the number of employee complaints.

Just like going to a doctor for an annual check-up, an HR audit can help your company determine the health of your HR systems. If you find areas that are out of compliance, the auditor can provide recommendations and best practices.

Below are five common areas of risk that are found in HR audits.

  1. Misclassification of exempt and nonexempt jobs

    Wage and hour laws and regulations are complex and changing, making it easy to make a mistake in classifying positions. The Department of Labor (DOL) estimates that more than 70% of all employers violate the Federal Labor Standards Act, which has resulted in millions of dollars in lawsuits for past overtime.

    Besides reviewing your job descriptions to ensure that they are properly classified as exempt or non-exempt, employers are required to post a notice in the workplace, notifying employees of their right to file a complaint through the DOL.

  2. Inadequate personnel files

    The HR audit should include a review of employee files. One common mistake with employee files is having disciplinary notes or performance reviews that are inconsistent or vague. If you fire an employee and are later sued, your written documentation can help you prove that the termination was appropriate. An audit will assist you in creating airtight documentation.

    One other common problem is not keeping an employee’s personal health information separate, as required by HIPAA laws. The fine for a first time infringement by someone who did not know they violated HIPAA is $100 to $50,000. The fine for a violation for willful neglect, when corrected in the required time period, is $10,000 to $50,000 per violation.

  3. Prohibited attendance policies

    In order to run your company, you need your employees to have good attendance. However, strict attendance policies must comply with the American with Disabilities Act (ADA).

    In one recent case, the Equal Employment Opportunity Commission (EEOC) charged Pactiv, an Illinois-based packing company, with disability discrimination after an investigation revealed that the company charged workers with “attendance points” for medical-related absences.

    The EEOC charged that Pactiv discriminated against individuals with disabilities by not allowing leave as a reasonable accommodation.

    Pactiv was ordered to pay $1.7 million, create a new attendance policy, and conduct ADA training.

  4. Inaccurate time records

    Some employers require nonexempt employees to punch a time clock or complete time sheets. If you do this, it is important to keep accurate records, which an audit will review.

    In one recent case, two clerical workers sued for several years of overtime back wages. The employees tracked their own hours. Because there were no official time records, the company was required to pay the two workers for overtime.

  5. Form I-9 errors

    HR audits often uncover inadequate documentation, such as missing or incomplete Forms I-9. Employers can be fined between $100 and $1,000 for each failure to accurately complete a Form I-9.

    One company that recently ran into trouble with I-9 violations is an Arizona metal company, DLS Precision Fab LLC (DLS). The company was ordered to pay $305,050 for I-9 related violations. DLS argued they should not be held liable for their HR manager’s mistakes. The court disagreed.
It is good practice to conduct an HR audit every few years to ensure that you are on the right track with regard to compliance and best practices. Reviewing I-9s should be done more often. However, whenever there are significant changes in employment law, it makes good business sense to conduct an audit to ensure compliance.

If you have in-house professionals who are knowledgeable, objective and have the time, they can conduct an HR audit. If not, contract with an external consultant.

After conducting the review and identifying any gaps in your HR practices, create an action plan for implementing necessary changes. Conducting an audit and then failing to act on the results may increase your legal risk. So…just do it!