Conducting an HR audit is a proactive step that organizations take to identify the function’s strengths, weaknesses, and opportunities. The word “audit” generally elicits the idea that an aspect of the operation is doing something wrong. However, this does not need to be the case. Consider an HR audit like a report card, this process allows an organization to evaluate the effectiveness of the policies and procedures conducted by the human resources department. HR audits are also used to aid the organization by identifying risk and minimizing legal exposure while meeting its strategic business goals. Essentially, HR audits are an efficient tool used to improve processes like recruitment, retention, onboarding, training, salary and compensation, payroll, performance management, and many more common practices within an HR department.
Why HR Compliance Audits Are Important
Federal, state, and local employment laws are complex, often conflicting, and at times, counter-intuitive. Unintentional violations potentially lead to lawsuits, fines, bad publicity, loss of talent, employee dissatisfaction, and lost business. Taking the time to do a comprehensive HR Compliance Audit helps mitigate those risks, ensure adherence to applicable laws, and highlight opportunities for improving the effectiveness and efficiencies of HR practices.
Finding time internally to conduct an extensive audit can be a burden within itself, which is why an organization will often engage with an external HR audit firm that they can trust. By doing so, organizations can benefit from specialized expertise, independent and unbiased evaluation, comprehensive analysis, and actionable recommendations. This approach enhances the credibility and thoroughness of the audit process, leading to improved HR practices, reduced risks, and better alignment of HR with organizational goals.
CCI’s Audit Approach
CCI Consulting’s proactive approach in conducting HR audits for clients consists of three phases – review documentation and assess current processes, identify gaps, and prioritize corrective actions. The audit process is conducted through a series of employee interviews and a comprehensive review of current documentation, tools, and practices.
Phase 1: Review Documentation and Assess Current Processes
The goal of Phase One is to gather insights into the current approach and processes related to the following factors:
- Federal Laws
- Equal Employment Opportunity (EEO)
- Americans with Disability Act (ADA)
- Employee Retirement Income Security Act (ERISA)
- Family Medical Leave Act (FMLA)
- Employment Eligibility Verification (I-9 Forms)
- Consolidated Omnibus Budget Reconciliation Act (COBRA)
- Fair Labor Standards Act (FLSA)
- State Laws
- Wage & Hour
- Sick & Safe Laws
- Policies & Procedures
- Performance Management
- Discipline Procedures & Documentation
- Employment, Recruiting, Benefits, Medical & I-9 Files/ Records
- Workplace Harassment/ Sexual Harassment
- Staffing & Selection
- Wage and Hour Administration
- Leave and Accommodation Administration
- Additional Documents
- Grievances, complaints, and lawsuits
- I9 errors
- Outdated or missing Federal, State labor, and employment posters.
- Inadequate, missing, or improperly maintained employment files.
- Failure to file or inadequate mandatory plans/ reporting – i, e,) Affirmative Action, 5500, EEO, VEVRA.
- Insufficient record retention
Employment laws and regulations change frequently, which is why it is critical to ensure that your organization is up to date on the latest rules and regulations.
Phase 2: Identify Gaps
When conducting an HR audit, it isn’t enough to just ensure the basics are in place. If your policies are not synchronized with your practices and you are failing to address HR deficiencies this can cause an increase in expenses, a reduction in employee engagement, and expose your company to exponential risks.
The goal of Phase Two in the audit process is to identify any potential issues and opportunities for improvement. Here are some of the most common inefficiencies and risks discovered in the audit process:
- Noncompliance with Federal & State Laws – Regulators are consistently moving benchmarks for compliance; a frequent incumbency that businesses may accidentally allow to slip through the cracks.
- Insufficient Employee Handbooks – Outdated or incomplete employee handbooks can become a liability or impede management efforts. An employee handbook is an excellent business tool that enables employees to know what is expected of them and will help mitigate potential damage to the employer. The overall design of the employee handbook should reflect the organization’s business philosophy and it should clearly communicate the employer’s expectations of its employees.
- Inconsistent Employment & Diversity Practices – Diversity and inclusion are highly considered core competencies of company culture, talent acquisition, and employee retention.
- Inadequate Documentation & Record Keeping – Accurate and detailed records are essential for employers to defend any type of employee claim, particularly unemployment compensation or wrongful termination claims.
- Misaligned HR Skills – As an organization evolves, the responsibilities and tasks of an HR department can become too broad, resulting in skill gaps and insufficient support.
Phase 3: Prioritize Corrective Action Plan
When the review is complete, CCI provides a report that summarizes potential gaps and areas in need of attention. The report highlights potential compliance violations, perceived operational or process inefficiencies, and areas that are not consistent with a current best practice approach.
- Step 1: Correct Violations of the Law – Fines and judgments can be extremely costly, not just in monetary payments, but in lost opportunities for business and talent. Delaying corrective action only amounts to more severe problems down the road.
- Step 2: Address Inefficiencies that Impede HR’s Return on Investments – By aligning talent for the right jobs, HR departments can avoid duplicate work and discern opportunities to outsource mundane and resource-draining tasks.
- Step 3: Implement Best Practices – Once inefficiencies are addressed, organizations can then build on a strong foundation of operational excellence to create an effective HR function.
Why HR Compliance Audits are Important
Taking the time to do a comprehensive HR Compliance Audit ensures adherence to applicable laws and highlights opportunities for improving the effectiveness and efficiencies of HR practices which, in turn, can have a positive impact on areas such as employee performance, employee engagement, talent attraction, and retention. In addition, organizations can reveal possible inadequate documentation, and insufficient employee policies and handbooks.
CCI Consulting was recently engaged with a company to provide an HR Audit to review current HR practices and their impact on the business, summarize compliance and procedural gaps, and identify risks to lay the groundwork for prioritizing HR initiatives.
At the conclusion of CCI’s audit conduction, our client was supplemented with a personalized report to help prioritize areas of risk within the HR operation.
- High-Risk Factors
- Personnel Files – Through CCI’s audit approach, we were able to identify lapses in the company’s personnel file storage, as well as discover expired Employment Authorization Forms. The regulation violations discovered in the company’s record-keeping could have led to substantial fines from various agencies or audit failures that can result in penalties or extra tax payments. CCI was able to successfully recommend corrective actions to improve the company’s file storage and termination procedures, compliance with state and federal laws, and updates to all personnel files.
- Standard Operating Procedures – CCI’s in-depth audit was also able to identify flaws in the client’s SOPs. Due to the lack of a dedicated staff overseeing the HR function, there was no documentation for various standard procedures including recruitment, onboarding, performance management, disciplinary action, and routine operations. CCI’s recommendations following the audit allowed our client to create and document standard operating procedures in areas such as recruitment, onboarding, training, performance and disciplinary management, and termination. By engaging with CCI to conduct an audit, our client was better equipped to bring consistency across the organization, allow easy transfers of work, minimize errors, and reduce duplication of effort and potential litigation.
- Medium Risk Factors
- Performance Management – CCI’s audit was able to identify this specific HR scope area as a medium risk factor due to the organization’s lack of programs in place to manage performance, provide formal feedback, and supplement performance recognition. Performance management helps boost employee engagement, productivity, and retention. Disclosed in the client’s audit report, CCI was able to effectively propose a standard performance evaluation practice and provide the tools to assist managers with the evaluation, coaching, and documentation in the performance management process.
- Workplace Training – At the time, CCI’s client was actively implementing equipment and on-the-job training for all new hires, however, there was no other training conducted. The lack of training, specifically leadership training, can have a direct impact on an organization’s ability to manage conflict resolutions, performance management, harassment claims, and employee relations. Distinguishing this gap in the organization’s training procedure allowed CCI to recommend annual training around safety, harassment, code of conduct, and leadership to help improve compliance with laws and regulations.
- Low-Risk Factors
- Compensation and Benefits – Low-Risk Factors or Best Practices are considered to help maintain positive employee morale; however, they do not contain significant compliance concerns. In this client’s case, their compensation and benefits strategies were sufficient but could use improvement due to the undefined compensation practices and informal salary and raise distribution. Retention imposes a constant business impact especially if employees feel their compensation does not match their required duties and responsibilities or the market. With CCI’s advisory, our client was given the tools to properly install fair and equitable pay practices as well as establish standards to appropriately offer and adjust salaries.
- Terminations and Layoffs – Due to the client’s seasonal business model, layoffs were a typical occurrence during the winter months. Despite no history of major impacts regarding layoffs, the company did not have a standard process to determine criteria for seasonal layoffs. In appropriate selection of employees due to layoffs may result in potential lawsuits for the company, such as wrongful termination or adverse impact/discrimination; and or could create a financial risk. Thanks to CCI’s expert counsel in the audit process, our client is now better suited to conduct a formal seasonal layoff process.
Is Your Organization Ready for an HR Audit?
HR audits can be conducted at various times depending on the organization’s needs and circumstances. If your organization is experiencing one of the following situations, you may want to consider coordinating an HR audit.
- Organizational Transitions
- Preparing for Growth or Expansion
- Regulatory Changes
- Following Legal Issues or Complaints
- Performance or Efficiency Concerns
- Change in HR Leadership
Although these scenarios are great instances that may trigger an audit, timing may also depend on an organization’s resources, priorities, and availability of external audit firms. There is no “best time” to conduct an audit, as every organization has different circumstances. Even if there are no extenuating predicaments to elicit an audit, nevertheless, do not wait for an issue to arise, taking a proactive approach is always better than a reactive one.
Patrick Beatty, Marketing Manager
Kimberly Lundy, Senior Human Resources Consultant