How healthy is your company? Sometimes it’s obvious it’s a bit under the weather. Key indicators may be high turnover, decreased productivity, excessive absenteeism and numerous employee complaints. Other times, an illness could be lurking beneath the surface and isn’t identified until a lawsuit rears its ugly head.
In both cases, how do you get to the root of the issue? Conducting an HR audit, an objective and systematic analysis of the HR function, is a way to expose and address gaps between HR’s current and desired state. An HR audit is a deep dive into HR’s policies, procedures and documents in an effort to mitigate legal exposure and continually improve HR functions and activities. Generally, the objectives of an HR audit are to assess whether:
- Corporate policies, procedures and actions are legally compliant with federal, state and local employment laws.
- The HR function supports and is aligned with the corporate mission.
- HR is effectively serving its constituents including employees, corporate leadership and shareholders.
- HR follows best practices employed by companies in the same industry.
After the HR function is assessed, an HR audit provides a roadmap for addressing any deficiencies and legal non-compliance.
Smart HR Audit
While there are different ways to conduct an HR audit, Smart HR’s approach is tailored specifically to each individual client’s needs. Generally, here are the steps involved in a Smart HR audit.
Initial Client Meeting
During an initial onsite client meeting, the Smart HR consultant gathers information about the client’s reason for conducting the audit. Was there a particular issue like an EEOC charge that precipitated the audit? Has the company experienced a RIF, merger or acquisition affecting employee morale, benefits or compensation? Has the shift to remote work during the pandemic left some managers feeling ill equipped to manage remote employees and remote employees feeling disengaged? Maybe there is no reason other than simply wanting to ensure the company and HR is operating in a legally compliant manner.
Whatever the reason, Smart HR begins with a thorough understanding of the audit’s purpose and scope based on client feedback during this meeting. No detail is left unaddressed down to whether the client prefers audit updates daily, weekly or bi-monthly, and the client’s preferred method of communication whether by email, telephone or in-person. The Smart HR consultant ensures the client has a timeline for audit completion and thoroughly understands the audit process moving forward.
Information and Data Collection
The next step in the audit process is for the Smart HR consultant to learn about the company and its HR processes and procedures. The Smart HR consultant uses a variety of methods to collect information such as questionnaires, employee interviews and on-site meetings to examine personnel files and employment law posters.
The Smart HR consultant conducts a comprehensive review of all HR documents including: job descriptions, employee handbook, Summary Plan Descriptions, application, interview questions/notes, offer letter, orientation and new hire packet, sample disciplinary document, training materials, releases for pre-hire testing (background, drug, credit, etc.) and performance appraisal form.
Once pertinent information and data is collected, it’s time for a comprehensive review and comparison of the HR function between what is or could/should be. Generally, Smart HR reviews and analyses the following HR areas:
• Legal Compliance (federal, state and local)
• Posting Requirements
• Record Keeping
• Compensation/Pay Equity
• Employee Relations
• Recruitment and Hiring
• Employee Engagement/Development
• Performance Appraisal Systems/Management
• Policies and Procedures/Employee Handbook
Often a large portion of the audit is devoted to legal compliance as employment laws are many, varied and ever-changing making compliance challenging. Most clients with compliance issues are completely unaware they exist until they are revealed in the HR audit. Organizations can be particularly vulnerable in certain areas like hiring, discipline, pay equity and termination. Here are some common areas of non-compliance often uncovered during an HR audit.
- Failure to document. Proper documentation is critical during all phases of an employee’s tenure with a company. In the event a current or former employee files a wrongful discharge, discrimination or sexual harassment claim, a company cannot present a defense without proper documentation pertaining to that employee’s performance, any disciplinary actions taken against the employee and other employment actions. Accurate documentation of performance problems is critical to justify decisions regarding discipline or discharge. Some examples of critical actions to document are:
- Pre-employment: Justification for the employee’s hire and why the employee was chosen over other applicants; offer letter stating clear terms of employment; employment contracts if applicable; consents to testing if applicable (drug and other employment tests); employee handbook acknowledgement.
- During employment: Performance appraisals; warnings and other disciplinary actions; personnel action forms indicating transfers, salary increases, etc.; requests for FMLA leave; payroll records.
- Post-employment: Reason for discharge and all supporting documentation.
- FLSA Misclassification. It’s common for employers to misclassify an employee as an independent contractor in violation of the FLSA. Employees are entitled to minimum wage and overtime pay protections and, when misclassified as an independent contractor, an employee is denied critical benefits and labor standards protections. Confusion may also exist when classifying an employee as exempt or non-exempt. Of particular concern is a non-exempt employee misclassified as exempt and denied overtime pay. In this case, penalties can be severe and may include lawsuits (including class action), IRS audits, payment of back wages and overtime with interest and DOL penalties of up to $1,100 for each violation.
- Incomplete Personnel Files. Already mentioned, it’s common for personnel files to lack critical documentation of performance, disciplinary actions, justification for salary increases and terminations. Sometimes confidential medical information such as a request to take FMLA leave is kept in a personnel file instead of in a separate confidential medical file. There is essential employment information that should be maintained in every personnel file and other information (drug test results, wage garnishment notices, medical information, etc.) that should not.
- Form I-9 Errors. All employers are required to complete and store an I-9 form for every new employee to verify their identity and eligibility to work in the U.S. Among common mistakes are missing or incomplete I-9s, backdating I-9s, using an outdated I-9 form, failure to complete the I-9 within the required three-day verification period and requesting specific verification documents.
- Failure to Properly Integrate Federal and State Laws. Sometimes a federal employment law is more or less beneficial to an employee than a state law. When a federal and state law exists concerning the same employee benefit, the law most beneficial to the employee takes precedence. FMLA leave is a perfect example. The federal FMLA law sets the minimum standards for FMLA leave, which means that states can opt to provide more generous leave options for employees. The federal FMLA doesn’t require paid FMLA leave. However, 11 states (California, Colorado, Connecticut, Delaware, Massachusetts, Maryland, New Jersey, New York, Oregon, Rhode Island, and Washington—and the District of Columbia) currently offer paid family and medical leave.
Upon completion of the audit, clients receive a detailed audit report followed by an in-person debriefing of the Smart HR consultant’s findings and recommendations. Should the client request assistance with executing any recommendations, Smart HR is available to help every step of the way.
Pandemic-Fueled HR Issues
The pandemic created a host of HR issues for which an HR audit can help. The shift to remote work for many meant employers were no longer limited to hiring employees in the local geographical area. While the talent pool greatly expanded, so did the headache of dealing with multi-state employment laws. An HR audit can provide critical information about employment laws in other states in which employees operate to ensure legal compliance.
Because this has been such a hot button topic for Smart HR clients, Smart HR provided a three-part blog series for multistate employers, the first of which can be found here. Other potential pandemic-fueled issues that may be revealed in an HR audit are the need for management training for managing a remote workforce, how to re-engage remote employees, the need for enhanced employee benefits particularly concerning mental health and recruiting strategies for a tightening labor market.
Get Smart HR
When you partner with Smart HR for an HR audit, you can be assured no stone will be left unturned. Our consultants have invested considerable time and effort creating and cultivating Smart HR’s audit offering. As with all Smart HR offerings and services, the HR audit is continually refined and improved based on client feedback, the current employment and HR landscape and evolving best practices.
Conducting an HR audit gives you the peace of mind of being legally compliant in all states in which you operate and access to the current best practices for similar companies in your area and industry. It also engenders good will among your employees and fosters a climate of continuous improvement at your organization.
Have you scheduled your company’s annual checkup? If not, call Smart HR today and learn more about how an HR audit can ensure your company’s wellbeing.