Introduction To The Human Resources Audit

What is a Human Resources audit? Why do one? How do we do it and what do we do after it is done? This article will discuss the basic concepts and help you get organized to take on this important and beneficial project.

It is simple to define a Human Resources audit. The audit is a tool that we use to (i) measure an employer's compliance with its legal obligations in managing its workforce and (ii) chart any corrective actions that might be needed. Fortunately, it is relatively easy to perform an audit, although it does require time and effort. We will discuss that a little later.

Why Do We Recommend That Employers Periodically Audit Their Employment Relations Practices?

One answer is as obvious as the latest headline from almost any area of the country: "Employee sues and wins $$$$ judgment against Employer." The audit helps us to eliminate many simple but common errors that employers, especially new businesses, often make. The audit also serves to educate HR professionals on the latest trends and best practices used by their peers. The HR audit can give those responsible for employee relations some reassurance that legal risks have been managed and minimized, thus freeing them to focus on more creative aspects of their jobs that can add value to the employer's bottom line.

There are also other benefits to doing an HR audit. If your company is in the market for financing, investors will want to know that you have done all you can to protect the company from unnecessary lawsuits. The results of an HR audit can be presented to investors for their due diligence review. Similarly, if an employer is interested in obtaining Employment Practices Liability Insurance, the insurance carrier will assess the degree of existing risk by asking many of the same questions one would ask in an HR audit. Typically, an insurance company will not issue a policy unless the employer can demonstrate (i) substantial compliance with applicable employment laws and (ii) the existence of appropriate employment procedures and policies.

How Do We Do An HR Audit?

This is where the time and effort part comes in. First, we need to know what to look at and what questions to ask. Then, we need substantive knowledge of the applicable legal requirements so that we can evaluate whether what we have found satisfies the laws that apply in our workplace.

Most Human Resources professionals are well aware of the issues that create the greatest legal risks. Hiring, firing, benefits, wage and hour compliance, employee handbooks, and illegal discrimination are the most common areas where lawsuits arise. In order to assess the degree of exposure that a company has, we must first be familiar with the legal requirements in each of these areas. Other legal obligations arise from state and local laws as well. The Human Resources professional must also have at least a basic familiarity with the employer's obligations under those laws.

You can still do an HR audit even if you do not have the necessary legal knowledge yourself. There are commercial HR audit tools available that will guide you through a self-audit. In addition, there are service providers who will perform an audit for you for a fee, and other professionals who will perform the service at no charge as an adjunct to other services they provide. Regardless of how you do your audit, we strongly recommend that you involve your employment lawyer at the beginning of the process because it is important to protect the confidentiality of your audit and avoid creating evidence that would document potentially illegal current practices.

If we assume a knowledge of the substantive law, the next step in conducting an audit is to gather information on your operating environment and procedures. Typically, you will be guided in this process by a checklist (which might be in print, on software, or web-based). The checklist will ask you questions on your practices and policies in many areas. It might also ask for copies of your existing employment policies and forms, and your employee handbook. This part of the process may be tedious and time consuming, but it should not be difficult.

After you have provided the information requested in the checklist, it is time to analyze your employment practices and policies to determine whether your company is in compliance with applicable laws. At the same time, a good audit will provide guidance to help you avoid common mistakes that lead to employee claims. For example, does your handbook have an appropriate description of employees' rights under the Family and Medical Leave Act? Does your handbook include the one provision that can almost guarantee you will not be sued for sexual harassment? (Ask employees to acknowledge that they are aware of their rights and responsibilities in this area.) Are workers who are entitled to overtime pay properly classified as non-exempt? Does your employment application request information that is inappropriate? Does it have language that preserves the at will employment relationship? Do hiring personnel know the difference between legal and impermissible interview questions?

The net result of your HR audit should be some sort of scorecard, or a list of action items that need attention. What you do next is the key to whether the audit will be a success or a potential disaster.

The audit report should provide both a snapshot of your company's strengths and also a roadmap for how to correct its weaknesses. If you act to correct the deficiencies, the audit will have been a worthwhile project. However, if you find areas where your company is not complying with its legal obligations and do not correct those problems, the audit report may come back later as extremely damaging evidence in an employee's lawsuit. The simplest way to look at it is, don't start an audit unless you are willing to follow through and change what needs to be changed!

We suggest that you prioritize the action items. For example, we often find that employment handbooks need immediate changes, especially in the area of anti-discrimination policies. Also, we have yet to find an employer that does not have someone misclassified as an exempt worker. (OK, that might be a slight exaggeration!) After the emergency items are corrected, turn to the other areas that need improvement. Sometimes all that is needed is a new or rewritten policy statement. Other times, we might recommend management training (e.g., hiring and interview procedures). The key here is to make a list, assign the work, and stay with it until you have made all the necessary changes.

Let's Get Started!

First, assess your abilities and your available time to perform the Human Resources audit. Next, choose the appropriate audit tools that best suit you and your company. Should you perform the audit yourself using software or the Internet? Should you hire a service provider? Confer with your employment lawyer before you start.

The audit will take time and attention. Yes, it may be tedious. However, the benefits you will obtain for your company will be well worth the effort. In addition to the potential for lessening exposure to legal risks, there is a related benefit. Your employees will realize that the company values their contributions and is committed to improving the workplace for all