HR audit involves devoting time and resources to take an intensely objective look at an organisation’s HR policies, practices, and procedures. Performing an HR audit can be extremely helpful for employers to avoid legal misconduct and the risk of being liable for what is deemed as ‘unfair employment practices’. In other words, legal issues and conflicts can be extremely costly and an HR audit makes sure that there is a proactive way to minimise the costs associated with such compliance issues.
There are three main types of HR audit:
- External audits are performed by external parties which can be extremely helpful in removing any bias when reviewing the state of a company’s welfare.
- Internal audits are performed by people employed by a company or organisation. The resulting audit of the internal team will be given directly to management and the board of directors.
- Internal Revenue Service (IRS) audits are performed by a government agency for the collection of taxes and the enforcement of tax laws. IRS audits routinely perform to verify taxpayer’s return and specific transactions of a company.
The cost of external audit
The cost of conducting an external audit can be extremely expensive. According to Audit Analytics, between 2010 to 2016, audit fees increased steadily, climbing to £7.16 billion in 2016 from £5.92 billion in 2010. In the year 2019-2018, more than the third quarter of companies surveyed saw fees increase by an average of 21.7 percent, while a handful of one-third companies saw their fees decrease by an average of 7.2 percent. This means hiring an external audit can cost a lot for small to medium businesses. Therefore, the best alternative is to conduct an internal audit.
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To do an internal audit, employers must have a professional auditor, meaning employers should spend the budget to hire one. Based on Payscale data, the average internal auditor salary is $58,631 annually, with the range between $44,000 to $79,000 annually. Internal auditor should have a public sector internal auditor (ASSA) or certified internal auditor (AS) certification. In addition, all internal auditors with a certificate are required to undergo regular training in a certain number of hours each year and keep up their professional knowledge. This means employers should also invest in training expenses to establish an internal auditor position.
HR audit checklist
Finally, HR and the auditor should make sure that the auditing process is a success. The following checklist can help ensure the success of your internal auditing. Please note that this checklist is provided for informational purposes only, hence, this should not be construed to constitute legal advice.
- Employment application and background check documentation
- Ensure that the application contains appropriate language to minimise exposure to negligent hiring and employment-at-will liability
- Review the application to confirm that it complies with applicable nondiscrimination laws.
- Confirm compliance with rules pertaining to criminal background inquiries, including ban-the-box laws, credit check laws, federal and state Fair Credit Reporting Act laws, and industry-specific regulatory background check rules.
- Review scripts, guidelines, lists, or forms for interviewing applicants to ensure that only permissible questions are asked.
- Ensure that managers are consistent in terms of the questions that they ask of applicants.
- Offer letters and employment contracts
- Review offer letters and employment contracts to guard against the creation of express or implied agreements.
- Make sure that existing employment contracts comply with federal and state laws.
- Determine whether restrictive covenant agreements should be provided along with offer letters and whether offers of employment should be contingent upon execution of such agreements.
- Employment handbook and policy manual
- Review or create, as appropriate, handbooks and manuals to ensure compliance with applicable federal, state, and local laws, including updates to such laws.
- Confirm that handbooks and manuals minimise exposure regarding employment-at-will and other federal and state laws governing the workplace.
- Ensure that updates reflect technological advances in the workplace.
- Consider whether separate handbooks or local practices sections are desired or appropriate.
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- Corporate compliance and Codes of Conduct
- Within the scope of corporate compliance, review codes of conduct, including conflict-of-interest policies.
- Ensure codes comply with applicable federal, state and local law, regulations and best practices.
- Ensure that your organisation complies with all federal, state, and local laws pertaining to the posting of workplace notices and forms to be provided to employees at time of hire or at other times throughout employment (e.g., wage theft, sick leave, and pregnancy accommodation).
- Make sure that job descriptions exist, as they are key to demonstrating essential job functions.
- Ensure that job descriptions accurately explain job functions and distinguish essential from nonessential functions.
- Confirm that job descriptions accurately reflect the day-to-day functions of the applicable job.
- Employee benefit documents
- Review employee benefit documents to ensure compliance with the federal and state laws, including new requirements under health care reform.
- Ensure that Forms I-9 are filled out for every person hired, and kept for three years or one year following termination of employment, whichever is longer.
- Prepare and retain public access files, audit files, and other immigration documents for appropriate time periods.
- Review classification of employees as exempt or non-exempt to ensure compliance with wage and hour laws and payment of overtime.
- Confirm that no employees are misclassified as contractors.
- Ensure compliance with federal, state, and local laws pertaining to wage payment, including timing of paychecks (including pay on termination).
- Review personnel files to ensure that they are appropriately maintained (e.g., where the law requires information to be kept separately, such as medical records, make sure that your organization does so).
- Ensure that there are sound procedures to control access to personnel files and protect confidentiality.
- Confirm that your organization complies with any applicable personnel file laws
- Recordkeeping requirements
- Review recordkeeping requirements with respect to employment and employee benefits matter to ensure compliance with federal and state laws.
- Government contractor requirements
- Determine whether affirmative action plans, pay transparency, voluntary self-disclosure, or other policies/procedures are required.
- If affirmative action plans are required, ensure that they are “narrowly tailored” to meet their objective.
- Waiver and release agreements
- Review waiver and release agreements to ensure compliance with applicable federal, state, and local laws, and that the organization’s interests are protected to the maximum extent possible.
- Performance review and disciplinary forms
- Review these forms to protect the organization’s interests, avoid the creation of implied contracts, and ensure that the organization’s right to discipline or terminate employees is not restricted.
- Manager and staff training
- Ensure all employees are trained regarding their rights and responsibilities under applicable equal employment opportunity laws, policies, and the organization’s complaint procedure.
- Train managers with respect to harassment and general liability avoidance (note that certain jurisdictions require harassment avoidance training for managers).
- Employment-related matters
- Review pre-employment tests to ensure they do not run afoul of rules pertaining to validation, drug testing laws, or limitations on medical tests.
- Ensure whistleblower’s compliance with applicable regulatory and licensing requirements.
- Make sure that your organization maintains an appropriate internal complaint mechanism.
- Ensure that, where appropriate, agreements and/or policies are in place to protect the organization against solicitation by former employees of clients and employees.
- Confirm that non-competition agreements are narrowly tailored to protect the organization’s interests.
- Consider including references to applicable laws pertaining to trade secrets in order to gain certain additional protections.
- Protection of Intellectual Property (“IP”)
- Confirm, if desired, that the organization will own employees’ and other workers’ IP created during employment or any other relationship.
- Update agreements to keep up with changes in technology and state and local IP laws.
- Review agreements to ensure compliance with state law.
- Confirm that terms are well-defined and that agreements clarify whether commissions are due post-termination, and if so, determine whether procedures for post-termination payments are clear.
- Determine whether written agreements are required (if not required, written agreements are recommended in any event).
- Salary, bonus, and compensation
- Review salary, bonus, compensation, and performance information, including pay range for different grades, frequency, and timing of salary reviews, correlation of increases to performance, and performance evaluation procedures.
- Ensure compensation practices are explained clearly.
- Review incentive compensation and equity compensation to ensure compliance with state tax, wage withholding, and securities laws.
- Ensure commissions and compensation methodologies do not inadvertently promote noncompliant business behaviour.
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