HR Audits Are Key to HR’s Organizational Alignment and Success
In the past year, COVID-19, increased regulations, and managing a remote workforce have all significantly contributed to the changing nature of human resources and intensified the pressure on the HR function. This new environment demands that HR is equipped, engaged, and invested in not only helping their organization meet its business objectives but mitigating risk as well. From the early days of the pandemic through the end of July 2020, current and former employees filed at least 436 workplace-related lawsuits linked to the pandemic. Other cases included wage and hour issues, wrongful termination charges, and equal pay—among many others.
In addition to ensuring HR processes, policies, and procedures are compliant, HR audits help an organization achieve and maintain a competitive workplace—to make sure that it is well-positioned to continue to attract, retain, and engage its employees. An HR audit is an objective examination of your business's HR policies, practices, and procedures. The goal is to look for trouble spots and/or identify ways you can improve.
Why HR Audits Are Important to a Company’s Success
Whether you hire an outside company to perform the audit, or you and your HR team perform the audit internally, HR audits are a vital means of avoiding legal and regulatory liability that may arise from an organization's HR policies and practices.
An HR audit involves identifying issues and finding solutions to problems before they become unmanageable. It is an opportunity to assess what an organization is doing right, as well as how things might be done differently, more efficiently or at a reduced cost. Here, we’ll cover the four primary types of HR audits and how often they should be conducted.
1. Compliance Audit: Most HR departments perform compliance audits to ensure legal compliance with reporting needs as well as compliance with all regulations. For example, many companies perform audits to ensure compliance with the Americans with Disabilities Act (ADA) or the Family and Medical Leave Act (FMLA) regulations. Any legal statute could be rationale to prompt an audit to ensure compliance.
According to SHRM, an HR compliance audit can help ensure that HR practices abide by frequently changing laws and regulations. The compliance audit generally has two parts: an evaluation of the organization’s HR policies, practices and processes, and a review of current HR data. Indicators of potential problems include internal grievances filed, pending legal complaints, and turnover and absenteeism rates. The most common items for a compliance audit follow the same pattern as the most common compliance violations, including:
- Issues related to hiring, performance management, employee discipline, or termination. Other high-risk areas include:
- Misclassification of exempt and nonexempt jobs.
- Inadequately maintained personnel files.
- Prohibited attendance policies.
- Inaccurate wage and hour or time records.
- Form I-9 errors.
- Outdated federal and state labor and employment law posters.
- Insufficient record retention.
Federal, state, and local employment laws are complex, counterintuitive, sometimes conflicting and frequently changing. As organizations are dealing with changes in COVID-related leave or vaccine policies, state paid leave policy changes, increased OHSA penalties, changes in FSLA standards, and “ban the box” legislation, this is the most important audit you and your team can conduct.
2. Best Practices Audit: In addition to identifying areas of legal risk, audits are often designed to provide a company with information about the competitiveness of its HR strategies by looking at the best practices of other employers in its industry.
This audit helps your organization maintain or improve a competitive advantage by comparing its practices with those of companies identified as having exceptional HR practices. The first step in a best-practices audit is to conduct an evaluation of current HR processes. Using a checklist that starts with a high-level evaluation of company policies and procedures is a common best-practices auditing tool. A best-practices audit includes an evaluation of all HR processes and procedures such as workforce planning, recruitment and selection, performance management, and health and safety.
3. Functional Audit: In a functional audit, a specific function such as payroll or benefits administration is assessed to confirm it is operating as intended. This type of audit is then applied across all functions, including hiring and recruiting, performance management, compensation, job descriptions, and complaint investigation. The functional audit evaluates the various functions of the HR department, how those functions are being conducted, and whether they are effective and efficient.
Specific function HR audits can include anything from general recordkeeping, recruiting and hiring practices, an audit of employee handbooks, performance appraisals, disciplinary policies and procedures, compensation policies, or vacation and leave-of-absence procedures.
4. Strategic Audit: This type of audit focuses on the strengths and weaknesses of systems and processes to determine whether they align with the HR department's and the organization's strategic plan. For example, given the chaotic talent marketplace, remote work, and the new hybrid work model, many companies now must reimagine how HR will develop talent, manage performance, deliver services, and increase employee engagement. HR professionals will need to be systematic in their thinking and move with speed and agility. Organizations will need HR teams to determine whether it has the right level of talent, capability, and influence to lead the charge to adapt to this new future of work.
The Cadence: Because of the time-intensive nature of HR audits, the most efficient method is to conduct a different audit each quarter, dividing up the work into focus areas that are in organization alignment. This also provides you and your team a regular and consistent guide point to share with company leaders and stakeholders important priorities by area with short term and long term goals and changes.
Finally, it is critical that your organization act on the information identified as a result of an audit. The organization must create action plans for implementing the changes suggested by the audit, with the findings separated by order of importance: high, medium, and low. Conducting an audit and then failing to act on the results can significantly increase legal risk, as SHRM explains in Internal Audit Used to Demonstrate FLSA Misclassifications (Novick v. Shipcom Wireless Inc., 5th Cir., No. 19-20056, Jan. 7, 2020).