Legal Clinic the HR Department

Question:  The CEO of my company has asked that I perform an audit of our HR department. I haven't done one before. Can you explain the process and provide some ideas of what specifically to look for. Also, are there any drawbacks we might face to doing an audit?

Monday, March 11, 2013
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Answer: An audit is a systematic, objective tool for how well the workplace is complying with regulatory and policy requirements. A well-run audit has various long reaching benefits. It can help an employer avoid exposure to legal liability by ensuring the company's HR practices and policies comply with the dizzying array of employment and labor laws. A well-run audit can also serve as an educational tool by increasing employee awareness of the human resource's function's commitment to compliance. It can also identify ways to improve the efficiency and cost effectiveness of the HR department.

Audits can be performed in-house or through the use of an external third-party auditor. External audits may provide a fresh perspective that a self-audit may not necessarily be able to capture. However, regardless whoever performs it (internal HR or outside third-party), the auditor must be aware that employment law is governed by federal, state, and often city law and that the laws can vary greatly from state to state and city to city -- what is legal in one might expose the employer to liability in another. In addition, an audit must examine the employer's own policies to determine if the employer's practices are in accordance with those policies.

Because each employer's needs may be different, there really is no one exact "how-to" formula for performing an HR audit that meets every employer's needs. What is better is to identify the various areas that typically fall under the purview of an HR audit and to highlight some of the key issues what an auditor should look at, and for, when performing a comprehensive HR audit.

The main goals of an HR audit are to: (1) determine whether company's employment-related materials and practices are complying with the law and the employer's own policies; and (2) identify and bring into compliance, any area that may not be in compliance. An audit should identify what the employer is doing right or wrong, as well as gray areas that could use improvement. Practically, this means that the auditor should typically review the company's  

*     Printed materials, such as employment applications and any company handbooks or manuals;

*     Practices, such as those involved in recruitment, hiring, promotion, and firing;

*     Policies, such as sick and vacation leave policies; and

*     Procedures, such as those governing performance reviews and discipline.

Auditors should also identify any of the company's unwritten practices to determine whether or not they should be finalized and/or changed.

The auditor should carefully read the materials, conduct interviews with HR and other relevant personnel, and observe first-hand the workings of the HR department.

Before beginning an audit, it is important to define its scope as your company may only want to examine particular areas and not others. Areas that commonly fall within the scope of an HR audit include, but are not limited to, the following:  recruiting and hiring practices/procedures, handbooks, termination/separation, performance appraisals, disciplinary protocol, compensation/pay, leaves of absence and record keeping.

Once you define the scope of the audit, the next step is to identify all the federal, state, and local laws that apply to the areas being audited. Identifying all the laws that apply can be a very long and complicated. Therefore, the assistance legal counsel can be very helpful at this step.

Common Areas for Auditing

When reviewing the employer's recruitment and hiring practices/procedures, an auditor should determine whether recruitment measures are consistent with equal opportunity obligations. The auditor should review job advertisements, employment applications, and interview questions, as well as offer letters and orientation materials, to ensure they comply with applicable law. If the employer uses pre-employment medical examinations and/or drug tests, the auditor should review both how the testing is conducted and how the results are used. Any other pre-employment tests should be validated. Use of background checks -- such as credit reports or criminal convictions -- in employment decisions has recently been the focus of much debate and emerging legislation. An auditor should be particularly vigilant in reviewing whether the employer's use of these devices complies not only with the federal Fair Credit Reporting Act, but any additional state or municipal laws.

An auditor should also read any employee handbooks, supervisory materials, or personnel policy manuals. Handbooks and manuals should be checked to see if they contain appropriate policy statements, such as the employer's equal employment opportunity and anti-harassment policies. These materials should also contain effective disclaimers that avoid unintended contractual obligations, ensures at-will employment status, and preserves the employer's right to implement changes. There are many federal, city and state posting requirements -- an auditor should check the handbook for these required postings. An auditor should ensure that manuals comply with federal laws such as: (1) the Drug-Free Workplace Act; (2) federal and state wage and hour laws; and (3) the federal Family and Medical Leave Act ("FMLA"). A review of the manual should ensure that it is consistent with state and city law governing subjects such as employee access to personnel files, jury and witness duty, meal and rest periods, and smoking. And the auditor should make sure that the handbook has a section for employee acknowledgement -- and that HR has procedures to ensure that employees actually sign it.

The audit should review the employer's performance appraisal system. Obviously, the first question will be whether the employer has such a system at all. Then, the auditor should investigate the system itself to determine for what purposes the appraisals are used, if managers are well-trained in proper use of the system, and whether appraisals are carried out in a timely manner. A sample of evaluations should be surveyed for any "smoking guns" that reveal particular or general problems.

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If the employer has a disciplinary protocol, its policies and guidelines should be reviewed. Things to look for include:  (1) the format for warnings; (2) whether there is centralized or independent review of discipline and termination decisions; and (3) whether there is a meaningful internal complaint procedure available to disciplined employees.

Wage-and-hour laws have become a hotbed for litigation. The auditor should check whether the employer's practices comply with the Fair Labor Standards Acts and any applicable state laws. For example, an auditor should make sure that employees categorized as "exempt" from the FLSA meet the statute's salary and classification requirements. For non-exempt employees, the audit should make sure the employer complies with state and federal over-time and minimum wage laws.

An auditor should also review the employer's executive-compensation scheme. Things to watch for include ensuring that option holders receive all legally required information and that IRS regulations are satisfied.

The employer's sick leave, vacation and time-off policies should be reviewed to ensure compliance with any applicable state law and with the company's own policies. Examples of things to look out for include compliance with the Family Medical Leave Act, unpaid leave as accommodation under the American's with Disabilities Act, and laws governing time off for jury duty, voting time, religious purposes, and military leave.

Many laws govern an employer's record-keeping policies and practices. Federal and state laws require an employer to maintain and preserve certain records. Additionally, many states have laws governing an employee's right to access her personnel file. The auditor should ensure that the employer's policies comply with these laws.

Potential Drawbacks to Audits

Generally, there are very few if any drawbacks when an HR audit is properly conducted. There are, however some considerations employers should keep in mind when deciding to conduct an audit. First, any material produced during the audit could potentially be used in litigation against the company. This risk can possibly be reduced by using an attorney to conduct the review. But caveat emptor -- simply using an attorney does not guarantee the confidentiality of the audit documents.

Invoking the protection of doctrines, such as attorney-client privilege or attorney work-product, requires fulfilling many conditions. An employer interested in maintaining the confidentiality of the audit should consult with legal counsel. Additionally, if noncompliance is discovered during an audit, it is very important that the employer implement appropriate corrective action in a timely fashion.

Failure to correct problems identified during an audit can lead to many more problems because if problems are identified through the audit and nothing is done to correct them, the employer's non-action can lead to lawsuits and also be used against the employer in future enforcement proceedings.

Keisha-Ann G. Gray is senior counsel in the labor and employment law department of Proskauer in New York and co-chair of the department's employment litigation and arbitration practice group. Proskauer Associate Aaron Feuer assisted with this article.

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