How to Conduct a Successful HR Compliance Audit

By Kierra Benson - Last Updated on July 3, 2020
HR Compliance Audit

To ensure that a company is accurately following federal statutes plus has established business practices and procedures to instill that employees understand and follow them, the human resource sector must perform a compliance audit.

What is an HR Compliance Audit?

When performing an HR Compliance Audit, the human resources sector performs a run-through and analysis of a company’s operations to assess if it is in alignment or compliance with government rules and regulations while simultaneously meeting the needs of the employees.

A great example of an HR Compliance Audit is an overview of a company’s benefits, procedures, policies, safety, and labor packages such as:

  • Workers’ Benefits, Compensation, Relations, & Safety
  • FLSA (Fair Labor Standards Act)
  • Company Handbook & HR Guidelines
  • HR Compliance
  • Employee Attendance (Tardiness & Absences)
  • Wage Distribution
  • Interviewing, Hiring, Firing, & Training Practices & Policies

The actual HR Compliance Audit process consists of conducting interviews with key members of a company’s workforce to learn about its culture and practices, ask about company documents, assess forms, files, and other paperwork that are written within company protocol packages, and create a report analyzing HR operations then pinpoint weaknesses that are not in compliance with federal statutes nor meets the needs of the employees to provide solutions for a better work environment.

The final audit reports would often have the following at the end of the study:

  • Executive Overview
  • Audit Findings and Suggestions
  • Future Action Plans

(Also Read: HR Compliance | Ultimate Guide for Beginners)

Why Do We Need a HR Compliance Audit?

At first glance, the HR Compliance Audit process seems like a lot of information to breakdown. So, why is it needed? One reason many businesses go through with having an HR Compliance Audit is to avoid employee complaints, lawsuits, violations, and government sanctions.

If there so happens to be a series of unmet standards within a company’s benefit, procedures, policies, safety, and/or labor packages, then that could lead to employees filing lawsuits and complaints for not being a part of a healthy work environment. This could then lead to a business possibly being punished by government authorities for not abiding by set rules and regulations.

The HR Compliance Audit process also gives an opportunity for a business to look inward and recognize whether its protocols have a positive, negative, or neutral impact on the direction that a company wants to go or is headed. Audits also helps visualize and quantify the impact of company policy to observe possible gaps or weak spots and make way for solutions to fix the problem.

(Also Read: HR and Employment Law Compliance Guide)

Importance of HR Compliance Audits in 2020

Going through the process of conducting an HR Compliance Audit is essential for a business that wants to keep up to date with constantly changing federal rules and regulations. A practice that was acceptable for a business to do 10 years ago can become completely obsolete due to the continued rise of the digital landscape, increased diversity, and the changing of social mores (either gradually over time or suddenly due to a major cataclysmic event i.e. the Covid-19 virus).

HR Compliance Audit Checklist

Whether a small business is trying to acquire their first employee or a legacy business want to ensure that they prevent receiving complaints from their employees, an HR Compliance Audit Checklist assists in tracking whether a business has met or is meeting government standards in how they run their operations.

  1. Posters

    The visual infographics that are often placed upon the walls of a place of business, usually in the breakroom, that displays important information about workplace policies, safety procedures, employee health, etc. Enforced by the Department of Labor.

  1. Personnel Files

    Background documents about employees that contains personal information (address, phone number, tax documents, emergency contacts, etc.) that are kept in a secured placed. Enforced by various agencies.

  1. Practices

    Mandatory policies (dress code, sexual harassment, bullying, cell phone & internet use in the workplace, etc.)  that are written, placed in the employee handbook, and are required learning by employees when first hired and on a yearly basis. Enforced by various agencies.

  1. HR Compliance

    Authenticate the various procedures and documents of the business with the government to catch weak spots and find solutions.

  1. Recruiting & Hiring

    The process of creating job openings & applications, conducting interviews, and finally choosing the most qualified employee.

    The process is recorded to ensure that it is non-discriminatory (based on race, gender, disability, etc.), to clarify reasons for why some candidates were denied the position, and to ensure that the process is completed in a timely manner. Enforced by EEOC (Equal Employment Opportunity Commission), ADA (Americans with Disabilities Act), and other agencies.

  1. Distribution of Pay, Employee Benefits, & Promotions

    Go over the overall company budget to ensure no overspending, that the money acquired through customer services can be distributed to its workers through income for hours worked, and to create an income distribution schedule for the entire year.

    Receive federal healthcare benefits for employees by accurately reporting the number of workers that they have on the payroll to ensure that every full-time employee can have full coverage.

    Adjust summary plan descriptions to show any changes and distribute them to new participants. Ensure elections are correctly added with plan carriers. Find out about any elections needing evidence of inscrutability.

(Download Whitepaper: 5 Tips for Payroll Compliance)

  1. Employee Complaints

    A business must have a platform where its employees can express their grievances about indiscretions happening within the workplace without the possibility of backlash or sabotage.

  1. Health & Safety Practices

    Ensure that OSHA (Occupational Safety & Health Act) requirements are being met, find possible safety issues within the workplace, and handle them with government approved methods, especially if a company handles hazardous chemical materials. Include in-person tours for inspectors of workplace facilities to show transparency to workers & customers and to show that safety is a top priority.

  1. Review HR Policies & Operations

    Re-evaluate employee roles in ensure compliance under the Fair Labor and Standards Act for accurate hourly pay rates, go over company policy packages to ensure compliance with state and national government worker laws, and make sure programs (rehab services & voluntary benefit programs) that are offered by the company also comply with federal statutes.

What practices and policies should be audited?

A business’ HR compliance audit procedures will depend on an organization’s needs. But some overall things to consider about are how a business handles roles and responsibilities, what rules and regulations might a business have to adhere to, and whether a business has an efficient record tracking system in place.

Some questions to ask:

  • Is there knowledge about undocumented or outdated policies or practices?
  • Is your employee handbook detailed and current?
  • Has Every single HR policy and procedure been disclosed to management and employees?
  • How is recruitment of in-house and external candidates practiced?
  • Are hiring procedures created and hiring managers taught to be non-discriminatory?
  • Is your income distribution system tracked by management?
  • Are jobs labeled correctly as exempt vs. non-exempt(1)?
  • Are employee benefits in compliance with government laws?
  • Are expected employee behaviors communicated in company handbook?
  • Are employees treated unbiased on a consistent basis in terms of income, punishment, promotion, etc.?
  • Are policies regarding discrimination and harassment clearly communicated?

Who is an HR Compliance Audit Right For?

  • Startups
  • Small businesses (< 15 workers)
  • Expanding business (up to 50 workers)
  • Large businesses (> 50 workers)

HR Compliance Costs

Here are some of the range of costs when conducting an HR compliance audit:

  1. Insurance Company

    Some insurance companies will give tools to assist you in auditing your HR practices. They do this to lessen the chance of risk from potential EEO claims to OSHA violations. Contact an insurance agent to see if this service is offered. It may potentially be free of charge.

  1. Self-Audit

    Depending on how large or small your organization is, this is usually a lower cost option. You may be able to complete the HR compliance audit within a short amount of time; bringing attention to issues as you go along.

  1. Hiring an HR Consultant

    Hiring a consultant will cost a either a fixed one-time price or be on the hour, depending on rates provided. In either case, you will likely get an objective view of any issues in your HR compliance. The price depends on both the length of your audit report and how large your business is.

  1. Hiring an Auditing Firm or Attorney

    Hiring an attorney, based on their hourly rates, may be a pricey option. However, it has the benefit of attorney/client expertise. If they see a major gaffe, such as files not being private, you can address and solve the issue without the results of the audit being in danger of being discovered (through a lawsuit).

  1. Resting on your Laurels

    This is going to be your most pricey option.

HR Compliant Audit Providers

With SaaS (Software-as-a-service) platforms used for time-tracking employees and storing personal employee information, there is bound to be platforms that also provide HR Compliance features.

  • HR Software

    A tool that uses data stored in the cloud to allow your business to monitor employees by role description and location. This helps to identify relevant employment laws that affect your employees. It can alert you about problems, such as an unaccounted for I-9 work authorization form, or an employee who lives in an area that requires local employment taxes to be taken out of a paycheck.

    It also takes care of employee documentation digitally, including employee rules and company handbooks, review documents, job openings, and disciplinary forms. Some include recruitment tools such as legally compliant application forms and interview checklists to stop HR in-compliance.

    For a cost-saving HR software option, opt for Zoho People(2). Zoho People is free of charge if a business has five or fewer employees. After that, it only costs $1/month per employee and allows for add on services like recruiting as your business expands.

  • Income Distribution Software or Services

    A lot of small business owners do not know that their payroll provider has HR compliance services. However, most payroll providers have HR compliance set up into their employee payroll database. For example, they will be able to inform you about specific labor law posters that are required and may provide them for you.

    Providers will also make sure that employee information, such as state and federal tax documents are stored. They will also process payroll in compliance with state government overtime regulations. Most also offer employee compensation insurance and time tracking services for different kinds of leave, such as medical, maternity, or sick leave.

    For a cost-saving payroll provider that is catered to small businesses, opt for Gusto(3). Gusto provides HR labor law compliance for low price of $6/month per employee plus a $39 monthly service fee. They also provide insurance and can offer health benefits and 401(k) savings plans for employees.

  • PEO

    A lot of small businesses with a tight budget choose to work with a PEO(4) (Professional Employer Organization). As a co-business, a PEO works with you to ensure HR compliance. That lessens their work risk and assists the business in providing professional HR services on par with larger businesses.

    PEO typically provides consulting and legal advice as part of their services. And in some instances, working with a PEO can lower your worker’s compensation costs by gathering your workers with other business’ employees.

  • Full-Time HR Staff

    Employing a full-time HR manager is another way to receive HR compliance. However, most small businesses run on a tight budget and might not can afford a second set of staff to work for them at that capacity. Based on findings researched by Indeed(5), a full-time HR manager can range in the costs of about $55,000 annually. Therefore, many businesses hold back until they have 50 to 100+ workers before bringing on a full-time HR manager on board.

Pros & Cons of Conducting an HR Compliance Audit

Bringing insight in your business by using an HR Compliance Audit can be enlightening. But, like with everything else there is always a flip side to the coin.

Pros of an HR Compliance Audit

  • Lessens Mistakes and Fines– Helps you to discover and come up with a solution for issue before they are publicly exposed by sanctions, lawsuits, or fines.
  • Better Legal Results– Increase your chance of victory in the courtroom if you are put on
    the legal spot by a disgruntled former employee.
  • More Satisfied Employees– Safer work environments leads to happier employees.

Cons of HR Compliance Audit

  • Self-Auditing – Lack of objectivity
  • Documentation of HR Problems – Possibility of complaints and lawsuits of reported problems are not fixed immediately upon discovery
  • Hiring an Attorney – Lawyers are expensive and can put a bit of a dent on your budget

Alternatives to HR Compliance Audit

Without employees, there is no need to conform to HR Compliance standards. This could be a viable option if a business works with a temporary staffing agency, a free-lance contract employee, outsource your staffing.

  • Temp Agency

    Instead of going through the recruiting and hiring process, temp and staffing agencies provide workers for your company. Since the workers are hired by the agency, your business pays a fee for use of the worker. It typically costs 30 percent to 50 percent more than if you paid the worker an hourly wage or a salary. But you do not have to deal with the complex HR compliance audits.

  • Free-Lance/Contract Workers

    Free-lance/contract workers are often self-employed, independent contractors or gig workers. These employees are compensated via 1099, not W-2(5). However, the Department of Labor provides very specific rules on what king of work falls under the label of employee vs. free-lancer/contractor. While hiring a gig worker will not take away your HR compliance problem, your HR workload, like processing payroll taxes to providing healthcare/insurance benefits, is greatly diminished.

(Also Read: Top 30 HR Compliance Software in 2020)

Frequently Asked Questions about HR Compliance Audit

Q. What is the risk of a do-it-yourself HR compliance audit?

A. HR compliance audits serves as a way to look inward into possible flaws and issues in the way a business operates. If one does not bring in outside eyes to look at how a business actually operates instead of how it is perceived to operate, it can lead to a lack of objectivity.

Q. What do fines cost if our HR audit misses something important?

A. The price of overlooking problems within a business’ policy can lead to costing more than using a top-notch HR auditing service. Employee lawsuits and government sanctions can not only be extremely costly, but it can also ruin your business’ reputation as well.

Final Thoughts

Overall, the benefits of performing an HR compliance audits absolutely outweigh the costs of what could possibly happen if one is not performed. Even if an HR audit service is not financially feasible at the moment, try using a PEO before considering using self-auditing. As the saying goes pay now or pay even more later.

Kierra Benson

Kierra Benson | Kierra Benson is an alumnus of the University of North Texas at Dallas with a Bachelor's degree in Communication and Technology. She previously completed an internship at a local newspaper and worked as a content creator for a small online business. Her goal is to work in the media industry in writing/editing and advertising. She has always been fascinated by how messages are marketed in the media to influence the masses and sell produ...

Kierra Benson

Kierra Benson | Kierra Benson is an alumnus of the University of North Texas at Dallas with a Bachelor's degree in Communication and Technology. She previously com...


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