One critical, yet often overlooked, function of human resources (HR) is regular audits. Depending upon the type of business, audits can be anywhere from important to critically essential. At a minimum, audits are important to every business; for businesses working with the US government, those audits can be critically essential and can be the difference between winning or losing government contracts. Additionally, audits can help ward off fines and violations, such as non-compliance with labor posting requirements, failure to secure I9 information on new hires and failure to comply with the Fair Labor Standards Act (FLSA). Audits are also an excellent way to identify where gaps occur so that processes for improvement can be implemented. Following are key areas for HR audits, which are recommended on an annual basis.
Company policies and procedures – Typically, company policies and procedures are documented by way of an employee handbook. Throughout the year, policies may change, so completing an in-depth annual review of the handbook is important to catch changes to policies and procedures such as time reporting, disciplinary procedures, lunch breaks, holiday schedules, etc. When employee handbooks are not maintained, it can leave areas of vulnerability where policy and practice are inconsistent.
Hiring practices – There is much documentation that is maintained as part of the recruiting process. Ensuring that the proper documentation is in place throughout the process will ensure that when the information is needed, in the case of an external audit or for reporting purposes (such as EEO), everything is at hand. Important documentation that should be audited includes:
- I9 forms – These are required for every new hire. I9 forms must be completed and signed by both the employee and reviewing party and placed in an employee’s file. It is recommended that all new hire files be audited for I9 forms at least every six months to ensure compliance.
- Applications, notes from interviews, EEO data – Employment applications as well as notes from interviews should be kept for each position that has been recruited. In the event of an external audit by the government, the organization will be asked to procedure EEO data showing the number of people who applied for each position, name of candidate and all available EEO data on the candidate. External audits occur to ensure that there are no discriminatory hiring practices in place. Companies should be able to show for each job who applied for the job, the date they applied, the source of the hire, disposition of candidate, name, race, sex, military status (where these things are available). External audits will also look to review employment files to ensure that applications are documented. Depending on the level of recruiting, it is recommended that files be audited quarterly or every six months at the most.
Note that many companies use Applicant Tracking Systems (ATS) which maintain much of the front-end information on applicants. In these cases, running reports every six months to ensure that all data is being captures is sufficient.
Employment, benefit and medical files – These are more important for internal tracking purposes and ensures that every employee has appropriate documentation relative to benefit enrollment, beneficiary designations, 401K sign-up, etc. It is recommended that all files be inspected at least once a year to ensure that the proper information is in the proper file. It is advisable that medical information be kept in a file separate from the employment file, at least in the case where private health-related information is maintained, such as in disability claims, sick leaves, return to work slips, etc.
- Standard employment file contents:
- Application, resume
- I9
- Job title, job number, FLSA classification, manager designation, department name and number, etc.
- Standard company-required hiring forms such as confidentiality agreements.
- Performance evaluations
- Documentation of pay increases/decreases with dates and reasons
- Emergency contact information
- Termination paperwork
- Hire and termination checklists
- Disciplinary letters and employee rebuttals
- Standard benefit file contents:
- Benefit enrollment forms
- Beneficiary designations and change forms
- 401K forms
- Medical files:
- Documentation relative to employee sicknesses, return to work slips, disability information from doctors, etc.
Compensation – It is common practice today for companies to maintain compensation related information in an HRIS system which are linked to payroll systems. In this case, annual data audits are sufficient. Compensation files include the following information:
- Dates and reasons for all pay increases/decreases
- Proper classification of employees by exempt and non-exempt to ensure proper pay for overtime
- Pay deduction information
- Details on bonuses, incentives and other pay categories
- Time reporting details that support proper pay
Compliance – There are several standard audits that should take place annually as part of federal and state compliance. Thing to audit include:
- Ensure that all federal, state and local labor compliance posters are displayed in prominent, easily accessible locations to all employees.
- Ensure that proper safety and related training records are up-to-date date for every employee.
- Ensure that annual Affirmative Action Plans are complete (government contractors with at least 50 employees), documented and made available to employees.
While the audit process might appear daunting, it is simply checking the things that are done every day as part of the HR responsibilities. New employees, or simply familiarity with processes, occasionally result in lapses of proper documentation and policies, so having an audit checklist and completing routine audits ensures that HR policies and practices stay on target.
