What is an HR Compliance Audit?

A compliance audit is a thorough review of a company’s HR policies and procedures to ensure they meet current employment law and regulation requirements. The audit covers all aspects of HR, including hiring practices and terminations, to identify any potential compliance issues.

Key Focus Areas

A compliance audit should review policies based on federal, state, local, and industry-specific regulations. Key focus areas for this audit include:

• FLSA compliance
• Work eligibility
• Compensation
• Hiring and termination
• Workplace safety
• Benefits
• Leave policies
• Recordkeeping
• Annual reporting

While not an exhaustive list, these areas represent the most challenging areas for companies. These audits should be conducted at least annually to ensure ongoing compliance.

Preparing for the Audit

Conducting an HR compliance audit requires careful preparation. Before beginning the audit, take time to assign responsibilities, gather the necessary documentation, and identify any high-risk areas. Getting everything in order ahead of time helps ensure the accuracy and efficiency of the audit.

Assigning Responsibility

An accurate audit requires having a designated person or team to oversee the process. This person or team should have a strong understanding of HR laws and regulations as well as company policies to help identify compliance risks.

Gathering Necessary Documentation

Before beginning the audit, make sure to gather all relevant documentation, including:

• Employee files
• Performance appraisals
• Disciplinary reports
• Employee handbooks and company policies
• Training records
• Job descriptions
• Recruitment and termination records
• Any relevant legal documents

Make sure the audit team also is aware of and has access to relevant employment regulations.

Identifying High-Risk Compliance Areas

A review of HR policies and implementation should highlight any potential high-risk areas. Differentiate these risks based on policy concerns and issues based on inconsistent enforcement to determine the best solutions for these risks.

Elements of an Effective Compliance Audit

A thorough HR compliance audit includes some key areas of employment law and company policies to ensure all compliance requirements are met. Each part of the audit plays a crucial role in reducing risk.

Employment Policies & Procedures

A company’s employment policies and procedures set the compliance foundation.

Review handbooks and company policies to ensure they meet current labor laws and company standards. Include a review of important labor law regulations, including:

• FLSA
• FMLA
• OSHA

Verify that policies regarding wages, leave, and safety meet federal and state requirements. Review anti-discrimination and harassment policies to ensure they protect employees and reduce legal risks.

Employee Classification & Compensation

Misclassifying employees is one of the most common compliance issues, and this misclassification can lead to significant penalties. During the audit, assess exempt vs. non-exempt classifications to ensure employees are categorized correctly.

Review federal, state, and local wage laws to verify employee pay meets minimum wage requirements. This includes a review of overtime pay and payroll record accuracy.

Another important factor to consider is the differentiation between contractor and employee classifications. Make sure all classifications are accurately laid out and all requirements for these classifications are met.

Recruitment, Hiring, & Termination

There are HR compliance requirements throughout the employee lifecycle from fair hiring practices to legal requirements for terminations.

Examine recruitment and hiring practices to ensure they comply with regulations, including:

• EEOC
• ADA
• Title VII

Confirm that the company job postings, interview questions, and hiring decisions comply with all relevant anti-discrimination laws.

Examine hiring and termination documentation to ensure processes are consistent with legal requirements. This includes reviewing I-9 documentation to verify that you have proper employee work authorization.

Workplace Safety & Health

A safe work environment protects employees and helps avoid penalties. A workplace safety review should ensure all workplace safety procedures and programs comply with OSHA regulations. This includes a review of training records and ongoing adherence to safety measures.

Benefits & Leave Compliance

Numerous regulations exist around employee benefits and leave policies. Benefits compliance includes:

• ACA
• COBRA
• ERISA

These are all federal regulations, though some state regulations can apply, so make sure the audit team is aware of state-specific benefit laws.

Review all paid and unpaid leave policies to ensure they comply with relevant federal and state regulations, such as FMLA. Make sure these policies are correctly documented and applied.

Confirm that you have proper documentation regarding benefits and leave options and that these policies are clearly communicated to avoid misunderstanding and disputes.

Recordkeeping & Documentation

Accurate recordkeeping is essential to avoid costly legal issues. The compliance audit should verify that all required documentation is retained according to regulatory requirements. This includes:

• I-9 forms
• Payroll records
• Disciplinary actions
•  

Follow guidelines for digital and physical storage of sensitive documents to keep personal information secure and organized.

Review all confidentiality and data security requirements such as HIPAA, GDPR, and CCPA to keep sensitive employee information safe in compliance with privacy laws.

Conducting the Compliance Audit

Preparation and a well-structured approach ensure a successful HR compliance audit. Use a comprehensive HR compliance checklist to help develop a structure for examining HR policies, procedures, and documentation. Use this checklist to help identify gaps.

Interview key personnel such as supervisors to get a clear understanding of how the policies are implemented. Review relevant documentation to ensure everything is accurate and consistent. Make note of any discrepancies to help enhance policies moving forward.

Addressing Compliance Gaps

Once any gaps have been documented, work with your review team to determine needed corrective measures for these issues. Update policies and procedures to reflect these measures and address current regulations that affect your company.

Determine any training needs to ensure employees understand the proper implementation of the policies in place. Continue to monitor compliance changes and review company policies to ensure they remain compliant.

Remain Proactive with HR Compliance

Remaining proactive with HR compliance requirements is a crucial aspect of avoiding legal risks and ensuring operations run smoothly. Conducting regular HR compliance audits, updating policies to reflect current requirements, and developing a compliance-oriented culture helps your business maintain legal integrity.

If you are unsure where to start with a compliance audit, HR Service, Inc. can help. Our expert HR team is available to assist with navigating HR compliance challenges, providing solutions to keep businesses compliant and operating efficiently. Access our HR Audit tool to get started reviewing and updating your policies.

Written By: Penny Clark