Conducting an effective human resource audit

By Candace Walters

Published in the Rochester Business Journal, October 3, 2003 © HR Works, Inc.

As a business owner or executive, you're working hard to build a successful organization. You have had no serious problems in the employment area until today, when a notice arrived from the Department of Labor (DOL) saying that you're being investigated. What prompted this notice? A disgruntled employee who claimed you cheated him or her out of wages? You may never know.

What should you expect if your company must submit to a DOL investigation? The CFO of a local business recently spent more than 60 hours preparing for and meeting with the DOL investigator. She had to provide time records from the past three years, the employee handbook, organizational charts, employee names, social security numbers, hire dates and job descriptions. As part of the process, the investigator also conducted private interviews with several employees. In the end, the DOL ordered her company to make significant payment for back wages. The firm also incurred its own legal fees.

How can an organization avoid the time, expense and embarrassment of a DOL investigation? The best solution: Conduct an audit of your own HR Department and make sure your pay practices and other policies comply with ever changing state and federal regulations.

What is an HR audit?

Used optimally, a human resource audit helps senior management to:

• Ensure compliance with wage-and-hour laws and the myriad of other employment and benefits-related statutes.
• Examine the effectiveness and costs of HR policies and practices and their role in the organization's strategic planning.
• Benchmark actual against desired performance and develop an action plan for addressing shortfalls.
• Save money by identifying and correcting inefficiencies and compliance problems.

Progressive organizations will embrace a well-executed HR audit as an important tool for creating, updating and executing HR strategies and best practices that will provide long-term support to the organization's big picture.

The HR audit process

Auditing a human resource department is a systematic process that involves at least two steps:

1. Gathering information to determine compliance, effectiveness, costs and efficiencies.
2. Evaluating the information and preparing a written report, with an action plan based on exposures, priorities and a timeline for instituting changes. In order to reduce exposure to legal liability, some changes will need to be implemented immediately, while others can be completed in three to six months.

Like a financial audit, an HR audit must be comprehensive in order to be effective. The audit review includes but is not limited to:

• Department infrastructure
• Compliance with state and federal employment laws
• Recruitment and selection processes
• Employment-related tests
• Employee relations
• Performance-evaluation processes
• Documentation, including employee handbooks
• Job descriptions
• Personnel records and files
• Benefits administration practices
• Benefit costs
• Exempt and non-exempt classifications
• Time-keeping and pay practices
• Recordkeeping and posting requirements
• Policies governing independent contractors
• Training and Development
• Technology
• Safety and security
• Labor relations

Immediate benefits of an HR audit

As with accounting audits, the findings and recommendations from HR audits are only as good as the information provided. If you are not entirely honest and objective, no purpose is served.

However, if staying on the right side of the law and reducing legal exposure are not enough incentive to launch your organization on the audit path today, consider the other benefits. Very typically, small to medium-size companies realize almost instant cost savings once an audit is complete and changes are implemented. For example:

• Correcting benefit premium errors and overpayments can generate many thousands of dollars in savings.
• Initiating a safety program can reduce workers compensation experience modification numbers, reducing annual premium costs by tens of thousands of dollars.
• Shopping benefit costs among alternative carriers and modifying employer/employee co-pay ratios can recoup dramatic savings.
• Examining the effectiveness of recruiting tools can pare the expense of filling positions.

A small or medium-size firm also may benefit from using an HR audit to:

• Study retention and turnover, employing a neutral party to solicit honest feedback from employees, and allowing the company to develop an action plan.
• Examine the company's foundation for its compensation philosophies and develop an objective method of grading jobs, with new ranges that are market-competitive and internally equitable.
• Create or enhance an employee-referral program or internal jobs board.
• Improve employee communication and ensure that the HR department is accessible.
• Identify opportunities to outsource areas within human resources that offer more value to the company

The optimal outcome: Taking HR to the next level

Certainly, companies that complete an HR audit for compliance and cost reasons will enjoy an improved employment climate and a healthier bottom line. Organizations that opt to gain maximum benefit, however, also will use the HR audit to ensure that HR practices are linked to and play a vital role in the company's strategic planning and execution.