HR Compliance Audits: A Complete Guide

Alex Kehayias | Jan 15, 2024

HR Compliance Audits: A Complete Guide

HR compliance is critical for business leaders, HR managers, and finance professionals. While compliance requirements can vary significantly across states and even localities, one tool can help organizations overcome the challenge: HR audits.

Let’s dive into what HR audits entail and why they are crucial for managing your business.

What Is an HR Audit?

An HR audit is like a thorough check-up for your company’s HR department. It examines everything from your HR rules to your workflows, helping you protect your business, set up best practices, and pinpoint places to improve.

You can categorize your HR audit efforts into three main areas:

  • Compliance: Non-compliance can lead to legal issues and financial setbacks. Audits ensure adherence to federal, state, and local employment laws.
  • Best practices: Audits measure the effectiveness and efficiency of existing HR operations, aiming to refine both individual performance and overall organization.
  • Strategic alignment: In today’s competitive market, HR is not merely a support function but a strategic partner that can significantly impact business outcomes. Audits help you evaluate how well your company’s HR strategy aligns with objectives and goals.

Why Should You Conduct an Audit?

Understanding the ins and outs of your organization’s HR functions is more than just a prudent move — it’s essential for long-term sustainability. Here are a few reasons why:

Improves Business Structure

An HR audit acts as a microscope that provides an in-depth analysis of an organization’s structure. It pinpoints areas that demand swift action while confirming what’s already working efficiently. The outcome is data-driven decision-making that can enhance organizational performance.

Applies Best Practices

In a business landscape characterized by rapid changes in technology and consumer behavior, staying current with HR best practices can provide a competitive edge. An audit evaluates current practices against industry standards, helping organizations adopt procedures that enhance productivity and overall success.

“Audits are a great opportunity for leadership to gather and look at opportunities for their company to grow and learn new best practices to help their employees thrive,” highlights Taylor Fike, Partner at Fike Advisors and Expert Contributor for Mosey.

Shows Weaknesses and Gaps

No one enjoys spotlighting their flaws, but that’s precisely what an HR audit does — though with constructive intent. It helps organizations identify weaknesses in their HR policies and procedures and offers a roadmap for making necessary improvements.

Keeps HR Departments Organized

The enemy of productivity is often disorganization. HR audits serve as a system check, ensuring everything from payroll compliance to employee management runs smoothly. Audits also show you what tools you need to stay organized.

Gaining a grip on why employees stick around or take off is golden intel for any organization. HR audits help you discern employee retention and turnover trends, offering a foundation for crafting effective talent management strategies.

Enhances Employee Experience

The well-being of your employees is just as important as the bottom line — and even adds to it. An HR audit fine-tunes your employee policies and practices, elevating the work environment while boosting both output and profits. “Clear communication is key for a healthy employee culture. If you do not set the tone as an HR department, your employees will feel the effect,” notes Fike.

Maintains Compliance

Arguably, one of the most crucial aspects of an HR audit is ensuring compliance with federal, state, and local laws. Auditing mitigates the risk of legal repercussions and secures an organization’s reputation in the market.

Ongoing compliance monitoring makes it easier for organizations to stay up-to-date with legal obligations, adding an extra layer of security. Mosey makes it easy to stay compliant by keeping all of your compliance needs on one platform.

What Are the Steps of HR Auditing?

Executing a robust HR audit involves a series of coordinated steps, each designed to scrutinize different facets of human resource management. This approach ensures that all elements — from compliance to strategy — meet the standards that bring your organization success.

Determine Audit Scope

When embarking on an HR audit, the first pivotal task is clearly defining your audit’s scope. Whether it’s zoning in on HR compliance, payroll accuracy, or strategic alignment, picking one main area per year may offer a focused lens for your audit. This allows for a nuanced, deep review of the area in question as well as ample time to carry out any changes necessitated by the audit findings.

One way to do this is to set up a three-year audit cycle divided into three main parts. This segmented approach may prevent unrealistic expectations and help yield precise, actionable insights.

Write HR Audit Checklist

Once you have a defined scope, your next move is to create an HR audit checklist. Think of this checklist as your audit roadmap — detailing the landmarks you need to visit along your journey.

A good checklist spells out all the specific steps, from checking the accuracy of employee handbooks and assessing compliance with Equal Employment Opportunity laws to scrutinizing benefits packages, if applicable.

This checklist not only guides you through the process but also ensures that you leave no stone unturned when inspecting the areas under your chosen scope.

Decide How To Collect Data

With your checklist ready, it’s time to decide on your data collection methods. These could range from leveraging in-house capabilities to hiring an external audit firm with specialized expertise.

Data collection could be a hybrid affair, combining questionnaires, face-to-face interviews, and the study of existing documents and records. The method should align with the scope and the resources available for a thorough examination.

Set Quality Benchmarks

Setting quality benchmarks is much like setting the rules of a game — it clarifies what constitutes a win. In the context of an HR audit, these are the industry standards or best practices against which you will measure your practices.

Knowing what excellence looks like in your industry gives you a yardstick for assessing your HR department’s performance. You can adapt industry standards to your organization as well.

Assign Audit Tasks to Staff

After setting up the game board, it’s time to put your players in place. Divide the audit tasks among your team members based on their respective specialties. Fike highlights that “Delegating these tasks helps create the environment where other employees feel like their voice is going to be heard.”

While your compliance employees can delve into federal and state employment laws, your experts in employee relations can handle matters like retention and turnover trends. Assigning tasks strategically ensures that each audit area receives the nuanced attention it deserves.

Decide Audit Timeline

No plan is complete without a timeline. Set up a rigorous yet feasible schedule for all phases of the audit to end on time and within budget — from data collection and analysis to the roll-out of recommended changes.

A well-structured timeline provides the scaffolding needed to keep the audit on track, ensuring that each phase is given its due time without dragging the process out indefinitely.

Evaluate Findings

The finale of the audit process is the evaluation meeting. Once all data has been gathered, analyzed, and compared against your quality benchmarks, gather your audit team to dissect the findings.

Here, you’ll pinpoint your HR department’s vulnerabilities and identify its strong suits. You’ll also spot gaps, if any, between your practices and industry standards or legal requirements. This exercise transforms the collected data into actionable insights, setting the stage for future improvements.

Make a Plan for Continued Monitoring

Audits shouldn’t be a one-time event but part of an ongoing strategy to continually improve HR functions. Create a plan for regular checks and updates to ensure long-term compliance and effectiveness.

Make sure your plan includes the following:

  1. HR compliance: The audit assesses your organization’s alignment with current federal and state employment laws. It’s essential to review employee handbooks, EEO policies, and other legally mandated procedures. The review should cover the accuracy, clarity, and compliance of these documents with current laws.
  2. Payroll and benefits compliance: Examine if your payroll and benefits align with federal and state requirements. This involves evaluating federal tax withholdings, employee classifications, and overtime calculations.
  3. HR strategy: This aspect focuses on the efficacy of your HR practices. How well do they contribute to achieving organizational goals? How aligned are they with the company’s overall strategy?
  4. Equal Employment Opportunity (EEO) laws: Ensure practices related to recruitment, selection, and hiring to ensure compliance with EEO laws. Employers must be cautious of employment policies that could discriminate based on age, race, or other protected categories.
  5. Affirmative Action Program (AAP): If applicable, the AAP mandates federal contractors and subcontractors to actively recruit and advance minorities and other protected categories.
  6. Americans with Disabilities Act (ADA): Ensure that your organization’s hiring and promotion activities are in compliance with the ADA, especially if you have more than 14 employees.
  7. Personnel files and required documentation: Check for compliance in maintaining personnel files and necessary documentation like I-9 forms. These should be organized according to federal and state record-keeping laws.

When you follow these steps, your HR audit can act as both a diagnostic tool and a strategic roadmap, helping your organization improve effectiveness and align with broader business objectives.

Using Mosey as an HR Audit Tool

Why settle for a good HR audit when you can have an exceptional one? Enter Mosey, your go-to platform for simplifying the often convoluted realm of HR compliance. Mosey is a holistic tool designed to make compliance easy. Coordinate your compliance needs as you navigate things like payroll tax registration and state employment regulations.

Mosey brings a new level of organization and efficiency to your HR audit process, allowing you to focus on what matters — strategic improvement and content employees. Schedule a demo to learn more—our team is excited to meet you.

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