EMPLOYMENT LAW / HR
Conducting A Human Resources Audit
August 2007
By Dana R. Scott, HR and Benefits Consultant
For New Hampshire Business Review
Given the everyday demands of a Human Resource Department, and those of us who deliver HR services, it is easy to neglect to review your own internal processes and systems to ensure compliance with state and federal laws which govern HR practices, as well as the effectiveness of those practices when measured alongside the corporate structure, culture and business plan. However, it is important to take the time necessary to perform an HR "audit" and to determine what areas, if any, have the potential for legal liability or otherwise need attention.
The components of such an examination are many, but can be performed in small "chunks" so that the process is manageable. Some of the areas HR professionals and staff may want to focus on include:
Hiring Practices
You receive Employment Applications via mail, fax, walk-in applicants and Internet applicants. A review of your Employment Application at least annually will ensure you are obtaining all the information you need and may legally request, and that you are not asking for unnecessary information or information which will not be used. And, as important as obtaining an accurate work history for a potential employee is, it is also important that the Application contain certifications and authorizations by the candidate which will allow you as the potential employer to perform a thorough background check.
The Application should contain the candidate's certification that all information s/he is providing is true and accurate, and his/her understanding that any omission or misrepresentation will be grounds for discharge. The Application should also contain an authorization which allows the hiring organization to verify all information and which releases the hiring organization and previous employers from any liability as a result of that process. Finally, the Application should state any other criteria that may be required for the position (post-offer drug test, for example) and should also indicate that if the candidate is offered a position, s/he will be an at-will employee.
Many organizations have de-centralized the interviewing and selection process, with functional managers performing the screening, interviewing and selection for their departments. While this may make sense for a large company with several locations, a high turnover and the need to fill positions quickly, it is important to ensure that the individuals performing these functions have been thoroughly trained on appropriate interviewing protocols and the nuances of interviewing. In addition, a helpful tool that HR may provide might be a basic applicant interview record to ensure that questions are being asked consistently, even though candidates' responses may inevitably lead to more and varied follow-up questions. Interviewers also need to be sensitive to the "notes" from these interviews, as they may be utilized later in cases of claimed discrimination in hiring practices.
Reference and background checks are most often performed by the Human Resource Department since HR staff members are trained in soliciting the appropriate information in a manner that is consistent and equitable. A review of your company's standard offer letter and rejection practices is also worthwhile. These are often areas where mistakes are made that can lead to liability in the future. Be sure the offer letter indicates the position, its classification, start date, rate of pay and frequency (hourly, weekly, bi-weekly, e.g.), and pay date. If the offer is conditional, the specifics should be clearly indicated.
Performance Management
Do employees receive regular and timely feedback regarding their performance? Oftentimes, we are quick to document a policy infraction or performance issue, but fail to take the time necessary to conduct an annual performance review. If your organization simply provides across the board COLA increases, perhaps a performance evaluation is not necessary. However, to the extent that performance appraisals are to be done, does your company have managers who are always late with this process? Are there obstacles (other than volume) to a timely performance review process? Do you use a focal review process or one based on the employee's anniversary date? There are advantages and disadvantages to both, and your company's budget process may be helpful in determining what may work best for your organization.
Have you updated your performance appraisal forms to accurately reflect the culture of the organization and its values? Is the employee presented with an opportunity for self-evaluation? Are job descriptions up-to-date and reflective of the essential duties of the position in addition to containing the physical requirements/demands?
Personnel Files
Personnel files also should be maintained in a manner that complies with state and federal law, and a random check of these files is always helpful. Personnel files should contain information such as: resumes and applications; offer letters; job descriptions, performance evaluations; benefit enrollment forms; payroll change notices and/or documentation related to personnel actions; documents regarding performance issues; employee handbook acknowledgements.
Information such as Form I-9, medical information (related to a medical leave of absence or FMLA leave), and Workers' Compensation information should not be kept in the employee's personnel file.
Wage and Hour Practices
Is your time recordkeeping process in compliance with state and with federal law? It is helpful to conduct a random audit of timecards to ensure that practices are as they should be, in particular for non-exempt employees. As an example, in New Hampshire, time records for non-exempt employees must reflect the time the employee began work each day, the time s/he left for lunch, the time s/he returned and the time his/her workday ended.
Overtime practices should be consistent and clearly communicated. "Comp time" for non-exempt employees may not be used to avoid the payment of overtime wages that are due. Meal periods should be in keeping with legal requirements and appropriate arrangements should be made for employees whose meal period is curtailed or may have to be foregone.
Compensation systems should be reviewed for equity, competitiveness and effectiveness. Various components might include base pay, bonus, incentives, market adjustments, stock options and deferred compensation. If a large percentage of your turnover is due to financial considerations, it may be time to re-evaluate your compensation structure. Market surveys are helpful; even more helpful is information you can obtain from HR colleagues in your industry. In addition, potential issues such as compression should be addressed.
Finally, an evaluation of position classifications under the Fair Labor Standards Act (FLSA) is a lengthy and often cumbersome process. However, it is critical to ensure that positions are classified correctly using the FLSA requirements in order to avoid costly penalties as a result of the misclassification of non-exempt positions.
Employee Benefit Retirement Plans
Documentation regarding your employee benefit plans should be centrally located. IRS Determination Letters, Plan and Trust documents including all amendments, Forms 5500, Summary Plan Descriptions and Summary Annual Reports should be easily located and available. Discrimination test results should also be kept for each plan year. Each eligible participant should receive a Summary Plan Description and an annual Summary Annual Report. Contribution election forms, if applicable, and beneficiary forms should be in the employee's personnel file. Employees who have had a change in marital status should be reminded of their current beneficiary under any retirement plan (and life insurance plan) in the event they may want to make a change.
Other Benefit Plans/Policies
Is your organization covered by COBRA? If so, recent changes to COBRA should be reflected in the communications you provide to newly-eligible employees and their eligible dependents as well as the forms you provide to those employees and their eligible dependents who leave the organization. Have you communicated your Family Medical Leave Act leave policy, if applicable, in writing to all employees? Are there any "special arrangements" for former executives of the company, retirees or others? If so, do you have all relevant documentation?
Employee Handbook
While an employee handbook is not required for employers, it is the recommended location for all of an organization's policies and procedures. Handbooks should be updated at least annually to ensure that any changes in federal or state law are reflected as appropriate, as well as changes to company polices and procedures. For example, recent New Hampshire law changes necessitate the addition of crime victim leave and first responder leave policies to your personnel policies. Equally important as the employee handbook content is how well its contents are communicated to employees.
Employee Separations
Exit interviews are an important part of an employee's separation from the company. You may learn valuable information that you might not have known otherwise. There are certain wage payment rules that apply when an employee resigns voluntarily or is separated involuntarily. Make sure that you know these rules and administer them consistently and correctly. Benefits continuation information and conversion forms should also be provided to employees upon separation.
Other Areas
Other areas to be reviewed during an HR audit can include verifying that all required federal and state posters are displayed at all company locations; communication of the company's smoking policy (generally in the handbook along with information as to who questions/concerns should be directed); reviewing filings of EEO-1 Reports, VETS-100 Reports and Affirmative Action Plans; reviewing of OSHA logs and Worker's Compensation information, and the company's Safety Plan and Committee.
Conclusion
Conducting periodic audits of HR practices is a necessity in today's fast-paced HR environment where laws and enforcement activities are constantly changing and the penalties for non-compliance can be devastating. The reality, however, is that for many companies HR staff are lean and have little time, if any, to devote to this important task. If that is the case, consideration should be given to outsourcing this activity to an outside HR professional. Besides time, the benefits to this approach include having an outside expert update, review and provide advice regarding your current procedures, practices and policies in accordance with changes in the law. Employers are encouraged to identify areas for HR audit review and to continually review their practices to ensure compliance and peace of mind.
Dana Scott, Human Resources and Benefits Consultant at the Concord, New Hampshire law firm of Gallagher, Callahan & Gartrell, regularly assists clients with HR audits. For more information, call 800-528-1181 ext. 236.
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