A Checklist for a Comprehensive HR Compliance Audit

Posted by Muhammad Talha on Jun 29, 2022

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Human resources is responsible for talent acquisition, employee retention, and ensuring smooth day-to-day administration. However, there’s one additional role that all HR professionals play, which is perhaps the most important: acting as the first line of defense against legal issues.

Conducting an HR compliance audit is about dotting your i’s and crossing your t’s to ensure your business isn’t violating federal and state laws. There are so many areas to cover — from employment discrimination to data privacy — it can be easy to miss potential HR compliance issues in your organization. And non-compliance may land your business in hot water with both regulatory authorities and your employees.

Breaking down your HR compliance audit into core areas can help by listing all the regulatory issues in one place. Follow our comprehensive checklist below to help you remain compliant.

1. Recruitment

While providing equal employment opportunities is morally right, discriminatory hiring practices still persist today. Several employment laws protect people of minorities — those of certain genders, races, and national origins — from those practices. A few examples of these laws include Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA). Failure to comply, even if it’s unintentional, could potentially land you in legal trouble. Here’s a checklist of measures that will help you remain compliant:

  • Review your job descriptions and make sure they don’t use discriminatory language. Having a specific gender, race, national origin, sexual orientation, or veteran status as one of the requirements for the job can be a red flag.
  • Create a standardized interview process. Use interview scorecards and ensure that hiring managers use them to evaluate all candidates equally.
  • Make sure that the interviewers don’t ask candidates any questions that are illegal according to federal and state anti-discrimination laws. These include questions about race, ethnicity, national origin, gender, sexual orientation, disability, marital status, and religion.
  • Keep a record of all job applications, interviews, and evaluations to provide reasons to reject/select candidates in case your business gets  accused of discriminatory behavior.

A helpful tip is to share post-interview surveys with all candidates to rate the job descriptions, the behavior of the interviewers, and the interview itself. Also, acquire feedback from all the people on the panel. Use that information to consistently improve your hiring practices.

2. Selection and Onboarding

Various laws and other regulatory requirements apply to all employers when filling vacant positions. From ensuring employment eligibility to communicating company policies, a lot goes into guaranteeing compliant selection and onboarding. Here’s a list of the essentials:

  • Complete the USCIS Form I-9 for every employee you hire (whether they’re citizens or non-citizens). Doing this ensures the employment eligibility of your employees under the Immigration Reform and Control Act (IRCA) of 1986.
  • Get a signed Form W-4 from every new employee to know how much federal tax to withhold from their paycheck. Without a signed W-4, an employer is required to withhold at the rate of a single person with no allowances, which could be a higher withholding amount than the employee wants.
  • Correctly classify salaried-exempt, salaried non-exempt, and hourly non-exempt employees. According to the Fair Labor Standards Act (FLSA), a federal law, the key difference between the classifications is that you’re obligated to pay all non-exempt employees minimum wage and overtime pay when they work more than 40 hours a week. 
  • Classify all non-employees (individual contractors hired to do one-time jobs or projects) correctly. Refer to the Common Law Rules set by the IRS or file Form SS-8 to determine if a worker falls under this category. This will help you avoid potential misclassification lawsuits.
  • Share a comprehensive employee handbook with all the new hires. It should include information regarding your company’s internal policies, procedures, expectations, and the benefits and rights of your employees. The purpose is to protect your business against claims of unfair treatment or concealment of information that would benefit the employees.

Also, consider any additional paperwork or legal formalities required by your state. For example, you need to acquire additional tax forms from your employees if a state income tax is applicable. For instance, if you’re in New York, you need to make sure that employees complete Form IT-2104 to specify how much state tax to withhold from their income.

3. Salaries and Wages

The next step is to ascertain that you’re providing fair compensation to all your employees based on the level and duration of professional duties performed. The FLSA is the main reference to use to ensure you pay fair salaries and wages. Other applicable laws include the Equal Pay Act of 1963 (which enforces equal pay for equal work regardless of sex) and state-level regulations. Avoid civil penalties and potential lawsuits by doing the following:

  • Make sure you’re paying all your non-exempt employees the federal minimum wage of $7.25 per hour or more. If you’re in a state that specifies a different figure than the federal minimum, you’re liable to pay the higher one.
  • Check your payroll to ensure you’re paying overtime wages to all non-exempt employees. Pay any owed wages immediately to avoid legal consequences.
  • Audit timesheets to check whether you’re tracking time accurately or not. This audit will help ensure that you’re fairly compensating non-exempt employees in compliance with the FLSA. In case of any discrepancies, make the necessary changes and pay the owed wages as soon as possible.
  • Ensure you’re compensating your employees fairly and equitably, regardless of sex, age, or any other attributes irrelevant to their positions. Give underpaid employees raises so that they’re paid equitably.
  • Make sure you’re withholding the correct income tax amount from your employees’ paychecks based on their W-4 forms.
  • Make sure you’re contributing 6.2% up to the wage base for the Social Security tax and 1.45% of gross compensation towards Medicare tax for every eligible employee. This is a legal requirement under the Federal Insurance Contributions Act (FICA).
  • Ensure you’re contributing to unemployment insurance through payroll taxes. The required amount varies from state to state.

Finally, ensure you’re paying your employees (both exempt and non-exempt) on time per your internal policies. The pay period should be standardized and specified in the offer letters.

4. Employee Benefits

You also want to make sure you’re providing benefits to your employees in accordance with the law. By offering subpar benefits, you’ll not only struggle to retain your employees, but you may also step on some legal landmines and get slapped with lawsuits and penalties. To avoid that:

  • Provide adequate health insurance coverage to all qualifying employees and their dependents. This is only relevant if you’re considered an applicable large employer (ALE) — with 50 or more full-time employees — under the Affordable Care Act (ACA).
  • Check to see if changes to your state’s laws require you to offer a mandatory retirement plan. Find a plan provider (or look into a pooled employer plan if you’re a small business) if that’s the case.
  • Get your company’s 401(k) plan (if you offer one) audited by an external auditor if you have 100 or more eligible participants. This will ensure your plan meets the minimum standards required under the Employee Retirement Income Security Act (ERISA).
  • Ensure you have the policies and processes in place to enable eligible workers to easily apply for unpaid leave under the Family and Medical Leave Act (FMLA). Remember that this law only applies to you if you have 50 or more employees.

It’s also worth looking into your benefits administration platform if you have one and ensuring that it’s not causing any unnecessary roadblocks for your employees. Survey your workers to determine if there’s anything that could be improved about the platform and the internal processes so they can enjoy their benefits hassle-free.

5. Employee Safety

A company is responsible for creating a safe working environment for its employees, regardless of the nature of work and industry. It’s better to refrain from making assumptions that the employee safety laws don’t apply to you. To that end, we highly recommend that you:

  • Ensure your workplace meets the standards set by the regulatory agencies, such as the Mining Safety and Health Administration (MSHA) or the Occupational Safety and Health Administration (OSHA). You can look up the recommended safety standards of both on their websites. Failure to comply may result in hefty penalties.
  • Make sure you’re maintaining your workers’ compensation insurance program, especially if you’re in a state that enforces it.
  • Conduct annual safety training with mandatory attendance. 

6. Employee Data Protection

Employers are expected to act as the custodians of their employees’ data. While the U.S. doesn’t have a central law that protects employee data, different regulations apply to all employers. To remain compliant:

Keep an eye out for any state-level regulations concerning employee data protection. For instance, the California Consumer Privacy Act (CCPA) — although primarily drafted for consumers in the state — also protects employees. Employers are required to provide privacy notices and disclose the purpose of collecting employee information.

HR Compliance Is About Being Proactive

It’s crucial to conduct HR compliance audits on a regular basis. That way, you can identify potential violations and take responsible measures to avoid getting into a legal mess. Keep an eye out for any changes in federal and state regulations to ensure you’re always compliant.

Conducting an HR compliance audit is worth it, but it can be an overwhelming, exhausting process. Inova’s Human Resource Outsourcing service can lend a helping hand and make compliance audits a breeze. Request more info today to learn more.

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