HR Audit

HR Audit

A human resources audit is the process to review and benchmark the state of HR functions at your business. As an outsourced HR services provider, one way Milestone Business Solutions routinely supports our clients is by performing these audits and helping them act on the results. That’s why we have created this guide and checklist to help you get prepared to perform an HR audit yourself or identify where you need outside support.

Importance of Human Resources Audit

Human resources audits are important to protect companies from operating outside compliance and pinpoint opportunities for improvements, efficiencies, and cost savings.

HR mistakes and non-compliance can cost employers in a variety of areas. These include employee tax filing mistakes, failure to comply with health insurance law, or not realizing overtime pay was needed. The fines associated with these errors can range from $1,000-$500,000 or more!

Identifying and addressing these issues before they cause the business to incur fines is one reason many choose to conduct an internal HR audit or hire an external auditor.

As for what should be in an HR audit review, HR compliance, payroll, and benefits compliance, and HR strategy are all important to review—or address the need for. 

HR strategy processes and employee engagement can be especially relevant to preventing employee churn. Replacing an employee cost $15,000 per turnover back in 2017, and the tight hiring conditions created in recent years (and pandemic) since haven’t helped make the prospect cheaper. The same study found that 75% of conditions that caused an employee to leave a job were preventable. It just so happens that the top ones are human resources related:

• 22% of employees left a role due to a lack of professional development opportunities.
• 12% of employees left a role due to their work-life balance.
• 11% of employees left a role due to manager behavior.
• 9% of employees left a role due to the compensation and benefits provided

All these risks can be identified and addressed through the processes of an HR audit. These audits can be conducted internally by HR staff and other stakeholders, or with the support of an external HR audit consultant. Let’s start with taking on the audit for yourself.

Internal HR Audit

Internal HR audits help companies get to the root of problems as well as find ways to better serve their employees and manage risk. In the best-case scenarios, internal human resources audits are conducted regularly, especially on the compliance side.

Auditing HR is a project best tackled in phases of exploration, with the ongoing implementation of process improvements throughout. Human resources functions include everything from hiring to employee engagement, administration, benefits, developing and applying policies, and more. 

Picking one or two key areas to audit prevents information overload and reserves time and resources to act on the discovered issues. If the audit takes forever, then nothing actually gets improved.

How Do You Do an HR Audit?

The first step in the internal HR audit process is defining its scope. What should an HR audit include? Before you think “everything,” consider these three categories:

HR Compliance Audit

Doing an internal HR compliance audit means reviewing your employee handbook and company policies to ensure compliance with laws like Equal Employment Opportunity (EEO), the Americans with Disabilities Act (ADA), and your state’s employment laws. This audit could also encompass personnel files and documentation, as well as required labor law postings.

Compliance will encompass payroll and benefits as well. This includes reviewing your history of employee taxation and reporting to the IRS. This audit also draws in data about employee benefits, including the notices and recordkeeping that are required from the employer. 

Your audit will confirm compliance with benefits-related laws such as the Family Medical Leave Act (FMLA), Affordable Care Act (ACA), Consolidated Omnibus Budget Reconciliation Act (COBRA) and more. Worker’s compensation and unemployment insurance held by the business should also be reviewed and benchmarked.

Talent Acquisition and Lifecycle Audit 

The talent lifecycle is from recruitment through resignation. This audit looks at how your company handles employees upon first contact from a recruiter or resume application all the way through an exit interview. The goal is to get an idea of the gaps your company may have throughout this relationship with employees. A healthy talent lifecycle will fill your recruiting process with talented individuals who are productive faster and stay longer at your company. 

Specifically, a talent lifecycle audit will look at things like: employment branding, careers page, job postings, onboarding process, sourcing strategies, early career programs, exit surveys, relocation policy, and temp worker processes.

HR Strategy Audit

Doing an HR strategy audit means identifying one or more key HR success metrics, then gathering data on past performance to define the next best action. Broad strategy audits can be overwhelming for a company, so we often recommend hiring an HR strategist in a fractional capacity so they can work with you to prioritize where to start and what to focus on. 

The area your business seeks to improve determines what goes in the human resources audit checklist from a strategic perspective. It can quickly get complicated, which is why the success metrics you want to see improve are a good focus for the audit.

Even within these broad categories, it can be wise to focus on just one process or strategic pain point. For example, trying to audit payroll and benefits at once may be a challenge. Breaking the broad process down into smaller parts lets you achieve small wins along the way. Again, working with an outsourced expert also makes this much easier. 

HR Audit Checklist

Once you know the scope of the audit you want to conduct, an internal audit checklist for the HR department is a natural next step. This lets you remember everything you need to keep an eye on. Using a pre-made HR audit template can help planners visualize and document the next steps ahead. You might also choose to describe the steps and timeline in an HR audit flowchart to keep everyone aware of what is happening next and when.

Here are a handful of  HR audit questions in a checklist to help you think more about common primary areas of concern.

Personnel Files

• Is your employment application current and in compliance with local, state, and federal laws that protect sensitive information or define what is considered discriminatory? 
• Have all employee forms been properly filled out and stored securely with the correct access right? 
• What has been added to employee files over the years? Are there any signs of discrimination or retaliation?

Payroll

• Is your payroll compliant to changing regulations such as minimum wage and overtime provisions for each state where your employees live? 
• How are you tracking paid and non-paid time off to ensure both that your employees are able to take advantage of the benefits and that you are compliant with financial and regulatory requirements? 

Compensation and Benefits

• Do you know if you are offering a competitive pay and benefits package for your industry and geographic area?
• Do you have a process in place to reward, recognize, and pay employees for performance? 
• Are you confident employees are aware of your benefit programs and are able to take advantage of them? 

Recruitment

• How full is your talent pipeline and is your strategy to compete and attract talent robust?
• Do you know what your company’s candidate experience entails and does it match your brand values?

Talent Retention and Turnover

• Are you tracking employee engagement and what are the main drivers to retaining your employees?
• Do you know how your employees are talking about your brand out in the marketplace on Glassdoor, Indeed, Google, etc?
• What is your organizational strategy to grow and develop your people? 

Performance and Productivity 

• Do you have a strategy to keep employees productive in a hybrid or work from home office environment? 
• Is your internal communication effective?
• Do employees have the work tools and environment to be successful?
• How are you addressing top and low performers in your organization? 

These questions reveal just how much there can be to learn about one small aspect of HR operations!

External HR Audit and Outsourced HR Services

Does all this sound overwhelming? Then you might prefer an external HR audit. An external HR audit is conducted by a third-party expert to examine policies, practices, and strategies, helping companies identify opportunities for improvement. 

Many business owners understand that as our world and their business changes, what worked in the past may not work in the future. An HR audit can be a good place to start before you dive headfirst into an organizational change aimed at tackling an HR problem or trendline.

Businesses choose external HR audits because sticking to the process of performing the audit yourselves can be challenging without outside motivation. In the same vein, maintaining perspective, facing potentially tough realities, and taking effective strategic action are all easier when it’s facilitated by an expert third party. Milestone’s strategic HR services deliver the experience and empathy necessary to make recommendations that fit culturally within your company, while also staying focused on goals and outcomes.

If you’re thinking “how do I prepare for an HR audit,” it might feel a little like needing to clean up the house before a visitor comes over. It’s true that not all HR auditors are created equal. At Milestone we believe in helping clients transform all their back office functions into a competitive advantage, from basic payroll processing to complex employee rewards and recognition programs. We want to help your business achieve its most audacious goals, not just confirm if your processes are good enough. Milestone’s experts have experience as business owners and in HR executive roles so we can move beyond just pointing out gaps to helping you transform your business. Another benefit of partnering with Milestone as an external HR auditor is the opportunity to outsource some of the more compliance-heavy operations like payroll and benefits administration. This frees up a business owner’s time spent on these activities or allows internal human resources staff to focus on strategic objectives, not playing catch-up. That’s just one more example of how entrepreneurs can turn back-office headaches into superpowers. Milestone Business Solutions is here to help it happen. Contact us today!