A human resources (HR) audit, like a financial or tax audit, helps your business identify potential compliance issues, ensure adherence to employment laws, and establish HR best practices.
A typical HR audit process involves a thorough review of your organization’s human resources functions, policies, procedures, and documentation to assess compliance with state and federal regulations. It covers key areas, including your organization’s employee handbook, record-keeping policies, hiring/termination procedures, and even communications like company-wide emails or announcements. Since regulations frequently change due to new legislation or interpretations of the law, HR audits should be conducted periodically to ensure that your business is complying with the latest federal and state requirements.
Why does a company need regular HR compliance audits?
Every year, HR compliance audits help small and mid-sized business (SMB) owners save thousands of dollars. In fact, according to the 2024 Small Business Trends Report by Counterpart, in 2024 alone, nearly 40% of SMBs faced employee litigation. The report also noted that “businesses are fearful of an increasingly challenging legal environment.”
Consistent HR compliance audits can help your company stay ahead of evolving regulations, strengthen human capital management, and avoid potential losses.
In addition, a well-executed HR audit can help your business:
- Minimize legal risks: By identifying gaps in HR policies, documentation, and workplace practices, businesses can address compliance issues before they lead to lawsuits or penalties.
- Enhance operational efficiency: A structured HR audit process helps optimize essential HR functions such as hiring, onboarding, payroll, and record-keeping.
- Improve employee satisfaction: A thorough audit can help companies better understand their employees, leading to improved HR policies regarding wages, benefits, and workplace safety.
- Maintain a competitive edge: An audit can improve inefficiencies, align HR with business objectives, and help management make more informed decisions about resource allocation, talent acquisition, and employee retention strategies.
When should a company conduct an HR audit?
It’s recommended that businesses conduct at least one HR compliance audit each year. Not only do audits help you keep up with ever-changing workplace laws and regulations, but they are also especially useful if your company is experiencing a major organizational change such as a merger, acquisition, or leadership transition. In addition, it’s important to conduct an HR audit before adding a significant number of roles or employees to your workforce.
While reactive audits should generally be avoided, those in charge of HR at your organization should be aware of key red flags, such as rising employee complaints, excessive turnover, or compliance violations. These indicate that an immediate HR audit may be necessary.
What is the HR audit process?
The HR audit process starts with a structured evaluation of your company’s HR policies, procedures, and practices to ensure compliance and operational efficiency. And a well-planned audit can help your company identify risks, improve HR management, and align practices with legal and industry standards.
The process typically begins with a comprehensive HR assessment, with questions in key areas such as:
- Are there policies that prohibit and outline how to address workplace discrimination?
- How are employee complaints documented and resolved?
- Do payroll practices and benefits offerings comply with legal standards?
- Are hiring and termination procedures fair, consistent, and legally sound?
HR audits can be conducted internally by HR teams or externally by third-party consultants for an objective review. Once the assessment is complete, your business should analyze the findings, address HR compliance gaps, and implement corrective measures to improve operations.
Types of HR Audits
HR audits serve different purposes depending on their focus, scope, and objectives. Here are some common types of HR audits:
- HR Compliance Audit: This type of audit ensures your company complies with all federal, state, and local employment laws and regulations. It includes reviewing HR policies related to the Fair Labor Standards Act (FLSA), the Americans with Disabilities Act (ADA), and more.
- Best Practices & Policies Audit: This audit assesses whether your organization’s procedures align with industry standards. It includes evaluating employee handbooks, job descriptions, and workplace policies to ensure they are up-to-date, legally sound, and effectively communicated to employees.
- Strategic Audit: This audit examines how HR policies support your long-term business goals. It focuses on areas such as employee retention, succession planning, company culture, and workforce development.
- Function-Specific Audit: This is a targeted audit that reviews the effectiveness of specific HR functions, such as recruitment, payroll processing, performance management, or benefits administration. It helps identify inefficiencies and opportunities for improvement in key HR areas.
- Competitive Audit: This audit compares a company’s HR policies, compensation, and benefits programs to industry competitors. The goal is to ensure your organization remains attractive to top talent.
Our Six-step HR Audit Process Checklist
A well-executed HR audit process requires careful planning and execution. Refer to this six-step checklist to get started:
1. Determine the Scope
The first step is to determine the scope of the audit. If an HR compliance audit has never been conducted, a comprehensive review of all policies and procedures is recommended. Alternatively, your business may decide to focus on specific areas, including:
- Compensation and benefits
- Recruitment and onboarding
- Workplace safety and compensation
- Feedback and communication
- Career development and training
- Succession planning practices
2. Develop a Plan
The next step is creating a structured HR audit process plan. By considering key factors such as available resources, you can ensure the audit runs efficiently with minimal disruption. Here are key criteria to consider:
- Define key objectives: Based on the audit’s scope, clearly outline the goals. These objectives may focus on addressing compliance gaps, improving HR policies, or aligning HR practices with business and regulatory requirements.
- Assemble the audit team: Decide whether to conduct the audit internally or hire a third-party auditor. While more cost-efficient, internal audits require knowledgeable staff with expertise and capacity. On the other hand, third-party auditors can provide unbiased insights and benchmark HR practices against industry standards.
- Set a timeline: Set a realistic timeframe for each audit phase, including data collection, analysis, reporting, and implementing changes. Be sure to consider scheduling constraints and operational priorities to minimize disruption.
3. Gather and Analyze the Data
Once the audit begins, your team should collect all applicable documents and forms under the scope of the audit. This may include employee files, payroll records, training materials, and compliance reports. Analyze the data to identify gaps, inconsistencies, and areas for improvement. If necessary, conduct employee surveys or interviews to gain additional insights.
4. Produce a Report
After the necessary information has been analyzed, compile a detailed report summarizing the HR audit findings. This report should identify strengths, weaknesses, and recommendations for improvement. Consider categorizing findings by risk level to help prioritize necessary actions, correct noncompliance, or improve policies. A well-structured report makes it easier for stakeholders to understand the results of the audit so they can take appropriate action.
5. Create an Action Plan
After reviewing the report, your company’s executives should meet with the audit team to discuss the findings and create a plan to address each area of concern. The plan should outline items, including:
- High-risk compliance issues that could result in fines, lawsuits, or penalties
- Specific corrective measures for compliance issues
- Changes to policy or procedures
- Training initiatives to reinforce best practices
- A realistic timeline for implementation, considering the available resources
When creating the plan, you should ensure that any corrective actions are practical and achievable. Additionally, measures should be taken to maintain the confidentiality of the audit information and protect it from unintentional disclosure.
6. Evaluate the Progress
A successful HR compliance audit doesn't end with implementation. Instead, continuous monitoring is essential. Regularly review the updated policies and procedures and track progress against the action plan. Schedule follow-up audits or mini assessments to ensure long-term compliance and effectiveness.
How G&A Can Help
Gain peace of mind and more time to focus on your business when you engage G&A Partners to help you maintain HR compliance, manage day-to-day HR tasks, and provide your employees the care they deserve.
