Audits Aren’t Only for Accounting

Businesses know financial audits. They use their CPAs to examine financial transactions and statements to present an accurate account of the company’s financial business transactions. However, employers should also consider a different kind of audit: a human resources (HR) audit. HR audits present an accurate account of the company’s compliance with federal and state labor and employment laws and regulations.

Consider this: Even if a company employs less than 20 people, they are still subject to 23 different labor laws. With 50 people, that number increases to 29 different federal labor laws. The chances of employers being routinely audited for compliance with these laws are constantly increasing. The federal agencies charged with enforcement of these labor and employment laws have stated that their main strategic initiative is enforcement of employment laws, and, in order to do so, they must increase their audit activity of employers. Additionally, employees are more knowledgeable and better informed of their rights and may also trigger audits via complaint to an agency, such as the United States Department of Labor (DOL). These audits are time consuming, and, if violations are discovered, can cost hundreds of thousands of dollars. These can include:

• I-9 Audits—This involves U.S. Immigration and Customs Enforcement reviewing I-9 forms. This isn’t only about hiring undocumented workers, but also about completing I-9 forms correctly and in a timely manner.
• Wage and hour—This involves the U.S. DOL auditing compliance with the Fair Labor Standards Act. These audits could be routine or triggered by a current or former employee complaint. These audits review that employees have been correctly classified as employees or independent contractors, ensuring that nonexempt employees are paid minimum wage and overtime for hours worked and are not subject to improper deductions from pay. Wage and Hour Division is responsible for ensuring government contractors’ compliance with prevailing wage regulations (Davis Bacon and McNamara-O’Hara Service Contract Acts).
• Retirement plans audits—These come from the Employee Benefits Security Administration, a division of the DOL, conducting audits of qualified retirement plans (both pension and 401(k) plans). These audits are conducted to determine whether plan sponsors adhere to the plan provisions and then manage those funds as required.
• Internal revenue service—While these audits are all about taxes, they can also examine the misclassification of workers as independent contractors. Not properly issuing 1099 Forms and issuing W-2s and 1099s with “bad” social security numbers can trigger an audit. Through memorandums of understanding, misclassification of workers can be shared with the DOL and state employment commissions.
• Affordable Care Act audits—Like independent contractor audits, compliance with the Affordable Care Act will be enforced by the Internal Revenue Service and the DOL. As employers with 50 or more employees are required to submit annual reporting (Forms 1094 and 1095), you should anticipate that audit activity will follow.
• State Department of Transportation audits—Businesses engaged in projects funded by the Federal Highway Administration must comply with federal work and have additional equal employment opportunity regulations with which they must comply.

First, you must understand which laws you are required to comply with based on your company’s size and your industry. It is also critical to establish whether the state(s) in which you do business have state labor and employment laws with which you are required to comply. Are there annual reports you should submit to a government agency, and if you haven’t submitted these reports, is there a penalty for it?

When participating in an internal HR audit, employers can identify risky areas and take action to mitigate that risk and correct potential violations. While addressing these issues may not completely protect an employer from possible penalties for violations, they do show good faith effort on the part of the employer to comply. This serves to either reduce penalties or, in some cases, allow employers to be warned of violations and avoid penalties. Like financial audits, HR audits may best be conducted by an independent third party. While audits could be conducted in-house, it is vital that the team member responsible has the knowledge and expertise to identify potential issues. Use of outside consultants will provide up-to-date compliance knowledge and assist in appropriate methods for correction. They also have no personal stake in the game. It is critical that companies review their federal, state and local employment obligations and potential risk.

One thing is clear—employers are at higher risk now than ever before for a visit from a federal enforcement agency. In the result of enforcement, employers should be knowledgeable and prepared.