HR Compliance: What Auditors Check and How to Prepare

Let's face it: the word ‘audit’ is enough to send jitters among business owners. 

It conjures images of investigators sifting through files, ruffling the office. But when it comes to an HR compliance audit, think of it as a health check for your business. It’s an opportunity for you to ensure process hygiene, orderly records, and protection from legal and financial risks.

The good news? You don't have to be a pro HR professional to clear audits. In this article, we’ll examine the HR compliance audit process. We’ll cover the metrics auditors look for, how you can stay prepared, and how experts can help you clear audits easily. 

HR Compliance Metrics on Every Auditor's Checklist

An audit might feel overwhelming, but auditors typically focus on a set of high-risk areas where small businesses commonly make mistakes. Getting these right puts you on a solid footing.

Here are the HR areas that demand your attention:

1. Hiring and onboarding records: This is ground zero for compliance. Auditors examine Form I-9 completions for every employee to verify their eligibility to work in the U.S. They review offer letters, background check mechanisms, and whether your hiring process stays unbiased and discrimination-free. 

2. Worker classification accuracy: Auditors could check if you've correctly classified workers as employees versus independent contractors/freelancers. They could verify that employees are designated as exempt (salaried, not eligible for overtime) or non-exempt (hourly, eligible for overtime) according to Fair Labor Standards Act (FLSA) criteria.

3. Wage, hour, and payroll precision: Documentation is your best defense during audits. Auditors could review documents to verify hours worked, wages paid, meal and rest breaks, and overtime calculations. This is where manual payroll processes could create risks. Auditors will cross-reference payroll registers with timesheets and pay stubs to ensure consistency.

4. Pay equity: This is a growing area of focus. Auditors now look for data that may suggest pay disparities based on gender, race, or other protected classes. You must ensure that employees performing similar work are paid equitably. 

5. Policy acknowledgments: Having policies isn’t enough; your team must acknowledge them. Auditors look for signed acknowledgment forms related to policies such as anti-discrimination, harassment prevention, remote work, and the use of AI.

6. Benefits and leave administration: Auditors verify that you are offering leave policies (such as FMLA or state-mandated paid sick leave) and benefits accurately. This includes having proper documentation for leave requests and ensuring health benefits comply with the ACA.

7. Workplace safety and required training: Auditors verify documentation of required safety training and review records of workplace injuries (OSHA logs). They also check whether you have completed state-mandated training, such as sexual harassment prevention training required in states like California, New York, and Illinois.

How to Prepare for an HR Audit and Compliance

Staying compliant shouldn’t be a last-minute scramble. You should integrate best practices into operations, not just for HR compliance, but also to enhance the employee experience.

• Conduct regular self-audits: Don’t wait for an official notice. Conduct internal audits at least once a year to identify and address gaps before they become more significant.

• Use technology: Leverage HR platforms to automate compliance tasks. These tools streamline record-keeping, track policy acknowledgments, log updates, and maintain a digital trail to support audit readiness.

• Train people: Equip managers and employees with the necessary knowledge. Train them on logging time-off requests, recognizing harassment, and following proper reporting procedures.

Boost Compliance with Reliable HR Experts

For a small business without an expert HR team, managing compliance can feel daunting. This is where DianaHR’s experts can prove helpful. 

DianaHR’s dedicated team of seasoned HR experts helps you comply with local, state, and federal laws, allowing you to redirect your focus on engaging employees. This can save you time and money, and help you avoid costly penalties. 

 For HR compliance audit, your DianaHR consultant can:

• Conduct a pre-audit review to identify compliance gaps before an auditor does

• Review and update your employee handbook and policies to ensure they align with current federal, state, and local laws

• Help you organize your records and documentation, ensuring everything is in order and easy to access

• Provide expert guidance on employee classification and multi-state compliance for your remote teams

Ready to make compliance worry-free? Talk to DianaHR today.

FAQs

What are the red flags for an HR auditor?

Inconsistent or missing documentation is a major red flag, especially regarding Form I-9s. Worker misclassification, payroll discrepancies, and inconsistent benefits administration also attract deeper scrutiny. 

How do I handle compliance for remote employees in different states?

Generally, the labor laws that apply to workers are of the state where they are located, not where the company is headquartered. This creates complexities regarding payroll taxes, leave laws, and wage requirements, which are among the reasons to seek outsourced expert help. 

Q: Do I need external help to prepare for an HR audit?

While not mandatory, it is recommended for small businesses without an in-house HR team. Preparing for an audit requires knowledge of complex federal, state, and local laws that are subject to frequent changes and updates. An external expert provides objectivity, ensures you don't miss common red flags, and saves you dozens of hours. As a result, you can focus on your business instead of legal research.