HR Compliance: Areas of Highest Risk for California Employers
An employers workforce represents one of a
companys most significant and valuable assets.
Whether that firm has two or two thousand employees,
there are certain legally mandated internal practices which
both the State of California and the Federal Government
require all employers in California to follow. One way to help
ensure the relationship between the employer and employees
is successful and to comply with these laws is to voluntarily
undergo a proactive audit of the companys HR policies and
procedures. Using the expertise of an outside HR professional
or organization to conduct the audit, provide written feedback
of findings, and develop an action plan to rectify areas of deficiency
is a proven solution to tackle these issues.
A voluntary audit can protect a company by identifying
areas where it might be vulnerable to an employee lawsuit or
an involuntary audit by an outside governing agency before
any problems actually occur. The cost in both time and
money of such an audit is relatively easy to justify when compared
with the often high fees associated with defending, and
most likely settling, a single employee-triggered lawsuit.
The trigger to an involuntary audit may simply be an
anonymous phone call to one of the many overseeing governmental
agencies by a current disgruntled employee, a former
employee with an issue, a 1099 contractor who gets audited,
or even a competitor seeking to gain some advantage. While
the issue may never end up in front of a judge, the cost of
diverting both time and money away from the business can be
considerable and create bad public relations for the company.
On the other hand, if the company has its practices and documentation
in order, employee-initiated lawsuits can be
averted. At the very least, litigation can be mitigated to reduce
cost, minimize the investment of time and successfully defend
While an involuntary audit by a governing agency may be
disruptive to the company and divert energy away from its primary
business, if an infraction is found it may lead to a further,
more in-depth audit. That in turn can potentially bring in
other governmental agencies to perform their own audits. If
that happens, a business may end up paying fines and penalties.
If, for example, a misclassified employee is unearthed,
back pay, taxes and penalties may also be involved.
An audit can help determine the effectiveness and efficiency
of HR practices and whether or not they are aligned
with business planning and strategy. It is also an opportunity
to assess an organizations HR best practices as well as
identify areas for improvement, what can be done more efficiently
and where costs may be reduced.
The four types of voluntary HR audits covering
specific areas of HR practices include:
• The Compliance Audit, which ensures compliance with
an employers legal HR obligations dealing specifically
with areas like at-will employment, leaves and absences,
COBRA, harassment, etc.
• The Best Practices Audit, which considers a companys
procedures for disciplinary action and its documentation,
practices for hiring and terminating, and performance
reviews, among others to ensure that they are in
alignment with court decisions or rulings in these areas.
• The Strategic Audit, which ensures that HR specific
areas in the company are aligned with its strategic goals.
For example, the Strategic Audit reviews the companys
benefits programs, hiring practices and training programs
to make certain they are structured to attract and
retain the best candidates for the companys long-term
• The Functional Area Audit is designed to look at very
specific areas of HR such as 401(k) administration,
health insurance programs, etc.
Once the decision for a voluntary audit is made and the
appropriate resource is identified to conduct the audit, the initial
set of fact-finding meetings will most certainly find that
specific items from each of the four audit types are unearthed
and will require further investigation to clarify or rectify.
Because of the potential legal and financial ramifications,
the Compliance Audit is the one that most businesses voluntarily
undertake as a first step. Some of the areas of HR practice
that should be examined during a Compliance Audit
include employee handbook/policies, recruiting selection process,
new hire orientation, employee files (including proper
completion of I-9 forms), properly written job descriptions,
salary and wage administration, benefits programs and administration,
performance appraisals, documentation of employee
counseling or disciplinary action, employee training and
development and termination procedures.
This list outlines only the basic areas of importance. There
certainly are many more areas to consider. Some of the most
common areas of non-compliance that we have found across
a variety of companies are in the following areas:
With the frequent change to state and federal law, it is wise to
revisit employee handbooks at least annually or as significant
events occur. While a handbook may seem a laborious effort to
create and maintain, it is the one place that all of the companys
policies, procedures and legal requirements for both the
employees and employer are documented. After a labor attorney
reviews the handbook, the document is distributed and an
employee will sign an acknowledgement of receipt and for
review of its contents. The employee cannot later claim being
unaware of certain policies as everyone at the company receives
the same document. This is an important legal defense if a dispute
arises with an employee or an involuntary audit occurs.
Incomplete or incorrectly filled out I-9 forms happen when
identification is obtained from an employee and no mechanism
exists to track and re-verify the renewal of expiring work
authorizations. In addition, the employers section of the I-9
form generally is not completely filled out. Oftentimes, the
employees start date is left off, which can easily result in a
fine for this slight oversight.
Different rules govern whether an employee is salaried
exempt or non-exempt hourly. This is an area where mistakes
are easily and often made and many employers will
incorrectly classify an employee based on title (e.g., manager)
or by earnings. It is usually impossible to determine if
someone is exempt based on pay or job title alone. This is
where a formal job description becomes an invaluable document.
Classifying employees exempt when they really
should be non-exempt or hourly exposes the company to
retroactive liability for overtime compensation and possible
Timesheets are generally non-compliant for non-exempt
employees. Each day, employers must record employee start
and stop times for shifts, meals and any unpaid breaks. Keep
in mind these breaks are mandated by the State and may only
be waived under certain circumstances.
New Hire Paperwork
New hire paperwork to be distributed is usually incomplete
or missing. There are several forms that California employers
are legally required to distribute to new employees. Confirmation
of distribution can be recorded on a New Hire
Checklist. In addition, employment applications should be
obtained from all job applicants and should be reviewed to
ensure that no illegal or discriminatory questions are being
While there are myriad compliance issues surrounding the
employee relationship, many companies feel they are in compliance
with these laws when in fact they are not.
Including the expertise of a Human Resources professional
as part of a companys inner circle of trusted advisors helps
encourage an environment that nurtures growth, maximizes
the companys ability to protect itself against employee-initiated
lawsuits, aligns its hiring practices with the companys
strategic plans, and better positions the company for long-term
Lori D. Burzminski