What is HR Compliance Audit?

In order to ensure that a business/ entity is functioning in compliance with applicable laws, an audit of its existing process and practices is essential. In an HR Compliance Audit, the processes and policies with respect to the employees of the business/ entity are vetted. This article describes in brief what is meant by HR Compliance Audit.

Meaning of HR Compliance Audit

In simple terms, a human resource (HR) compliance audit means identifying how effectively the human resource department of a business/ entity works. Conducting an HR audit means vetting the policies and processes of the HR department, such as employee handbooks, leave policies, policies for bonus and remuneration, compliance with applicable labor laws, etc.

It also includes conducting sessions with the human resource department of the entity/business to understand how the business operates, the work environment, the manner in which operations are undertaken. The audit also examines the compliances undertaken by the HR department in respect of the employees of the business/ entity under applicable law. 

An HR compliance audit generally comprises of two parts, namely:
1. an evaluation of the business/ entities’ operative policies, practices, and processes; and
2. a review of current HR indicators (i.e., number of unfilled positions, turnover, time taken to fill a vacant position, employee satisfaction, employee complaints filed, absenteeism rates, etc.).

Importance of HR Compliance Audit

Conducting an HR audit is not a requirement under Indian laws; however, it helps the business identify the shortcomings of its operating workforce and highlights the irregularities in the existing compliances and the measures to be taken to be compliant with applicable laws. 

The following advantages arise from conducting an HR audit:

1. Identification of inefficient systems and practices.
2. Avoidance of malpractices/ adverse practices having an unfavorable impact on the work environment. 
3. Improvement of existing policies and processes that have a direct impact on employees, which in turn helps employee retention.
4. Compliance with applicable laws.
5. Avoidance of any regulatory penalties.
6. Fostering equal and fair opportunities to all employees

HR Compliance Audit: Model Process

A company can conduct an HR compliance audit through the six steps described below: 

  • Identifying the scope of the audit

    The audit team should identify the underlying goals for conducting an audit. If the business/ entity has not conducted an HR audit before this, the team should undertake a comprehensive audit of all policies, processes, and practices. However, if the goal is only to determine the effectiveness of a particular process, then such audit should be focused on such practice/ process only.

  • Prepare a questionnaire/ requisition for information required:

    Once the scope is identified, it should prepare a list of requirements or questions concerning the subject matter at hand to ensure that information is collected streamlined and effective.

  • Collection of required data:

    Upon preparation of the requisition list, it should undertake the process of information collection. In this process, the requisition list can be used as the roadmap for the collection of relevant information through appropriate parties.
  • Review information collected and identified non-compliances/ inefficient practices:

    Upon collection of information, each document will have to be reviewed to check for non-compliance and/or effectiveness or ineffectiveness depending upon the goals of the audit identified under step 1 of this process. 
  • List action points and feedback:

    Upon review and summarization of the issues, proper measures should be identified to be taken in respect of these issues. Further, it should provide inputs to ensure that the compliance and policies are better equipped for compliance with applicable laws.
  • Ensure compliance through the favorable environment:

    Once the audit is concluded, the HR department should, through constant observation, ensure that the policies/ measures are being implemented properly for the benefit of all. Further, the business/ entity should undertake a periodic review of all policies and practices implemented to ensure the better functioning of the concerned entity. 

HR audit facilitates an entity/ business to understand whether its HR policies help, hinder, or have little impact on its business goals. It also helps quantify the results of the department's initiatives and provides a road map for necessary changes. 

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