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Will Your HR Department Withstand a Government Audit?

By Candace Walters


Woody Allen once quipped “confidence is what you have before you understand the problem.”

The 10 words sum up what many businesses, including middle-market and small companies, are starting to feel as 2013 brings in broader workplace requirements for employers and hard-line enforcement by government agencies.

A few news items to think about:

§ The U.S. Equal Employment Opportunity Commission (EEOC) stated last year that it had secured $365.4 million in monetary damages against employers — a $700,000 increase over the previous year and the highest level of monetary relief that the agency has ever reported.

§ In 2012, the Immigration and Customs Enforcement (ICE) assessed $13 million in fines, and arrested more than 200 employers accused of criminal violations related to employment.

§ Since September 2011, the Wage and Hour Division has collected more than $9.5 million in back wages, primarily for minimum wage and overtime violations under the Fair Labor Standards Act, which resulted from more than 11,400 workers being misclassified as independent contractors or otherwise not properly treated as employees.

“In this climate, all companies should pay close attention to regulation changes, especially in the health-care area,” said Mary Beth DiBacco, assistant vice president, specialty manager at the Chubb Group of Insurance Companies office in Rochester and expert in Employment Practices Liability Insurance.

To avoid becoming part of the fiscal year 2013 statistics, DiBacco said, employers should carefully reexamine their HR policies, procedures, and practices. The good news (sort of) is that agencies like the EEOC have made it easy to prioritize compliance efforts for 2013 and beyond.

The EEOC’s new strategic enforcement plan points to hiring, pay, and harassment as three areas of focus. Armed with this guidance, employers of all sizes should consider conducting an HR audit to ensure that their policies and practices are not creating liabilities for their companies.


What is an HR audit?

Used optimally, a human-resource audit provides senior management with an analysis of how well the company is complying with government regulations and specifically identifies gaps in compliance. An audit uncovers exposures and defines an action plan for addressing them.

Below is a short list of 2013 “hot topics” that should be part of any HR audit:


Health-care reform

A number of Affordable Care Act deadlines are upon us:

§ One is the requirements that employers notify employees this summer of the availability of state and federal health exchanges, which are required to be ready for open enrollment later this year.

§ Large employers (those who issued 250 or more W-2s in 2011) were required in January 2013 to disclose the annual cost of their group health-insurance coverage to employees on the 2012 W-2 forms. All employers will be required to disclose this information on 2013 W-2 forms.

§ A major change set for 2014 is the mandate that employers with 50 or more full-time equivalent employees provide affordable, minimum value health insurance or pay a tax penalty.

Independent contractors

§ The U.S. government loses approximately $3 billion a year on taxes for misclassified workers. In 2011, the IRS vowed to be more vigilant in finding employers who improperly classify workers as independent contractors.

§ Adding to the confusion for small firms is that an employer’s view of who is an independent contractor may not align with the government’s definition. The guidelines defining independent contractors can be difficult to interpret.

§ The stakes are higher than ever for employers, particularly those who have close to 50 full-time employees. Worker misclassification can trigger the health-care employer mandate. This could result in having to pay back taxes in addition to potential penalties associated with the health-care law, should the revised classification push the firm’s employee headcount over the threshold.


Background checks

§ The EEOC has issued updated guidelines on employers’ use of arrest and conviction records in employment decisions. Policies or practices that exclude candidates with any criminal record will not satisfy the EEOC’s requirements.


Form I-9 compliance

§ The seemingly simple, one-page, I-9 form is accompanied by a manual of almost 70 pages of instructions and frequently asked questions. Failure to execute the Form I-9 or comply with its complex requirements has resulted in millions of dollars of sanctions against employers.

§ Even when filed, employers may be fined for errors found on the Form I-9. Fines for substantive violations and uncorrected technical violations range from $110 to $1,100 per violation.


The “other” reasons for doing an HR audit

If staying on the right side of the law and reducing legal exposure are not enough incentive to launch an audit, there are a few more reasons to consider: cost savings and strategy.

More often than not, small to mid-size companies find audits yield immediate benefits. Correcting benefit premium errors and overpayments, for example, can generate many thousands of dollars in savings. Audits also can be used to identify opportunities to outsource areas within human resources that offer little value to the company.

It’s important to remember that HR can serve a strategic purpose — one that has proven to be a competitive advantage and a boost to the bottom line. Companies that complete a thorough HR audit for compliance and cost reasons can also use the gained insight to ensure that HR practices are linked to and play a vital role in the company’s strategic planning and execution.


Candace Walters is president of HR Works, Inc. (, a human-resource outsourcing and consulting services firm, which is based in Fairport and also has a DeWitt office. To reach HR Works, contact Director of Business Development Adam Dusseault at (315) 299-6982 or email:


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