Hidden risks Featured

8:00pm EDT August 26, 2009

You probably assume your human resources manager knows all the laws that apply to your business and is taking all the necessary steps to ensure compliance. But what if you’re wrong? Lack of compliance could ultimately cost you your business.

Conducting an HR assessment will alert you to any areas where your company is not in compliance.

“Too many CEOs think of HR as a housekeeping function and don’t recognize that it’s one of the highest claims areas that every company faces,” says S.A. “Sam” Murray, CEO of ManagEase, Inc. “One out of four companies will be sued for an employment-related matter, and most of the time, the claims are significant. In Orange County, the average jury award for a claim is $250,000, and that’s a cost most businesses would not be able to bear easily, if at all. And, more often, claims are settled out of court for significant amounts of money in order to avoid the risk of a jury decision.”

Smart Business spoke with Murray about how to use annual HR assessments to uncover risk factors and understand the options for fixing them.

What is the first step in assessing HR status?

The first step is hiring an outside expert just as you would hire an outside expert to audit your finance department. Most CEOs assume their HR manager is ensuring compliance, but that employee may have limited training and resources. They may read something and believe it to be true, or go into an online forum to get information without any idea of whether the source is credible.

It’s a rare HR person who has the skills and time to stay up-to-date on all the state and federal laws and regulations that apply to the company they serve. Compounding this deficit is the fact that the HR person generally reports to a senior manager who doesn’t have the knowledge base to supervise the position or serve as a technical resource.

With companies trying to keep costs down, they’re hiring less expensive and less experienced HR people or assigning the function to a person with no HR training. This can only increase their liability.

What happens during an assessment?

The assessment expert will evaluate a broad spectrum of documents and procedures. In addition to personnel files, the assessment looks at compliance with labor law; benefits, COBRA and ERISA requirements; HIPAA and confidentiality policies; company handbook, records retention and file security; decision-making processes and documentation for hiring and compensation; EEO compliance; wage and hour compliance; required trainings; OSHA and much more.

Wage and hour law compliance remains one of the biggest areas of liability for companies and yet this is an area where virtually all companies have some exposure. I’ve seen companies cut deals with employees for illegal practices, for example, paying time-and-a-quarter for overtime instead of time-and-a-half, believing they can override the law without consequences. In today’s information world, such practices are easily discovered by employees and their attorneys.

Once the assessment is done, what are the next steps?

Once senior management has accurate information, it’s up to them to determine whether to implement the assessment’s recommendations. Some companies move immediately to correct their deficiencies. Others say, ‘Yes, we know that we aren’t doing that correctly, and we’re living with that level of risk because we can’t afford to fix it.’

Some companies are more comfortable with risk than others, but knowing what risks exist and choosing to do nothing is still better than not knowing what exposures you have.

What is the risk of failing to do an annual assessment?

Without regular ‘checkups’ you risk having something surface down the line for which you won’t have any defense. You won’t be able to show you changed your policy or took action to remedy the issue when you became aware of it. Most of the time, the issues that arise are things CEOs are unaware of until they are notified of a claim. Then they go to the HR person for explanations or assistance and find that HR does not have the needed documentation, or worse, has communications or other proof that illegalities have been occurring, which will now be discoverable under the law.

Once an employee is successful with a claim, you may face punitive damages, which are awarded in situations where management should have known that actions or corrections needed to be taken. A CEO can say, ‘My HR person didn’t tell me,’ but the court will always hold the opinion that it is the CEO’s job to ensure all employees are doing their jobs, especially when it comes to complying with the law. Authorizing an assessment is probably the single smartest thing business leaders can do to evaluate their liability for employment-related issues.

Ultimately, one of the best risk protections is to outsource these types of complex functions to specialized companies. When you outsource, you transfer liability to the vendor and can demand a level of expertise from that service provider that is usually far greater than an employed manager will provide.

S.A. “Sam” Murray is CEO of ManagEase, Inc. Reach her at (714) 378-0880 or sam@managease.com.