6 HR Mistakes That Put You at Risk of an Audit

In today's complex regulatory environment, it's often not a question of "if" your business might be audited; it's a question of "when" and “by whom.”

One wrong move can put your organization under the microscope, especially in a climate where, as attorney Gerald Maatman told the Society for Human Resource Management (SHRM), “More class actions are being filed and are being settled at higher numbers than before. Companies are entering a new era of higher risks and higher stakes." 

But what makes businesses so vulnerable? When it comes to compliance, confusion and ignorance are often the biggest risks. Uncertainty is the leading cause of employee noncompliance. According to research from Gartner, 87% of employees reported encountering situations in the last 12 months where they simply didn’t know how to comply. No one can practice good compliance if they don’t know what compliance requires. 

Unfortunately, HR professionals themselves aren’t necessarily much better equipped. UpCounsel, a site that pairs growing companies with legal representation, claims that 50% of HR professionals lack confidence in their ability to keep up with ever-changing rules, and nearly two-thirds of them (64%) say they don't have the resources to manage HR compliance effectively. 

That’s why a strong HR risk management strategy is essential. Without it, simple mistakes can spiral into full-blown compliance audits, penalties, and lawsuits. Here are the most common HR mistakes that put businesses at risk of a HR compliance audit, plus how to avoid them.

1. Payroll Inaccuracies

Failing to pay employees for all hours worked, including overtime when applicable, is one of the fastest ways to trigger a Department of Labor (DOL) compliance audit. 

According to a 2024 report from the Economic Policy Institute (EPI), U.S. employers underpaid workers by more than $700 million between 2021 and 2023, with over $200 million more reported on the state level. Wage and hour violations can cost companies an average of tens or even hundreds of thousands of dollars in back pay and penalties. 

That said, compensation can be surprisingly hard to get right. Two out of every five employers struggle with payroll accuracy, and errors can quickly worsen until they trigger class-action lawsuits and recovery efforts by DOL. 

And, for what it’s worth, it’s not just underpayments that are worth an employer’s attention. Many of the 13.6 million American workers who say they’ve been overpaid indicate they’d only report the overpayment if it exceeded $463, which means many employers who are inattentive or struggling with payroll issues might be losing money too.

(For more information on getting help in this area, here’s what to look for in a payroll service.)

2. Misclassifying Workers

Misclassification, or treating employees as independent contractors or exempt when they shouldn’t be, is rampant. EPI has found that up to nearly a third of employers misclassify at least some workers. In fact, the think tank Century Foundation estimates that as many as 2.1 million construction workers alone are either misclassified or otherwise paid illegally. Ultimately, misclassification affects compliance with wage law, tax obligations (IRS), and benefits eligibility (DOL). 

But here too, compliance can be incredibly complicated. The IRS has a complex test involving as many as 20 separate factors to determine worker classification. Unfortunately, failure to get it right could trigger an audit and, in extreme cases, even end up causing the closure of the business.

3. Off-Limit Interview Questions

Asking about age, marital status, religious affiliation, disabilities, or other protected characteristics during interviews can spark claims of discrimination under Title VII of the Civil Rights Act, the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA). If there’s a pattern of violations, the Equal Employment Opportunity Commission (EEOC) could launch an investigation. 

Worse, interview questions don’t even necessarily have to be outright illegal to be a violation if they still steer the interview into prohibited subject matter. "Taboo topics are not blatant violations of any law, but they may have the tendency to lead the conversation into illegal territory, or may place the employer in a bad public relations light," Charles Vethan, President and CEO of Houston-based Vethan Law Firm, told SHRM.

4. Prohibiting Salary Discussion

Pay transparency is a big deal these days. Telling employees that they can't discuss their wages is illegal under the National Labor Relations Act (NLRA). Even policies that merely "discourage" pay discussion can draw scrutiny. 

And it’s not just the federal National Labor Relations Board (NLRB) that could audit or investigate a company following complaints, either; there’s a lot of activity in this area happening at the state level. “Be aware that pay transparency is very, very heavy on the minds of state legislatures,” says Janell Stanton, an HR and employment attorney at Minnesota-based law firm Wagner, Falconer & Judd.

5. Outdated Handbooks

An outdated handbook is worse than none at all because it can create legal liability if it misstates employees’ rights. Plus, some jurisdictions mandate that certain information be communicated to workers via handbook. SHRM, for example, notes that the state of Virginia requires that employee handbooks include specific disability and pregnancy accommodation information. 

“Ultimately, failure to properly update your handbook can leave an employer exposed to liability,” concludes SHRM. “Updating a handbook may not be your favorite to-do item, but employers really can benefit from making this an annual exercise.”

6. Not Ensuring a Safe Workplace

Failure to provide a safe work environment violates Occupational Safety and Health Administration (OSHA) regulations. Workplace injury claims almost always result in audits and, if substantiated, significant penalties ranging from $16,550 per isolated violation up to $165,514 per violation if the violations are determined to be willful or repeated. 

“There's really no typical penalty because penalty assessment will differ based on statutory factors including gravity of hazard, good faith of employer, size of the business, and history of violations," says John Ho, an attorney with Cozen O'Connor in New York City. In extreme cases, OSHA may even refer the case to the Department of Justice for criminal prosecution.

Compliance Is About More Than Just Avoiding Penalties

Of course, HR compliance isn’t just about dodging fines, HR compliance audits, and lawsuits. Good compliance is a competitive advantage. Businesses that get it right are better positioned to attract and retain top talent, maintain their reputations, and focus on growth without fear of unexpected regulatory action.

One of the smartest moves a business can make is partnering with an expert. Over a third of businesses now outsource some or all HR compliance functions to third parties like Professional Employer Organizations (PEOs). These experts provide dedicated, continually updated knowledge of federal and state labor laws. Third-party compliance experts ensure that businesses stay compliant while freeing leadership to focus on core operations, confident that their HR risk management strategies are sound.

In today’s high-risk environment, a robust HR compliance audit strategy isn’t optional; it’s essential for survival and success.

CoAdvantage, one of the nation’s largest Professional Employer Organizations (PEOs), helps small to mid-sized companies with HR administration, benefits, payroll, and compliance. To learn more about our Professional Risk Management Services, contact us today.

**The information provided on this website is for general informational purposes only and does not constitute legal advice. While we strive to ensure the accuracy and completeness of the information, we make no guarantees about its correctness, completeness, or applicability to your specific circumstances.  Laws and regulations are subject to change, and you should consult a qualified legal professional before making any decisions based on the information provided here.