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Employment Practice Audits The Seven Most Common and Often Costly Mistakes

January 6, 2011

It’s a typical scenario in a stagnant economy: Companies lay off employees to cut costs and those employees sue their former employers—often as a class-action lawsuit—for discrimination. Huge settlements can result.

In this environment, companies have alternatives to protect themselves from significant financial risk. One answer for proactive human resources managers is employment practice audits, which provide a relatively low-cost way to nip problems in the bud before a potentially costly lawsuit is filed.

Audits allow employers to examine key workforce decisions including:

• Layoffs
• Promotions
• Base pay
• Merit increases
• Performance ratings
• Bonus and stock allocations

Human resources departments can also use audits to assess the potential impact these decisions have on protected class members. But how do you make sure your audit is effective? The following are the most common, and sometimes most costly, mistakes made when conducting employment practice audits:

1. Waiting until a discrimination claim is raised or filed to conduct an audit.
A key benefit of auditing is prevention. Conducting an audit before a discrimination claim is made puts employers in a proactive instead of a reactive position. Systematic record-keeping by the HR department through ongoing audits enables employers to respond more effectively when claims of discrimination are made or employment decisions challenged.

2. Not conducting audits on a regular basis.
Workforces are dynamic. Employees change jobs, acquire more experience, receive pay increases, move locations and continually flow into and out of a company. Consequently, it is important for a company to evaluate its workforce on an ongoing basis. HR best practices should dictate annual audits.

3. Waiting until decisions are made final before analyzing employment practice outcomes.
Even in a company with the best of intentions, it is possible to have a neutral or objective decision-making process that inadvertently has an adverse impact on a protected group of employees. Conducting an audit of workforce-related decisions allows HR professionals to proactively evaluate potential legal liabilities before decisions are final. “Real time” audits often examine merit increases, ratings, bonus allocations, stock grants and promotions during the annual review process or layoffs during a planned reduction in force.

4. Not protecting the confidentiality of the audit.
Before conducting an audit, employers should take steps to make sure the contents of the audit remain confidential. Working with experienced inside or outside counsel is critical to maintaining the privileged nature of the audit. Maintaining confidentiality will minimize the risk of materials generated during the audit process being used against the company in future litigation.

5. Not using appropriate analysis techniques.
When preparing analyses, it is important to identify “similarly situated” employees and to use generally accepted techniques. An experienced economic consultant can work with the HR department to develop the appropriate statistical models for examining employment decisions for potential disparities.

6. Not properly archiving data.
It is not uncommon for companies to do a good job of monitoring their workforce in real time, but they sometimes fail to keep copies of the underlying workforce data. Without proper record-keeping, replication of results for earlier time periods can be challenging if not impossible. Rebuilding these databases retroactively can be a time-consuming and costly undertaking. Adequate record-keeping is key to a cost-effective and timely response to discrimination claims.

7. Failing to investigate potential problem areas or take corrective action.
This seems obvious, but it is a critical aspect of the audit process that is sometimes overlooked. A company may conduct audits for purely self-evaluation purposes, and not feel the need to take the next step and address potential problem areas. Whether it is because of an oversight, budgetary reasons or potential concerns of reverse discrimination claims, conducting an audit but failing to act on the findings creates its own set of risks should the audit become discoverable in litigation down the road.

Done properly, the benefits of an employment practice audit far outweigh the risks and data gathered from an audit provides vital information for employers in mitigating exposure to discrimination claims and costly lawsuits.

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