Enterprise Risk Management:
Common HR mistakes and how they can be costly for your company
February 12, 2020
By Amy Letke, SPHR, GPHR
Human resources can be a challenging aspect of any business. There's a lot to keep up with – and mistakes can create unnecessary risk and hinder business performance.
Yes, as an accountant, I think you know what I'm talking about – mistakes cost money. And if you're not careful, HR mistakes can lead to hefty fines, penalties and quite possibly, expensive lawsuits.
But there's no need to panic. In many cases, financial penalties can be prevented. Here are seven of the most common enterprise-level HR mistakes, and how you can avoid these risks or even fix them.
Mistake 1: Asking "whatever you want" in job interviews
Some questions are riskier than others, and some are flat out illegal. Asking questions about race, sex, religion, national origin, sexual orientation and age, for example, could be seen as discriminatory, which could potentially bring on a very costly lawsuit.
Discriminatory claims from inappropriate questions can even lead to Equal Employment Opportunity Commission (EEOC) investigations - which are another concern. In 2018 alone, there were over 70,000 charges through the EEOC – which resulted in $505 million in fines. Ouch.
To avoid legal problems and costly litigation, create a list of job-related interview questions and stay focused on the requirements for the role, rather than personal attributes that could lead to problems and be unprofessional.
Mistake 2: Not having good job descriptions
This one may appear harmless – but it's not. At worst, employees just aren't sure what they're doing, right? Wrong.
Besides the adverse effects on creating expectations and measuring performance, there are also legal and financial consequences. Inaccurate or non-existent job descriptions face potential Fair Labor Standards Act (FLSA) violations impacting overtime, exemption testing inaccuracies, Department of Labor challenges and even Americans with Disabilities Act (ADA) issues.
Creating accurate position descriptions for all jobs can fix this mistake. Be sure to include purpose (why the job exists), key responsibilities, physical requirements and typical activities expected.
Mistake 3: Failing to address and document performance problems
Failing to address and document performance problems is an easy mistake to make. But that doesn't make it any less harmful.
Let's say an employee repeatedly didn't show up to mandatory meetings and was eventually let go because of it. Now, the employee is suing for wrongful termination, stating that you violated the Federal leave of absence program to which she
Without proper documentation of the employee's absences (and no proof of addressing the problem), it may be pretty hard to convince a jury that the employees firing was for the reason you state. Considering legal defense in a lawsuit can cost upwards of $75,000 - $125,000, imagine what
losing would cost on top of that, considering penalties or fines.
You can see why it's crucial to deal with performance problems properly – and clearly. Be sure to document them professionally, thoroughly and based on facts, not opinions or hearsay, and address bad behaviors specifically. Then write out an action plan and give it to the employee in writing - outlining what you expect for moving forward.
Mistake 4: Thinking some or all employment laws don't apply to your company
So far, I've mentioned laws relating to the FLSA, EEOC, ADA – and I'm just getting started. Do you know the required employment laws? Do you know all the laws that relate to your company's size? You should. Compliance investigations are on the rise, and as I've mentioned, violations are quite pricy.
Avoid this costly mistake by learning which employment laws apply to you by your organization's size. (The big ones are: EEOC requirements, Department of Labor requirements and OSHA requirements.)
Stay on top of them – and remember, "not knowing them" won't be an acceptable defense.
Now, why is this so important? Well, assessing risk as well as HR effectiveness is essential for any organization's bottom line. How does one do that?
Once you identify an employment risk, your job is not over; it's just getting started. Assess the risk. What is its scope and probability for issues within the business? If the risk becomes a reality, what are some probable outcomes?
Let's take a look at an easy equation that can help us assess certain risks: L x C = V
The L stands for "likelihood," or the probability the risk will happen. C stands for "costliness," or the likely cost of loss if the risk happens. L multiplied by C equals V, the current value of the risk.
Here's an example of how the equation works. First, choose one of the following:
A. Incurring a 50 percent risk of losing $1,000.
B. Incurring a 10 percent risk of losing $10,000.
Which risk would you choose? The answer should be A: .50 x 1,000 = 500. The value of your risk is a loss of $500. If you chose B (.10 x 10,000 = 1,000), the value of your risk—$1,000—would be the higher risk.
In the example above, sometimes decision-makers choose the lower percent of risk but may sacrifice a higher cost if that risk is recognized. The moral to the story is: assess not only
the risk – but the cost of the risk as well.
Mistake 5: Making all staff salaried
Now to compensation or how you pay employees. Some employers don't want to have to deal with paying overtime, so they make everyone "salaried." It may sound like a good idea until someone gets disgruntled.
Let's say someone is receiving their pay as a salary, but the job description doesn't pass the Fair Labor Standards Act salary exemption test. In the course of my HR career, I have seen this mistake cost employers between $50,000 and $80,000 or more in back pay due to the nonpayment of overtime.
Department of Labor violations and even problems of internal equity could surface with making all staff salaried. This mistake can be avoided by having solid job descriptions, conducting exemption testing for each job and understanding overtime rules.
Mistake 6: Keeping poor employment records
Record retention is a big part of human resources. Employment records – including personnel files, performance issues documentation and I-9 information – need to be stored appropriately and retained.
What's the consequence of not doing this? You guessed it: legal issues and fines. A typical I-9 Immigration form fine, for example, can cost about $1,000 or more per error.
Fix this mistake by getting your employment records and files in order. Find out the retention periods for different documents and keep and dispose of them accordingly. Remember: having too much is just as bad as having too little. Also, be sure to audit your I-9s to make sure they are accurate.
Mistake 7: Not having an employee handbook or having one that is out of date
Now that I've mentioned several employment laws and their costly consequences, it's time to talk about employee handbooks. Employee handbooks contain all workplace policies and address issues pertaining to laws – they should provide clear work rule expectations and outline benefit programs too.
Not having one can be a big mistake. Employee handbooks can help protect a company from fundamental misunderstandings and more challenging issues such as lawsuits.
Employee handbooks should be updated regularly to keep compliant with the company and law changes. The top issues I see with businesses are:
- outdated handbooks
- unused policies
- inconsistant enforcement of policies
- stating inaccuracies
So, to avoid these mistakes, create a compliant employee handbook at your company. If your company has one, but it hasn't been reviewed in the past year or so, review and update it to reflect current policies and laws.
That's it for some of the most common HR mistakes.
Though this list isn't comprehensive (there are plenty more HR mistakes out there.), it is a good place for you to start.
The main takeaway is this: It is a best practice for businesses to be compliant with employment laws. Now, evaluate your HR risk and effectiveness, train your managers on proper HR procedures and good management practices, and get compliant.
By keeping within the guidelines I've mentioned, you'll be well on your way to passing HR compliance audits, reducing lawsuits and, of course, minimizing costly fines. Come to my session on Enterprise Risk Management at the KyCPA Spring Business Conference on April 17, (Click here for details and to register.) and learn even more about the risks of employment matters in your workplace.
About the author: Amy Letke, SPHR, GPHR is founder and CEO of Integrity HR Inc. in Louisville. She can be reached at email@example.com.