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Debbie Rabishaw is a consultant who works with small and medium-sized businesses ranging from 2 to 200 employees. She has seen firsthand how hidden HR risks can quietly erode a company’s bottom line. For this article Debbie provides practical strategies to help businesses strengthen their workforce, improve compliance, and foster a people-first culture.
When it comes to managing business risks, most business owners focus on the usual suspects—financial and tax audits, legal compliance, and insurance. However, one of the most overlooked areas of risk management is Human Resources. In fact, taking a “risk inventory” of your people-related practices isn’t just critical for daily operations; it’s also a strategic step when preparing a business for sale. Having a well-documented HR audit as part of your due diligence process not only demonstrates organizational health but can also increase the value of your business, making it more attractive to potential buyers and improving offers at the point of transaction.
Assessing your HR practices is essential to uncovering hidden vulnerabilities that, if left unchecked, can lead to costly penalties, legal issues, and operational disruptions. From labor law compliance to building a positive workplace culture, here are five reasons why reviewing your HR practices is essential for managing risk, complete with the likely costs and frequency of each risk becoming a reality.
1. Ensuring Compliance with Labor Laws
Potential Cost: Violating labor laws can be costly. For example, failing to comply with wage, hour, and overtime regulations can result in fines, back-pay settlements, and legal fees that total tens of thousands—or even millions—of dollars. Penalties for non-compliance can create severe financial strain, regardless of the organization’s size.
Likelihood of Occurrence: High. Employment laws change frequently, and even well-intentioned businesses can easily make errors that lead to costly penalties. Organizations that operate across multiple states face added complexity, as they must navigate varying laws and requirements.
2. Enhancing Employee Relations and Engagement
Potential Cost: Poor employee engagement leads to high turnover, costing a business between 50% and 200% of an employee’s annual salary to replace each individual. On a larger scale, disengagement costs U.S. businesses hundreds of billions in productivity losses each year. Turnover costs accumulate quickly and impact team morale.
Likelihood of Occurrence: Moderate to High. Without mechanisms to gauge employee satisfaction and resolve issues proactively, disengagement can easily take root, leading to higher turnover, productivity loss, and recruitment expenses.
3. Protecting Against Legal Liabilities
Potential Cost: Employment-related lawsuits are both costly and time-consuming. A single wrongful termination or discrimination case can range from $50,000 to $250,000 in legal fees and settlements. In cases involving multiple employees, class-action lawsuits may result in multi-million-dollar settlements and long-term reputational harm.
Likelihood of Occurrence: Moderate. While not an everyday issue, legal liabilities can arise from inconsistencies in interviewing, hiring, promotion, or disciplinary practices. Ensuring consistent and fair practices reduces the risk of discrimination claims and legal disputes.
4. Optimizing Operational Efficiency
Potential Cost: Inefficiencies in HR processes can cost thousands of dollars in lost productivity and administrative expenses. For instance, a 100-employee organization with an inefficient onboarding process may lose an estimated $50,000 annually to wasted time and resources.
Likelihood of Occurrence: Moderate. Many organizations unknowingly retain outdated processes or lack appropriate HR technology. Regular assessments can identify areas for improvement, enabling teams to streamline workflows, reduce manual tasks, and allocate resources to more strategic priorities.
5. Strengthening Organizational Culture and Brand Value
Potential Cost: Misalignment between HR policies and company culture can drive higher turnover, damage the employer brand, and even lead to reputational damage. Rebranding efforts to rebuild a damaged reputation can range from $100,000 to several million dollars, depending on the extent of the issues.
Likelihood of Occurrence: Moderate to High. Especially during times of growth or significant change, such as mergers or acquisitions, culture misalignments can easily occur. Ensuring HR policies are in alignment with the company’s values helps reinforce a positive culture, which both employees and customers value.
HR Audits: A Simple Solution for Lasting Protection
An HR audit is a comprehensive review of an organization’s HR policies, practices, and procedures. Think of it as an “HR checkup”—one that helps identify gaps, inconsistencies, or outdated policies that could lead to compliance issues or operational inefficiencies. During an audit, professionals review everything from hiring and onboarding processes to employee handbooks, disciplinary practices, benefits administration, and even HR technology.
By conducting an HR audit, you gain a clear picture of where your organization is strong and where it might be vulnerable. This proactive approach not only helps ensure compliance with labor laws but also enhances employee engagement, reduces turnover, and strengthens your overall workplace culture—all of which contribute to the business's long-term value.
With regular HR audits, you can avoid unexpected penalties, reduce turnover, strengthen your workplace culture, and reinforce the stability and sale-worthiness of your business—all essential factors in boosting your business’s long-term and short-term value. These audits are a proactive measure that pays dividends by protecting your business from costly pitfalls.
Interested in learning more?
If you’d like to explore how an HR audit could protect your business, reduce risk, and increase value, feel free to reach out to Debbie Rabishaw at debbie@nextstepadvisory.us, or visit her website, Next Step Advisory. Next Step Advisory can help you ensure your HR practices are as strong and sustainable as your business itself.
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