Employment and Labor Audits

Recent record jury verdicts and settlements in employment lawsuits have received a lot of publicity, and most employers are aware of the increased union activity in the Carolinas. These developments underscore the importance of conducting periodic employment and/or labor audits as a tool for employers to evaluate their organizations' compliance with employment laws.

Like financial audits, which are undertaken annually to assess an employer's financial health, employment audits provide a systematic means for employers to determine their exposure to employment lawsuits and to minimize potential liability by taking preventative action.

Labor audits seek to determine employee attitudes toward the employer and to identify possible areas of vulnerability to a union organizing drive. An overview of employment and labor audits follows.

Employment Audits

The scope of an employment audit depends on the objectives and needs of the employer, but generally focuses on two areas:

First, determining which federal and state laws apply to the employer. For example:

  • Employers with 15 or more workers are subject to Title VII of the Civil Rights Act of 1964 and the Americans with Disabilities Act (ADA), which prohibit discrimination on the basis of race, color, sex, national origin, religion, and disability.
  • Employers with 20 or more employees are covered by the Age Discrimination in Employment Act (ADEA), which prohibits age discrimination.
  • If an employer has 50 or more employees within 75 miles of one of its locations, it is covered by the Family and Medical Leave Act (FMLA).
  • Other federal laws generally applicable to all employers include the Fair Labor Standards Act (FLSA), the Occupational Safety and Health Act (OSHA), the Immigration Reform and Control Act, and the Worker Adjustment and Retraining Notification Act.
  • If an employer is a federal contractor, it may have to comply with additional federal requirements, such as Executive Order 11246, which imposes affirmative action obligations.
  • South Carolina laws generally applicable to all employers include the Employee Reference Law, the Trade Secrets Act, and the Wage Payment Act.
  • North Carolina laws generally applicable to all employers include the Wage and Hour Act, the N.C. Occupational Safety and Health Act, and the Retaliatory Employment Discrimination Act.
  • Businesses which employ commercial vehicle drivers may have to comply with U.S. Department of Transportation drug testing regulations.

Second, determining whether the employer's policies and procedures comply with the laws that apply to the employer. This part of the audit is accomplished by reviewing how the employer handles important aspects of the employment relationship, including the following:

Employee Handbook

While employee handbooks are vital communications tools, it is important that they contain a conspicuous disclaimer establishing that:

  • The handbook is not a contract of employment and is not intended to create any binding contractual commitments;
  • Both employer and employees retain a mutual right to terminate the employment relationship at will, with or without warning, notice, or cause; and
  • The employer retains the right to unilaterally modify, interpret, or discontinue any of the policies set forth in the handbook.

Also, each employee should be required to sign a form acknowledging that s/he has reviewed the handbook and that s/he has read and understands the handbook and the disclaimers.

Anti-Harassment Policy

An anti-harassment policy which prohibits sexual and other unlawful types of harassment (such as racial harassment) should be posted on bulletin boards and included in the employee handbook. The anti-harassment policy should:

  • Define sexual harassment and other types of unlawful harassment, using examples;
  • Identify the internal complaint procedures available to employees to complain of harassment without having to go through a harassing supervisor;
  • Explain that prompt investigation of the complaint will take place and that appropriate remedial action will be taken to stop unlawful harassment; and
  • Assure that employees will not be retaliated against for making complaints of harassment.

Also, supervisors should be trained to avoid engaging in any behavior that could be considered sexual in nature, such as flirting with subordinates or participating in "off-color" joking. Managers should be trained to investigate complaints of harassment.

Employment Application

Application forms should be reviewed to make sure that they do not make impermissible inquiries. To ensure compliance with Title VII, applications should not ask about birth dates, gender, race, marital status, financial status, or arrest records. To ensure compliance with the ADA, the application should not ask about medical conditions, worker's compensation injuries, disabilities, medical treatments, or medications received from a physician.

The application may, however, inquire about whether the applicant can perform essential job functions with or without reasonable accommodation. For example, the application could state: "This job requires you to move 40-pound parcels every few minutes. Could you do this with or without accommodation or assistance?"

Pre-employment Medical Inquires

The ADA prohibits requiring an applicant to submit to a physical examination at the pre-offer stage of the hiring process. An employer may require a medical examination after an employment offer has been made, and may condition the offer of employment on the results of the examination, as long as:

  1. All applicants are required to take the examination regardless of disability,
  2. The information collected is maintained confidentially in a separate file, and
  3. The results of the examination are used in compliance with the ADA.

Alcohol testing is considered a medical examination and cannot be required of an applicant until after a conditional offer of employment is made. On the other hand, drug testing is exempted from the definition of medical examinations under the ADA; therefore, an employer may require a pre-employment drug test before making an offer of employment.

Offers of Employment and Related Agreements

Job offers should clearly state that employment is at-will. Non-compete agreements should be reasonably limited in duration and geographic area. Finally, confidentiality agreements prohibiting disclosure of the employer's trade secrets should be prepared for new employees.

Job Descriptions

Employers should develop job descriptions which accurately describe the essential functions of each job. Accurate job descriptions are necessary to ensure compliance with wage and hour laws, and to provide a defense against charges of discrimination brought under the ADA. Employment audits will often reveal either an absence of job descriptions, obsolete job descriptions, or lists of duties that do not adequately or specifically identify the essential functions of the job.

Personnel Files

As part of the audit process, a checklist of all required information that must be kept in the employee personnel file will be developed. The employer will then sample personnel files to ensure that all necessary information is being maintained. Make sure that a properly completed 1-9 form has been prepared and executed for each employee. While this document can be kept in the employee's personnel file, copies of all I-9's for all employees may be retained in a separate 1-9 file for ease of access in the event of an Immigration and Naturalization Service audit.

All medical information, including information concerning medical exams, workers' compensation entries, drug testing, and medical leave requests, should be maintained in a separate medical file established for each employee and should not be placed in the employee's personnel file.

Performance Evaluations

The audit should determine whether supervisors are conducting employee evaluations on a regular basis and in a timely fashion. Nothing is worse than trying to terminate an employee for poor performance when no performance evaluations have been conducted.

Also, employers should make sure that supervisors are accurately evaluating the poor performance of underachievers. It is difficult to justify the discharge of a poor-performing employee when the employee has had years of satisfactory or superior evaluations.

Discipline and Termination

During the audit, an employer should examine its disciplinary policies and procedures to determine: (1) whether its work rules are being enforced uniformly by supervisors; (2) whether employees have notice of the work rules and the consequences of not following them; (3) whether discipline is promptly and consistently imposed for work rule violations; and (4) whether supervisors are uniformly and consistently documenting work rule violations and the discipline imposed.

Also, when investigating discipline and discharge cases, supervisors should inquire whether the employee has recently engaged in some type of protected conduct (for example, filing a sexual harassment charge), which the employee could assert as the real reason for the adverse action.

Leave of Absence Policies

The FMLA provides employees with twelve weeks of unpaid leave in a 12-month period to care for the employee's own or an immediate family member's serious health condition or to take care of a newborn or adopted child. All covered employers should have a written FMLA policy to ensure compliance with the Act and to take advantage of certain provisions of the Act which are helpful to employers.

Record Retention and Maintenance

Employers should develop a record retention policy because various federal and state laws have different record retention requirements, and a failure to maintain records could be used against an employer in the event of a lawsuit. For example, Title VII requires employers to keep application forms, resumes, job advertisements, and other records made or kept by the employer concerning hiring, promotion, lay off, or termination, for a period of one year from the date the records were made or the adverse action was taken.

The ADEA and the FLSA require employers to keep certain payroll records for three years. Occupational safety and health records must be kept for five years. Failure to keep OSHA records can result in civil fines.

Required Posting

Various employment statutes place an affirmative obligation on the employer to post required notices to employees informing them of their rights. Employers must determine whether all required federal and state notices have been posted.

Labor Audit

The purpose of a labor audit is to determine employee attitudes toward the employer, supervisors, and the job, and to identify possible areas of vulnerability to organizational drives by unions, which have recently exhibited increased activity in the Carolinas. Labor audits usually involve several steps, including the following:

  • Review of the company's union-free, no solicitation/no distribution, bulletin board, and visitor access policies.
  • Determine whether all employer policies not only comply with legal requirements, but also convey to employees that their needs are a matter of concern within the corporate hierarchy. This can be accomplished by developing an environment in which (1) employees are encouraged to communicate with management, (2) individual efforts are recognized, and (3) there is opportunity for advancement.
  • Determine how employees are compensated in relation to the area average for similar employees.
  • Face-to-face interviews with a representative sample of about 10 to 20 percent of unit employees, coupled with similar interviews of managers and supervisors.
  • Training sessions for supervisors. Supervisors must understand why it is critical for the employer to maintain non-union status. They should be trained to be alert to signs and sources of employee discontent.


The importance of conducting periodic and systemic employment and labor audits cannot be over-emphasized. The audit process allows employers to proactively identify and correct their own problems, and to avoid the more costly alternative of having the problems addressed by legal action. Because of these benefits, employers should treat employment and labor audits just as seriously as financial audits.

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