Compliance audit. For contingent workforce managers, it’s a word powerful enough to fear.
And knowing that failing an audit incurs costly consequences, such as back wages, financial penalties, and a damaged reputation, doesn’t alleviate any anxiety.
Vendor management leaders can offset the risk of noncompliance by preparing for a vendor compliance audit—an assessment of an organization’s ongoing adherence to federal regulations.
So what is a vendor compliance audit?
A vendor compliance audit is an investigation by the U.S. Department of Labor (DOL) into compliance practices of organizations that partner and contract with staffing agencies and the nonemployee labor they supply.
Where Do Vendor Risk and Compliance Intersect?
Federal compliance audits can occur unannounced and for any reason.
A proactive approach to measure risk in your vendor management program is the key to protecting your organization from noncompliance in areas including
- Third-party risk – The most widely cited challenge in compliance and ethics programs is vendor and supplier risk, with only 61% of organizations reporting that they conduct annual risk assessments.
- Worker classification – Between 10–20% of employers misclassify at least one worker. And the Internal Revenue Service (IRS) estimates organizations have misclassified millions of workers.
Risk can also increase when vendor program managers lack detailed record-keeping practices and visibility of their vendor and workforce data.
You may also like: 6 Ways to Mitigate Risk in Your Contingent Workforce Program
How to Prepare for Your Vendor Compliance Audits
Due to the complex and specific requirements of federal agencies, HR managers and procurement departments must maintain compliance across their vendor management program.
Staying audit-ready sounds difficult, but rest assured—tackling vendor audit preparation one step at a time makes the process more manageable.
1. Verify Worker Classification
Whether your team is considering a vendor program or you already have one in place, it’s important to understand the vendors and the types of workers they employ (e.g., independent contractors or W2s).
Classification can become overwhelming. So for HR and procurement teams new to vendor management, or those looking to brush up on the latest regulations, here are some resources that provide an overview of supplier relations and worker classification:
- Traditional vendors and types of modern third-party relationships
- Independent contractors (ICs) as defined by the IRS
- IRS common law regulations and IC forms W-9 and 1099-MISC
- Employment relationships as defined under the Fair Labor Standards Act (FLSA).
Each regulation bears its own financial, legal, and security accountabilities, so accuracy on all fronts is necessary to assess compliance risk across your vendor management program.
2. Document Vendor Management Processes and Data
To maintain full compliance, program managers must document every process across the vendor lifecycle.
Meticulous records hold both parties accountable for meeting contract standards and program integrity (e.g., the security of your program management technology).
Serving as a single source of record, a vendor management system (VMS) supports this need by automating critical processes, from requisition workflows to budgets and cost control, while also increasing visibility of your vendor management program.
A VMS supports all aspects of vendor compliance, including
- Managing staffing services
- Maintaining security policies
- Tracking and reporting vendor performance
- Storing compliance documentation, data, and reports.
Together, these features support continuous vendor compliance—from initial vendor selection to partnership termination.
3. Perform a Vendor Risk Assessment
Vendor risk management ensures that the relationship between two parties complies with vendor contracts, service-level agreements (SLAs), and federal regulations.
Carefully managing this relationship safeguards your organization from supply chain breakdown, reputational damage, and exposure to financial risks or fraud.
Once you verify worker classification, identify potential risks across your vendor management programs and, if you’re still early in the process, the vendors that you’re vetting.
In a joint effort, HR leaders, procurement, and compliance officers need to establish a comprehensive third-party risk management plan for total security across their processes, people, and property.
To gauge compliance accurately, perform a vendor risk assessment that measures compliance using standard metrics like
- People screening
- Physical security
- Record management
- Data privacy and cybersecurity.
4. Deploy Technology to Monitor Vendor Compliance
Managing contract compliance is a common challenge for compliance professionals in enterprise-level organizations.
Yet only 66% of compliance officers report that their organization uses technology to support compliance initiatives. And less than half say their processes include data monitoring and analysis.
A comprehensive vendor compliance program comprises processes such as
- Drug screenings
- Background verifications
- Professional certifications
- Security clearance and training
- Forms of indemnity
- Non-disclosure agreements (NDAs)
- Code of Business Conduct and Ethics.
Many organizations use spreadsheets to manage and track these procedures. This practice is not only cumbersome and inefficient, but puts your vendor program at an increased risk for errors and gaps in compliance.
A flexible vendor management solution, like VectorVMS, enables integration with other HRMS platforms, ensures vendor compliance and security, and scales as your engagements increase.
Need a solid business case for a VMS? Create one with a step-by-step guide [infographic].
5. Conduct Compliance Audits
Internal compliance assessments improve vendor audit preparation significantly. But surprisingly, of organizations that conduct them, only half report that they analyze audit results. And an even lower number of employers seek external audits.
Whether planned or ad hoc, internal or preemptive audits ensure your organization is ready to respond to official requests for information and documentation from auditors and regulatory bodies.
Perhaps more important, if your vendor compliance team or third-party auditor identifies that your company’s compliance processes have discrepancies, you’re able to mitigate those areas in advance of an official inquiry.
Even if an auditor finds no significant gaps, documented audit trails and compliance history provide another layer of security if or when your vendor management program is selected for an audit.
6. Organize a Vendor Audit Response Team
Assemble a team of subject matter experts and other vendor management program stakeholders who can respond effectively to compliance audits.
Your team’s vendor audit preparation should consist of efficient steps, defined roles, and clear responsibilities for specific tasks.
The team leader coordinates timelines, confirms task completion, and assigns functional and technical asset ownership to individuals who have access to relevant data.
Over time, your team will be able to refine and enhance their approach to vendor compliance, optimizing your vendor management technology, process, and practices.
Comply with Confidence
By following these 6 steps, your company will be fully prepared in the event of a vendor compliance audit.
With a team and vendor audit plan in place, HR and procurement leaders gain confidence in the company’s approach to vendor compliance.
Not only will this reduce risk across your contingent workforce management program, it will also improve your relationships with staffing suppliers and ensure that your company gets the most out of this critical component of your total workforce.