HR Risk Management: A Practitioner’s Guide
Navigating the world of work is becoming increasingly challenging, and there are many HR risks that organizations need to handle to stay compliant and thrive. Let’s dive into all you need to know about HR risk management.
What is HR risk management?
There is no way to avoid risk in business. Risk management is anticipating and preparing for potential downfalls to minimize consequences. Organizations have to apply risk management across their entire operations, but HR should focus on the risks it’s uniquely responsible for.
Risk management in HR means assessing and dealing with the potential risks that come with having a workforce. These risks are related to how you hire, retain, and manage employees and other types of workers, as well as employee behavior.
HR risk management is about contemplating likely scenarios and outcomes so you can minimize precarious situations, have adequate solutions in place, and even prevent problems from ever occurring.
There are four common risk management techniques that HR can also use:
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- Avoidance – Evading the actions that will generate or increase risk.
- Retention – Conceding the inevitability of particular risks because avoiding them poses more cost/risk than the loss.
- Loss prevention and reduction – Containing risks that can’t be eliminated and keeping losses to a minimum.
- Transfer/Sharing – Shifting some or all of the risk to a third party.
How to apply these techniques to HR will depend on your organization’s situation. It’s up to you to decide which of these methods makes the most sense for each risk area.
What are the key HR risk areas?
HR professionals need to consider many HR risk management issues in their jobs. Here are seven examples:
The complexities of employing people pose challenges for any organization. Matters such as turnover, employee burnout, employee relations, workplace conflict and harassment, and lack of employee engagement all have the potential to negatively impact the company and prevent it from thriving.
Modifications in the way people work bring new risk factors. An example is offering remote/hybrid work setup. Employees may find this desirable, but a lack of in-person dialogue and connection can lead to feeling isolated and communication failures. This can decrease employee engagement and productivity.
On the other hand, not offering this might lead to employees leaving for organizations that do.
Employee data management
Security breaches or misuse of personal information can leave companies vulnerable to lawsuits and brand damage. HR needs to ensure that the data is secure and used properly.
Human Resources activities and policies need to be in line with many laws and regulations, often across states and countries.
To stay on top of HR compliance, you must remain current on workplace safety and labor laws that continually change. This includes ensuring that all employee contracts are in agreement with applicable statutes and regulations.
HR is central in ensuring that organizations behave ethically regarding employees. Upholding ethical hiring and employment practices will help reduce the risk of employer-employee disputes.
Here are just a few examples of ethical policies that employers should maintain:
- Equal opportunity hiring.
- A non-discriminatory work environment.
- Impartial termination procedures.
Learning & development
HR is responsible for ensuring the company has staff with the right proficiencies to achieve organizational goals. Employees also want to grow in their careers, and they look to broaden their skills within the workplace.
While learning opportunities are based on organizational capabilities and competency needs, HR must also ensure that all employees have equal access to them. Limiting who can attend may seem unfair to those who are excluded.
Compensation & benefits
Fair pay and benefits should be maintained throughout the entire workforce. HR needs to balance how to provide competitive and fair compensation packages that are in line with the market and the company’s financial interests.
They also need to ensure pay equity and inclusive employee benefits offering. Doing so will support compliance with regulatory requirements and help employees feel like they are being treated impartially.
Mergers and acquisitions
There are many risks associated with the M&A process that involve staffing and other HR matters, so HR professionals play a vital role. For instance, turnover is often a significant issue within leadership. Research shows that “[a]pproximately 50-75% of key managers leave voluntarily within two to three years after a company has been acquired.”
When leaders depart too soon, it disrupts the M&A transition. Ideally, HR will help minimize turnover to reinforce success for the newly formed business.
Why is HR risk management important?
Having an HR risk management plan puts you in a position to prevent or appropriately deal with problematic employee situations. It can protect the safety and well-being of both employees and the organization in the following ways:
Enabling a proactive approach to HR issues When you purposefully manage risks up front, you’re able to resolve issues before they become big challenges. Understanding what you should do and when you should do it also saves you time and stress.
Constantly evolving technologies, employee classifications, and work settings make navigating the world of work challenging. Rapid change is bound to continue, and a proactive approach will help you better adapt to future risks.
Ensuring compliance Legal battles cost time and money, and employers are always vulnerable to them. The Seyfarth Workplace Class Action Litigation Report revealed that 2021 was a year of unprecedented workplace class action litigation in the United States.
Strong compliance with all labor rules and regulations minimizes legal threats. HR risk management helps companies avoid fines, penalties, and other legal issues, as well as all the damage that comes with them.
Building a productive workforce Many businesses are expanding hiring beyond regular employees to include contractors, leased employees, and gig workers. Effectively managing workforce risks and improving people experience allows companies to build and retain a complex workforce that can enhance organizational performance. Preserving and improving the organization’s reputation When HR risks escalate into noticeable conflicts, it can harm your employees’ view of the organization and cause a negative portrayal of the company to the public. This can affect your customer base and your ability to recruit future employees.
Watching out for red flags and preemptively resolving precarious circumstances will help you avoid adverse consequences.
Creating an HR risk management plan
A successful HR risk management strategy must be intentional. Here are five steps to get you started:
1. Identify key HR risks within your organization
Conduct an HR audit to see which practices at your organization are lacking and what you need to prioritize improving.
Think about the general risks that every enterprise faces and also liabilities that may be unique to your industry/company. For instance, an in-home caregiving business must consider what could go wrong when employees work alone with vulnerable clients, or what would happen if they work with an expired license.
2. Assess the risks and prioritize your actions
Your list of risky areas may seem overwhelming, so you need to break them down. Start by assessing and ranking each one by asking certain questions:
- What is the probability or frequency of it occurring?
- Is it preventable?
- How severe would the consequences be?
- Can we minimize the impact of the damage?
You’re not going to be able to manage all risks at once, but they won’t be equally critical. Line up what you need to do first. For example, you might prioritize areas that put you at legal risk, such as compliance problems or pay inequity.
If you don’t have those, start working off of your organizational goals to see how managing which risks will bring you closer to achieving those goals.
3. Design and implement your solutions
Now it’s time to decide what to do to minimize the risks you’ve identified. Start with determining the right risk management techniques. Then, you need to come up with solutions and start implementing them.
Here are two HR risk management examples of opting for the loss prevention and reduction approach:
An employee who is untrustworthy in their duties or causes a hostile work environment for others can pose multiple risks for an employer.
Preventative measures could include:
- Comprehensive candidate vetting in the recruitment and hiring process.
- A robust onboarding and training program for new employees.
- A thorough employee handbook and signed acknowledgment from every employee.
- Detailed position descriptions.
- Comprehensive policies and procedures with ongoing training.
- Manager follow-up, written records, and disciplinary action when job descriptions or policies are not respected.
Weak cybersecurity or failure to comply with employment laws or industry safety regulations can result in breaches, fines, accidents, or litigation. Following all the guidelines is essential, but there is no guarantee that you’ll avoid all problems.
Some deterrents to put in place include:
- Auditing all HR processes regularly for compliance.
- Designating an HR team member to be alert and keep an eye on new employment laws and high-profile legal situations.
- Educating employees and working with IT to ensure sensitive data is secure.
- Consulting with experts or an employment attorney to review your compliance/security procedures and documents.
4. Set up a continuous HR risk monitoring process
Human Resources risk management is an ongoing cycle. You’ll need a consistent risk assessment to be aware of everything your organization is exposed to. Setting up a process for this will ensure you can be proactive in evaluating and resolving risks as they arise.
Here are some questions to help you evaluate how well your HR risk management solutions are coping:
- Are overall risks being managed better?
- How well are we communicating our risk management plan?
- Have any risks altered over time?
- Have new risks emerged?
- Are employees observing risk management guidelines?
- Do employees need additional training?
5. Strengthen the risk management skills within your team
Developing your HR risk management skills will benefit your organization from a long-term perspective. What’s more, they’re increasingly important future HR skills that will help you stay relevant as an HR professional.
One way to improve these skills is to team up with another department that is more advanced in risk management for a workshop.
As you cultivate a risk management perspective, you’ll be able to act more strategically. Stay curious about developments going on within your particular business. Then you can anticipate how they might pose risks to HR and be able to stay on top of any changes that need to be made.
Winding it up
As the business ecosystem remains volatile, HR has to keep up. HR risk management enables HR teams to proactively approach issues within their area of expertise and make sure that the organization can function smoothly and effectively.