Board Chair, Is Your Company's Payroll Cycle Truly Lawful?If Your Audit Report Misses These Three Points, It May Conceal a Massive Labor Compliance Crisis!

Every year, a certain publicly listed corporation completes its internal audits: payroll calculations are mathematically exact, overtime requests are properly approved, and all personnel changes bear managerial signatures. The audit report cleanly concludes: "No significant deficiencies identified."

Then, without warning, the company is hit with a surprise labor inspection that uncovers chronic underpayment of statutory overtime. Shortly after, a dismissed employee files a lawsuit seeking confirmation of the employment relationship. Finally, a senior executive is formally accused of workplace bullying, and the scandal splashes across major media headlines.

The Board Chair is left completely bewildered: "Doesn't our company conduct internal audits every single year? Why weren't any of these issues flagged?"

This is a common ailment among publicly listed companies.

Internal audit teams frequently check only whether human resources operations comply with internal company policies, failing to verify whether those company policies and their actual execution comply with statutory labor laws.

I urge listed companies to fully integrate "labor law compliance" into their existing "payroll and personnel cycle" (薪工循環). This elevates labor risks from an administrative HR issue into a critical corporate governance priority that must be actively supervised by the Board of Directors.

For labor compliance training, delineating reasonable management vs. workplace bullying, grievance handling & investigation simulation workshops, board member continuing education certification, external committee members for workplace bullying and sexual harassment, PIP (Performance Improvement Plan) case simulation workshops, and litigation/mediation representation, please contact: Yesin Law Firm (Tel: +886-2-2515-6822 | Official Website: https://www.yesinlaw.com).

Keywords: Payroll and Personnel Cycle, Labor Law Compliance, Publicly Listed Companies, Internal Control Systems, Internal Audit, Board Corporate Governance, Labor Standards Act, Workplace Bullying Prevention, AI Workforce Adjustments, Labor-Management Risk Management.

Specifically, board chairs, general managers, and chief human resources officers should master the following three priorities:

1. The Payroll Cycle Is Not Just About Accurate Paychecks—It Is the Enterprise's First Line of Labor Compliance Defense

Pursuant to Article 7, Paragraph 1, Subparagraph 4 of the Regulations Governing Establishment of Internal Control Systems by Public Companies, the payroll and personnel cycle encompasses policies and procedures regarding:

Hiring, job rotation, leaves of absence, shift scheduling, overtime, dismissal and termination, training, retirement, determination of wage rates, timekeeping, calculation of total payroll, calculation of payroll taxes and statutory deductions, establishment of payroll records, salary disbursement, attendance tracking, and performance appraisals.

In other words, from an employee's first day on the job to their final departure date—across every phase of an active employment relationship—operations fall squarely within the scope of the payroll cycle audit.

More critically, Article 3 of the same Regulations explicitly stipulates that compliance with applicable laws and regulations is, by definition, a primary objective of internal control systems.

Executive management must require internal auditors to answer three fundamental questions:

1. Legal Validity of Core Policies: Are the company's employment contracts, work rules, compensation schemes, and personnel management policies lawful? Do they align with industry operational needs?

   
   

2. Statutory Grounding in Daily Execution: When line managers enforce these policies daily, is their execution rooted in labor compliance?

   
   

3. Remediation & Monitoring: When non-compliance risks are uncovered, is there an institutional remediation and tracking mechanism in place?

   
   

A Classic Example:

A company policy stipulates that overtime must be applied for in advance. A supervisor is fully aware that an employee worked late to meet a deadline, but refuses to approve overtime pay simply because the employee did not submit a pre-approval slip.

Even though the supervisor's decision aligns strictly with internal corporate policy, the company remains legally liable for administrative penalties for violating its statutory duty to disburse overtime pay under Article 24 of the Labor Standards Act.

This illustrates why procedural compliance does not equal statutory legality.

What enterprises truly need is to embed labor law compliance directly into internal control mechanisms, rather than scrambling to hire attorneys as firefighters after a dispute has already erupted.

2. From Compensation and Performance to Severance: Auditors Must Master Five High-Risk Domains

I advise listed companies to adopt a risk-oriented internal audit approach, prioritizing five critical areas:

Domain 1: Working Hours and Overtime Pay

Cross-reference attendance records, overtime pre-approvals, wage disbursements, and auxiliary work logs (such as system access timestamps, email records, and facility access logs) to identify hidden risks of unrecorded working hours or underpaid overtime compensation.

Domain 2: Performance Appraisals and PIPs

Review whether evaluation metrics are objective and measurable, verify whether underperforming employees are granted a genuine and reasonable runway for improvement, and ensure that Performance Improvement Plans (PIPs) are not being weaponized as administrative cover for unlawful dismissals.

Domain 3: Severance Dismissals and Disciplinary Dismissals

Articles 11 and 12 of the Labor Standards Act impose rigorous statutory prerequisites for terminating employment contracts. In particular, when claiming employee incompetence under Article 11, Subparagraph 5, auditors must evaluate whether the company possesses concrete documented evidence of incompetence, whether corrective coaching was provided, and whether the dismissal satisfied the principle of dismissal as a measure of last resort.

Domain 4: Workplace Bullying and Sexual Harassment

Internal audit cannot stop at confirming that the company has a grievance mailbox. Auditors must audit whether preventative measures, complaint intake, impartial investigation protocols, recusal procedures, victim protection safeguards, and post-investigation remediation workflows comply with current laws and operate effectively in practice.

Domain 5: AI Integration and Workforce Adjustments

While artificial intelligence and AI Agents can significantly reduce administrative overhead, when an enterprise downsizes headcount due to AI automation, it must rigorously differentiate between:

• A "change in the nature of business" under Article 11, Subparagraph 4 of the Labor Standards Act; and

  
  

• "Incompetence to perform the assigned job" under Article 11, Subparagraph 5.

  
  

These two statutory grounds have distinct legal burdens of proof and must never be conflated. Above all, an enterprise cannot label senior personnel "incompetent" simply because they are unfamiliar with new AI tools. Auditors must verify whether the organization provided necessary retraining, reasonable improvement periods, and formal evaluations of alternative redeployment or reassignment options.

These five domains represent the primary sources of future labor disputes, employment litigation, and administrative penalties from labor inspections.

3. Making Risk Visible to the Board: Establishing Three Lines of Defense in Labor Compliance

The Board Chair and General Manager cannot—and should not—personally audit every overtime slip or intervene in granular personnel disputes.

What executive leadership must do is build an institutional architecture ensuring risks are detected, prevented, remediated, and tracked.

I recommend deploying the "Three Lines of Defense" model:

• The First Line of Defense (HR & Line Managers): Responsible for executing day-to-day personnel management lawfully and embedding compliance baselines into standard workflows.

  
  

• The Second Line of Defense (Legal, Compliance & Occupational Safety): Responsible for establishing legal standards, setting risk parameters, and monitoring operational vulnerabilities.

  
  

• The Third Line of Defense (Internal Audit): Independently audits system architecture and assesses whether labor law compliance is genuinely implemented across daily operations.

  
  

In practice, companies should introduce a dedicated control activity into the existing payroll cycle: "Labor Law Compliance and Labor Relations Risk Management," supported by a comprehensive Labor Compliance Risk Control Matrix (RCM).

• Mandatory Ex-Ante Legal Vetting: Require prior legal review for high-risk severance cases, mass redundancies, executive terminations, major workplace bullying and sexual harassment grievances, and AI-driven organizational restructurings.

  
  

• Establish Key Risk Indicators (KRIs): Track abnormal overtime trends, unlawful severance exposures, recurring internal grievances, and past labor inspection citations.

  
  

Pursuant to Article 14 of the Regulations Governing Establishment of Internal Control Systems by Public Companies, internal audit must truthfully disclose all identified deficiencies and anomalies, tracking them at least quarterly until fully rectified. Critical labor compliance exposures should be promptly escalated to the Audit Committee and the Board of Directors through structured reporting channels.

This ensures the board receives more than a superficial report stating "payroll cycle audit complete"; it receives meaningful governance intelligence capable of surfacing genuine enterprise risks.

Attorney Chen Yeh-hsin's Key Takeaway

Never let a procedurally flawless audit report conceal unlawful personnel management.

I frequently remind business leaders:

• A complete internal system does not make it a lawful system;

  
  

• A manager’s sign-off does not make the decision legal;

  
  

• The absence of audit deficiencies does not mean your company is free from labor compliance risk.

  
  

For board chairs and chief executives, labor law compliance is not a minor HR administrative task. It is a material operational risk that directly impacts day-to-day business continuity, financial performance, brand reputation, ESG ratings, corporate governance scores, and Responsible Business Alliance (RBA) audit outcomes.

In an era where AI is radically redefining workflows, companies must shift legal risk management from ex-post damage control to ex-ante system design and personnel decision-making.

I recommend that board chairs request a joint "Payroll Cycle Labor Compliance Risk Review Report" from the Chief Internal Auditor and the CHRO at the next Audit Committee or Board meeting. This review should evaluate whether working hours, compensation, performance management, severance, workplace bullying, sexual harassment, and AI workforce adjustments have been systematically integrated into internal controls.

True excellence in corporate governance does not mean assigning blame after violations occur; it means building institutional systems capable of detecting risks early and preventing violations before they happen.

The next time your chief audit executive reports to the board that "internal controls over the payroll cycle are effective," will you follow up with this critical question:

"Are we merely confirming that our HR operations comply with internal company rules—or do we have solid evidence proving our critical personnel management practices truly comply with statutory labor laws?"