By performing a labour law compliance audit, an organization can ensure its compliance with the labour laws. The audit will allow one to understand the various adherence to statutory compliance and labour law compliance. This helps to ensure that the organizations follow legal guidelines regarding the rights of the employees, wages, their pay structure, and company policies. Routine compliance audits help firms to prevent legal penalties, maintain a good image of being good employers, and streamline HR procedures.

1. Importance and Benefits for Businesses

Labour law compliance audits are required if companies need to remain in the game and make sure they function effectively. So, what is a good sign of a good audit? A good audit keeps organizations safe from legal suits, financial penalties, and brand harm to the company. Companies that comply not only increase employee satisfaction and employee morale, but also make the firm able to continuously market their business. Moreover, the compliant companies are superior when it comes to labour recruitment and retention because they ensure that the employees feel safe in regard to their rights and privileges.

Common Risks of Non-Compliance

Violating labour laws has severe consequences in the shape of heavy penalties, lawsuits, and even government intervention. Non-compliance can lead to worker dissatisfaction, employee turnover, and even businesses filing for bankruptcy. Businesses would stand to lose their good reputation if they don’t practice the best forms of compliance, and it’s hard to attract talent, customers, and capital.

Compliance Cost VS Non-Compliance Penalty

Calculation Formula:

Savings = Penalty Avoided – Compliance Cost

Example:

A company spends Rs. 5,00,000 annually on compliance and avoids penalties of Rs. 20,00,000.

Savings = 20,00,000 – 5,00,000 = Rs. 15,00,000

Pre-Audit Preparation

Before performing a labour law compliance audit, businesses must establish the purpose and scope of the audit. The starting point in this is selecting relevant labour legislation, itemizing what should be covered during investigation, such as contracts of employment, pay, remuneration, and workplace health and safety, and the audit has covered all of the major compliance areas.  Companies must also determine whether the labour law compliance audit process will be a general compliance review or specific to certain risk areas.

Labour Law Compliance Audit: Scope and Objectives

First, determine the principal risks that may be a concern to the organization, like the Companies Act, 2013, and GST laws. Clear purpose and audit objectives must be in place, and the audit process should be aligned to the organizational goals and core business objectives.

Checklist of Essential Documents to Review

• Financial Records: Go through all your financial documents such as financial statements, accounts payable, accounts receivable, and all other related records.
• Compliance Documents: Ensure all the compliance records are in place, i.e., regulatory reports and internal policies pertaining to the Income Tax Act and the Labour legislation.
• Past Audit Reports: The past audit reports can point out areas to improve and also whether the recommended suggestions were implemented or not.

 

Forming the Audit Team

The audit team can be made up of external consultants or experts who offer labour law compliance services or internal compliance and HR staff. Legal advisors may also be included to offer regulatory guidance and interpretation. A team that has expertise in labour laws, finance, and an HR specialist guarantees an effective audit process.

2. Labour Law Compliance Audit Checklist

A proper labour law compliance audit in India demands the examination of several documents, such as:

• Employment contracts to cross-check the terms and conditions of employment.
• Wage records to ensure payment of salary according to minimum wage laws.
• Provident Fund (PF) and Employee State Insurance (ESI) records to check for compliance confirmation.
• Attendance registers to confirm working hours and overtime.
• Gratuity payment registers to ensure proper disbursal to eligible employees.
• PoSH policy documents for PoSH guideline audit, checking compliance with workplace harassment avoidance laws.
• Vendor compliance agreements to verify third-party commitments.

Why Vendor Compliance

3. Labour Law Audit Steps

• Step 1: Planning and Preparation

The initial step of the audit is identifying areas to be given attention, including Minimum wage compliance, Employee Provident Fund scheme compliance, and several others. This would enable the clear and specific objectives for the audit process.

• Step 2: Review Employment Contracts and Documentation

Collect all the relevant documents such as employment contracts, payroll records, attendance certificates, policy manuals, and compliance records. These documents provide a foundation for compliance assessment.

• Step 3: Verify Minimum Wages Compliance

Minimum Wages are not standardized across states, and businesses need to calculate the minimum wage rates of their operating state. The pay rate differs based on the level of expertise, sector, and location. Keep all the wage records of the workers, including pay stubs, attendance records, and agreements confirming the company is complying with the minimum wage laws.

How to Calculate Minimum Wage?

Calculation Formula:

Monthly Wages = Daily Wage Rate X No. of Working Days

Example:

The minimum wage for a skilled worker in a state is Rs. 750/day, and he has worked for 26 days.

Monthly Wages = 750 X 26 = Rs. 19,500

• Step 4: Check Provident Fund (PF) and Employee State Insurance (ESI)

The accuracy of the rate of employer and employee contributions to PF and ESI should be verified through a PF and ESI compliance audit. At present, employers pay 4.75% of ESI, and employees pay 1.75% of their basic wages. Contributions to PF can differ according to some categories of employees and salary limits. Ensure that all the supporting documents, such as enrollment forms of the employees in PF and ESI, registration information, and contribution history, are accurate.

Late Payments: Track contribution due dates to prevent fines. Contributions are due within 15 days from the calendar month end.

How to Calculate PF Contributions?

Calculation Formula:

Employee’s PF Contribution = 12% of Basic Salary

Employer’s PF Contribution = 12% of Basic Salary

(But only 3.67% goes to EPF, and 8.33% goes to EPS – Employee Pension Scheme)

Example:

If Basic Salary = Rs. 25,000/month

Employee’s PF Contribution = 12% of ₹25,000 = ₹3,000

Employer’s PF Contribution = 12% of ₹25,000 = ₹3,000

Out of ₹3,000:

₹1,250 (8.33% of ₹15,000 cap) goes to EPS

₹1,750 goes to EPF

Total Monthly PF Contribution = ₹6,000 (₹3,000 by employee + ₹3,000 by employer)

Note: EPS contribution is capped at ₹15,000 of basic salary (even if the basic is more), so 8.33% is calculated on ₹15,000, not ₹25,000. The rest goes into EPF.

• Step 5: Validate Statutory Registers & Records
  

For statutory compliance audits, organizations need to verify attendance registers for proper recording of working hours. Compare them with wage registers to ascertain that the employees are paid as per their attendance. Check compliance with leave entitlements according to statutory norms. Check overtime records to ascertain that the employees are paid for additional hours worked.

• Step 6: Assess Compliance with PoSH Guidelines

Make sure that your organization possesses a robust, legally sound PoSH (Prevention of Sexual Harassment) policy. In order to keep pace with PoSH legislation, document all the received complaints, steps taken, and remedies offered by the Internal Complaints Committee (ICC).

• Step 7: Review of Gratuity Payments

Gratuity compliance audits require the companies to check whether gratuity payments are being computed against the eligibility requirements specified under the Payment of Gratuity Act. Ensure that the gratuity payments are correctly calculated based on service length and the last drawn salary. Keep the records in minute detail for transparency.

How to Calculate Gratuity?

Calculation Formula:

Gratuity = Last Drawn Salary X 15 X Years of Service

Example:

An employee has worked for 10 years with his last drawn salary of Rs. 50,000

Gratuity = 50,000 X 15 X 10 = Rs. 2,88,462

• Step 8: Audit Contractor/Vendor Compliance

Perform audits of vendors or contractors to confirm that they adhere to relevant labour laws, such as minimum wages and social security payments. Ensure that all third-party contracts have compliance clauses with labour laws, so that they maintain the same standards that your organization demands. Having a vendor compliance checklist would help companies stay on track with what labour laws they need to comply with.

• Step 9: Putting Corrective Measures Into Practice

Act immediately to resolve any irregularities or gaps in compliance identified according to the audit report’s advice. This might be achieved through improving working conditions or revising procedures.

• Step 10: Follow-up Inspections

Plan follow-up inspections to confirm that corrective measures have been successfully taken and continuous compliance is upheld.

4. Identifying and Addressing Non-Compliance

Non-compliance may invite labour law penalties in India, bring fines between INR 50,000 to lakhs of rupees or even imprisonment, depending on the severity of the offense. Identifying areas of non-compliance and taking corrective actions are the responsibilities of a labour law compliance audit.

How to know the cost of Non-Compliance?

Calculation Formula:

Total Penalty = Penalty per Violation X No. of Violations

Example:

A private limited company failed to comply with the Minimum Wage laws and underpaid 50 of its employees by Rs. 2000 each. Their penalty per violation is Rs. 50,000.

Total Penalty = 50,000 X 50 = Rs. 25,00,000

This demonstrates the risk of non-compliance.

Corrective Action Plan (CAP)

• Immediate Rectification: Businesses can correct records and modify payment fluctuations to address discovered non-compliance issues promptly.
• Develop a CAP: Develop a detailed corrective action plan that defines the specific steps to correct each problem, the individuals involved, and the completion objectives.
• Training and Awareness: Schedule employee training sessions and plan management to sensitize them towards the need for compliance to help prevent future transgressions.
• Regular Monitoring: To catch potential problems before they can be observed, arrange a system for regularly checking the compliance state.

Preventive Measures and Best Practices

• Create Clear Policies: Formulate complete policies on payment of wages, record keeping, and workers’ rights that comply with the law.
• Conduct Regular Audits: Schedule frequent internal audits to assess compliance with labour laws and project areas where improvement can be made.
• Stay Informed: Remain current with new changes in labour laws and regulations to allow continuous compliance.

5. Post-Audit Reporting and Documentation

After completing the audit process, proper communication of findings and documentation is necessary.

Drafting a Clear Compliance Audit Report

• Executive Summary: Start with a concise summary of the audit purpose, scope, methodology, and key findings.
• Detailed Findings: Report in detail non-compliance findings supported by underlying evidence such as reviews of documents and employee interviews.
• Recommendations: Give clear recommendations for each finding resolution and implementation schedules.
• Retention Policies: Define policies for holding audit documents to retain files for the period required by law.
• Secure Storage: All audit documents must be stored in a secure physical and digital format to prevent sensitive information from falling into the wrong hands.

6. Leveraging Technology for Efficient Audits

Technology is transforming the labour law compliance audit process, speeding it up, enhancing accuracy, and minimizing it. Companies are using labour law compliance software customized to suit their needs that is capable of undertaking tasks such as workflow integration, payroll processing, and others. Below are the benefits of the technology-based tools that companies can take advantage of while enhancing their audits:

1. Data Extraction and Validation: Compliance management solutions have automated software that extracts data from papers with minimal human intervention and with precision. For example, reconciling transactions against supporting documents can now be done in seconds instead of hours.

1. Workflow Integration: Cloud solutions integrate workflows in such a way that auditors are able to work in real-time and test 100% of client data for better insights.
2. Risk Identification: Analytics powered by AI allow auditors to identify concealed risks and anomalies in big data. The new technologies have predictive modeling and trend analysis that can offer useful insights that our conventional techniques may overlook.
3. Time and Attendance Software: This promotes minimum wage compliance through automatic recording of employees’ attendance and overtime.
4. Payroll Software: Eliminates possible manual errors by automating payroll functions that are compliant with the minimum wage act requirements.

Benefits of Technology in Audits

• Efficiency Gains: Automation reduces time consumed on repetitive tasks so that auditors can focus on high-value activities.
• Improved Accuracy: By eradicating human error while handling data, technology offers precise documentation and reporting.
• Strategic Insights: Sophisticated analytics reveal patterns that enhance decision-making.

Conclusion

A company must undergo a labour law compliance audit to be compliant with labour laws, reduce risk, and maintain a safe working environment. Apart from avoiding legal penalties, regular audits for labour law compliance are useful in building trust, employee morale, and business sustainability. Open, fair, and legally sound workplaces are assured by adherence to the provisions of the labour law, which may be maintained through the leverage of the potential of technology, compliance with remedial measures, and staying updated about recent legislative reforms.

About comply360°

With a history spanning over 30 years of unmatched leadership in Labour Law Compliance and a strong presence in the staffing sector for over 27 years, Prompt Personnel Pvt Ltd is thrilled to introduce comply360° – a specialized brand entirely committed to Labour Law Advisory and Compliance Management services. We are resolute in our mission to establish comply360° as a distinct entity and to amplify its significance in the business arena.

The mission at comply360° is to educate and enlighten organizations and individuals about the perils of non-compliance. Our commitment is to deliver real-time compliance solutions, automating labour law services to streamline your operations seamlessly.