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How to Do a Labour Law Compliance Audit: A Step-by-Step Guide

An organization may make sure it is following the labor laws by doing a labor law compliance audit. The audit will show how well different people are following the law and the rules for labor. This helps make sure that the companies respect the law when it comes to their employees' rights, salaries, pay structure, and corporate rules. Routine compliance checks assist companies avoid legal troubles, keep up a solid reputation as excellent employers, and make HR processes easier. Connect 2 Payroll Companies Services in India by The Best Labour Law Consultant Ahmedabad.

1. Why it's important and how it helps businesses

Companies must do labor law compliance audits if they want to stay in business and make sure they run smoothly. So, what does a good audit look like? A successful audit protects businesses from lawsuits, fines, and damage to their reputation. Not only do companies that follow the rules make their employees happier and more motivated, but they also make it possible for the business to keep marketing itself. Also, conforming organizations are better at hiring and keeping employees because they make sure that their workers feel comfortable about their rights and benefits.

What Happens When You Don't Follow the Rules

Breaking labor rules may lead to serious repercussions including big fines, litigation, and even the government becoming involved. Not following the rules can make workers unhappy, cause them to leave the company, and even cause the company to go bankrupt. If businesses don't follow the finest compliance practices, they might lose their good name, which makes it hard to get talent, customers, and money.

Cost of Compliance vs. Penalty for Non-Compliance

Formula for Calculation:

Savings = Cost of Compliance – Penalty Avoided

For example:

A business invests Rs. 5,00,000 a year to stay in compliance and avoids Rs. 20,00,000 in fines.

Savings = 20,00,000 – 5,00,000 = 15,00,000 Rs.
Getting Ready for the Audit

Companies need to decide what the audit is for and how far it will go before they do a labor law compliance audit. The first step is to choose the right labor laws and list what should be looked into, like contracts of employment, salary, benefits, and health and safety at work. The audit has looked into all of the main areas of compliance. Companies also need to decide if the audit for compliance with labor laws will be a broad examination of compliance or one that focuses on specified risk areas.

The Scope and Goals of a Labour Law Compliance Audit

First, find out what the main dangers are that the company could be worried about, such as the Companies Act, 2013, and GST legislation. There should be a clear purpose and goals for the audit, and the audit process should be in line with the organization's main aims and business goals.

A selection of important papers to look over

Financial Records: Look over all of your financial paperwork, including your accounts payable, accounts receivable, and any other records that are connected.

Compliance Documents: Make sure that all the necessary compliance documents are in order. These include reports required by law and internal regulations related to the Income Tax Act and labor laws.

Past Audit Reports: Past audit reports can show where things need to be better and whether or not the suggested changes were made.

Putting together the audit team

External consultants or professionals who help with labor law compliance or internal compliance and HR workers might make up the audit team. Legal consultants may also be added to help in understanding and following the rules. A team with an HR professional, knowledge of labor regulations, and finance makes sure that the audit goes well.

2. A checklist for an audit of compliance with labor laws

A good labor law compliance audit in India requires looking at a number of documents, including

Employment contracts to make sure that the terms and conditions of employment are correct.
Wage records to make sure that workers are paid the minimum wage.
To verify for compliance, look at the records for the Provident Fund (PF) and Employee State Insurance (ESI).
Attendance records to check hours worked and overtime.
Registers for gratuity payments to make sure that qualified employees get the right amount.
PoSH policy papers for the PoSH guideline audit, which checks to see if the company is following the regulations against workplace harassment.
Vendor compliance agreements to make sure that third parties keep their promises.

3. Steps for an Audit of Labor Law

Step 1: Make plans and get ready

The first phase of the audit is to find areas that need improvement, such as compliance with the minimum wage law, the Employee Provident Fund program, and others. This would make it possible to set clear and explicit goals for the audit process.

Step 2: Look at contracts and other paperwork for work

Gather all the important papers, such policy manuals, compliance records, payroll records, attendance certificates, and employment contracts. These papers are the basis for checking compliance.

Step 3: Check that the minimum wage is being paid

Minimum wages are different in each state, therefore companies need to figure out what the minimum wage is in the state where they do business. The wage rate changes depending on the job, the amount of skill, and the area. Keep track of all the workers' salaries, including pay stubs, attendance records, and agreements that show the company is following the law on minimum wage.

How to Find the Minimum Wage

Formula for Calculation:

Monthly Wages = Daily Wage Rate X Number of Days Worked

For example:

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

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

Step 4: Look at the Employee State Insurance (ESI) and the Provident Fund (PF)

A PF and ESI compliance audit should check that the rates of employer and employee contributions to PF and ESI are correct. Right now, employers pay 4.75% of ESI and employees pay 1.75% of their basic income. Some types of workers and salary constraints may mean that contributions to PF are different. Make sure that all of the supporting documentation, such the workers' PF and ESI enrollment forms, registration information, and contribution history, are correct.

Late Payments: Keep track of when contributions are due to avoid penalty. Contributions must be made within 15 days after the end of the month.

How do you figure out PF contributions?

How to Figure It Out:

The employee's PF contribution is 12% of their basic salary.

Employer's PF Contribution is 12% of the Basic Salary

(But only 3.67% goes to the EPF and 8.33% goes to the EPS, which stands for Employee Pension Scheme.)

For example:

If the basic salary is Rs. 25,000 a month

The employee's PF contribution is 12% of ₹25,000, which is ₹3,000.

Employer's PF Contribution = ₹3,000, which is 12% of ₹25,000

From ₹3,000:

EPS gets ₹1,250, which is 8.33% of the ₹15,000 maximum.

EPF gets ₹1,750.

The total monthly PF contribution is ₹6,000, which is ₹3,000 from the employee and ₹3,000 from the employer.

Note: The EPS contribution is limited to ₹15,000 of basic income, hence 8.33% is based on ₹15,000, not ₹25,000. The rest goes to the EPF.

Step 5: Check the accuracy of statutory registers and records.

For statutory compliance audits, businesses need to check attendance records to make sure that hours worked are recorded correctly. Compare them to wage records to make sure that the employees are paid according to how many hours they worked. Check to see if the leave entitlements are in line with the law. Check the overtime records to make sure that the workers get paid for the extra hours they worked.

Step 6: Check to see if the PoSH guidelines are being followed

Make sure your company has a strong, legally solid PoSH (Prevention of Sexual Harassment) policy. To be in line with PoSH laws, the Internal Complaints Committee (ICC) must keep track of all the complaints they get, the procedures they take, and the solutions they propose.

Step 7: Look at the gratuity payments

Companies have to confirm that gratuity payments are being figured out correctly according to the rules set out in the Payment of Gratuity Act during gratuity compliance audits. Make sure that the gratuity payments are based on the duration of service and the final wage paid. Keep the documents very detailed so that everyone can see them.

How to Figure Out Gratuity?

Formula for Calculation:

Gratuity = Last Drawn Salary X 15 X Years of Service

For example:

An employee has worked for 10 years and made Rs. 50,000 last month.

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

Step 8: Check that contractors and vendors are following the rules.

Check that your vendors or contractors follow the right labor rules, such paying minimum salaries and making social security contributions. Make sure that all of your third-party contracts have language that say they will follow labor regulations. This way, they will meet the same requirements that your company does. A vendor compliance checklist would assist businesses keep track of the labor rules they need to follow.

Step 9: Putting the right steps into action

Follow the audit report's instructions and fix any problems or gaps in compliance right away. This might be done by changing procedures or making the workplace better.

Step 10: Inspections after the fact

Plan follow-up inspections to make sure that the right steps have been taken and that compliance is still being followed.

4. Finding and fixing problems with compliance
   
   If you don't follow the rules, you might face fines of INR 50,000 to lakhs of rupees or even jail time, depending on how serious the infraction is. A labor law compliance audit's job is to find areas where the law isn't being followed and fix them.
   
   How to find out how much it costs to not comply?
   
   The formula for calculation is:
   
   Total Penalty = Number of Violations X Penalty per Violation
   
   For example:
   
   A private limited firm broke the law by not paying 50 of its employees the minimum wage. Each of them was paid Rs. 2000 less than they should have been. They have to pay Rs. 50,000 for each time they break the law.
   
   Total Penalty = 50,000 times 50 = Rs. 25,000,000
   
   This illustrates how dangerous it is to break the rules.
   
   Plan for Corrective Action (CAP)
   
   Immediate Correction: Companies can swiftly correct records and adjust payment variations to cope with issues of non-compliance that they identify.
   
   Make a CAP: Write out a detailed plan for addressing each problem that includes the steps that need to be taken, who is in charge of each stage, and when the work needs to be done.
   
   Training and Awareness: Hold training sessions for employees and have management tell them why they need to follow the rules to help prevent future infractions.
   
   Regular Monitoring: Create a way to check on the level of compliance on a regular basis so you can find any problems before they happen.
   
   Best Practices and Steps to Take to Avoid Problems
   
   Set clear rules: Write out all the legal regulations for paying employees, keeping records, and protecting workers' rights.
   Do audits on a regular basis: Set up frequent internal audits to verify sure you're following labor laws and to uncover ways to improve your projects.
   Keep up with the news: Keep up with changes to labor laws and rules so you can always obey them.
   
   5. Writing down and reporting things after the audit
   
   It's crucial to share the results of the audit and preserve solid records when it's completed.
   
   How to Write a Clear Compliance Audit Report
   
   Executive Summary: Start with a brief description of the audit's purpose, scope, techniques, and major findings.
   Results in detail: If you identify any violations, be sure to report them all, along with the proof that backs them up, including checking documents and talking to staff.
   Suggestions: Be sure to offer clear instructions on how to fix each problem and when to do so.
   Policies for Keeping: Make standards for how long you may keep audit papers so that you can keep them for as long as the law says you can.
   It is important to keep all audit paperwork safe in both physical and digital versions so that private information doesn't get into the wrong hands.
   
   6. Using technology to speed up audits
   
   Technology is transforming how labor law compliance audits are done. They are now faster, more accurate, and less common. Companies are using specialist software for labor law compliance that may do things like manage payroll, integrate processes, and more. Here are some of the benefits of employing technology to make audits better:
   
   Data Extraction and Validation: Compliance management systems come with automated software that pulls data from documents with little help from people and with remarkable accuracy. For example, it now only takes a few seconds to match transactions with supporting documents instead of hours.
   
   Integrating processes: Cloud solutions combine workflows so that auditors may work in real time and look at all of a client's data to get better insights.
   Finding hazards: AI-powered analytics assist auditors uncover flaws and hazards that are hard to see in a lot of data. The new technologies have predictive modeling and trend analysis that might assist us identify things that our traditional ways of doing things could overlook.
   Time and Attendance Software: This keeps track of employees' attendance and overtime automatically, making ensuring they obey the minimum wage requirement.
   Payroll Software: This software does payroll duties that follow the rules of the minimum wage law, which means that there are fewer chances of making mistakes by hand.
   
   Benefits of using technology in audits
   
   Automation cuts down on the time spent on repetitive tasks, which means that auditors may focus on more essential tasks.
   More Accurate: Technology makes recording and reporting more accurate by getting rid of human error while working with data.
   Strategic Insights: Advanced analytics uncover patterns that help individuals make better decisions.
   
   To sum up
   
   Right labor law compliance audit must be done on payroll to make sure it follows the regulations, lowers risk, and keeps the workplace safe. Regular audits to make sure that labor regulations are being followed are beneficial for building trust, boosting employee morale, and the long-term profitability of the company, as well as avoiding legal fines. Following the labor law makes sure that workplaces are open, fair, and legal. This may be done by making the most of technology, following up on corrective measures, and staying up to date on changes to the law.