Labour Law Compliance: A Crucial Yet Ignored Area in Audit Practice

As Chartered Accountants, our role as statutory auditors goes far beyond mere verification of books and records. We are also guardians of corporate governance, compliance, and risk mitigation. However, a critical yet often Ignored aspect in audit practices is the due diligence and verification of compliance with various Labour Laws. These legislations carry significant financial, reputational, and legal implications for the organizations. It is essential that auditors give the required attention to these laws during audits.

This article highlights some key labour legislations which are often ignored or superficially examined during audits, alongside essential compliance requirements, calculation mechanisms, auditor responsibilities, and implications of non-compliance. The aim is not just to list down requirements but to instill a deeper awareness among audit professionals.

1. The Employees Provident Funds & Miscellaneous Provisions Act, 1952

This Act ensures social security for employees post-retirement through mandatory contributions.

• Applicability: Establishments employing 20 or more persons.
• Key Definitions:
• Employee: Includes part-time, casual, and contractual employees.
• Basic Wages: Includes basic salary, dearness allowance (DA), and retaining allowance.
• Contribution:
• Both employer and employee contribute 12% of basic wages + DA.
• Administrative charges: Employer to pay 0.50% additionally.
• Audit Responsibilities:
• Verify enrolment of all eligible employees.
• Reconcile salary registers and PF challans.
• Confirm remittances by the 15th of the following month.
• Validate UAN activation and KYC status of employees.
• Disclosure:
• Provision for unpaid PF contributions under current liabilities.
• Non-compliance must be disclosed with remarks on contingent liabilities.
• Penalties:
• Up to 100% of arrears as damages.
• Criminal liability with imprisonment up to 3 years under Section 14.

2. The Employees State Insurance Act, 1948

A comprehensive social security scheme that provides medical, sickness, maternity, and disability benefits.

• Applicability: Factories and other establishments with 10 or more employees earning wages ≤ ₹21,000 per month.
• Contribution:
• Employer: 3.25%
• Employee: 0.75%
• Audit Responsibilities:
• Ensure all eligible employees are registered with ESIC.
• Review remittance of contributions.
• Cross-verify payroll with ESI challans.
• Disclosure:
• Outstanding contributions to be reported.
• Penalties:
• Imprisonment up to 2 years and fine up to ₹5,000.

3. The Contract Labour (Regulation and Abolition) Act, 1970

This Act aims to regulate the employment of contract labour and to provide for its abolition under certain conditions.

• Applicability: Principal employers engaging 20 or more contract labour.
• Audit Responsibilities:
• Examine licenses of contractors.
• Confirm timely wage payments to contract workers.
• Check adherence to safety and health norms.
• Disclosure:
• Liability of principal employer if the contractor fails in compliance.
• Penalties:
• Fine of ₹500/day or imprisonment up to 3 months.

4. The Minimum Wages Act, 1948

Guarantees minimum wage for different categories of workers to prevent exploitation.

• Applicability: All establishments; specific rates notified by Central and State Governments.
• Calculation:
• Wages should not fall below the notified minimum.
• Includes basic wage + special allowance (VDA).
• Audit Responsibilities:
• Assess wages paid to different categories.
• Match payment registers with applicable minimum wage notifications.
• Disclosure:
• Non-compliance must be quantified and disclosed.
• Penalties:
• Up to ₹500 fine; repeated offences attract higher penalties and imprisonment.

5. The Payment of Bonus Act, 1965

Ensures a statutory right of workers to a share in the profits of the organization.

• Applicability: Establishments with ≥20 employees.
• Eligibility:
• Employees earning up to ₹21,000/month.
• Must have worked for ≥30 days in a year.
• Calculation:
• Minimum 8.33% and maximum 20% of basic + DA.
• Ceiling for bonus calculation: ₹7,000 or minimum wage, whichever is higher.
• Audit Responsibilities:
• Examine bonus payment registers.
• Confirm provision and timely disbursement.
• Disclosure:
• Accrued bonus must be reported in liabilities.
• Penalties:
• Fine of ₹1,000 or imprisonment up to 6 months.

6. The Payment of Gratuity Act, 1972

This Act ensures a financial benefit to employees for long-term service.

• Applicability: Establishments with 10 or more employees.
• Eligibility:
• Minimum 5 years of continuous service.
• Calculation:
• Gratuity = (15/26) × Last drawn salary × Years of service.
• Max limit: ₹20 lakh (can be revised by notification).
• Audit Responsibilities:
• Actuarial valuation must be reviewed.
• Review gratuity trust funds if any.
• Disclosure:
• Long-term provision in financial statements.
• Penalties:
• Fine up to ₹10,000 or imprisonment.

7. The Maternity Benefit Act, 1961

Provides maternity leave and related benefits to women employees.

• Applicability: Establishments with 10 or more employees.
• Eligibility:
• At least 80 days of work in the 12 months before expected delivery.
• Benefits:
• 26 weeks of paid maternity leave.
• Creche facility if ≥50 employees.
• Audit Responsibilities:
• Ensure maternity leave policies are in place.
• Review compliance and payment.
• Disclosure:
• Provision for future liability under employee benefit obligations.
• Penalties:
• Fine ₹5,000 or imprisonment up to 1 year.

8. The Equal Remuneration Act, 1976

Ensures equal pay for equal work irrespective of gender.

• Audit Responsibilities:
• Conduct gender-wise analysis of pay structures.
• Review HR policies to ensure compliance.
• Disclosure:
• May fall under ESG or CSR disclosures.
• Penalties:
• Up to ₹20,000 fine.

9. The Child and Adolescent Labour (Prohibition and Regulation) Act, 1986

Prohibits employment of children and regulates working conditions of adolescents.

• Key Provisions:
• No child (<14 years) can be employed.
• Adolescents (14-18 years) can work under regulated conditions.
• Audit Responsibilities:
• Age verification documents.
• On-site inspection for child labour.
• Penalties:
• Fine ₹50,000 and imprisonment up to 2 years.

10. The Right of Persons with Disabilities Act, 2016

Promotes inclusivity and equal opportunity for differently-abled persons.

• Applicability: All establishments.
• Key Compliance Points:
• Equal opportunity policy.
• Reasonable workplace accommodations.
• Audit Responsibilities:
• Review HR and facilities audit.
• Disclosure:
• Disclosure in ESG/CSR reports.
• Penalties:
• ₹10,000 for first contravention; up to ₹5 lakh for subsequent.

11. The Apprentices Act, 1961

Aims to develop a skilled workforce through structured training.

• Applicability: Organizations with sufficient facilities to train apprentices.
• Audit Responsibilities:
• Verify apprenticeship agreements.
• Confirm stipend payments and training logs.
• Disclosure:
• Disclosures for CSR initiatives.
• Penalties:
• Fine ₹500 for each shortfall.

Broader Auditor Considerations

1. Risk Assessment:

Auditors must assess the risk of material misstatement due to non-compliance with labour laws, especially in sectors with high employee turnover, contractual labour, and large unorganized workforces.

2. Internal Controls:

Evaluate the robustness of internal control mechanisms around HR and statutory compliance processes.

3. Representation Letter:

Auditors should obtain management representation confirming compliance with applicable labour laws.

4. Reporting Requirements:

• CARO 2020 requires reporting on regular deposit of statutory dues.
• NFRA and ICAI audit quality reviews focus on compliance reporting.

5. Link to CSR and ESG:

Non-compliance affects ESG ratings and CSR obligations. Auditors may need to verify relevant disclosures.

Conclusion:

Labour law compliance is not merely a regulatory checkbox—it has a material impact on the financials, employee satisfaction, and the brand image of an organization. As auditors, we must expand our audit procedures to include scrutiny of these laws to ensure that our audit opinions are holistic, responsible, and risk-aware.

These legislations, though seemingly operational, hold significant financial implications and impact organizational goodwill and continuity. Non-compliance can lead to severe penal, criminal, and reputational consequences.

Let us, as members of the Chartered Accountancy profession, uphold the integrity and comprehensive nature of audits by integrating these critical labour laws into our audit scope. The future of audit is not just about figures—it’s about responsibility.