Expert verified Ignoring labour laws can cost your business lakhs in penalties. A simple Labour Law compliance audit helps you stay compliant and protect your workforce.
Here’s a complete guide to the audits including the complete labour law audit process and a FREE downloadable PDF.
What is a Labour Law Compliance Audit & Why it Matters?
A Labour Law compliance audit is a detailed review of an organization’s adherence to various central and state labour laws.
It reviews policies, records, and practices related to:
- Employee wages, bonuses, and PF/ESI contributions
- Working hours, overtime, and leave policies
- Safety standards (Factories Act, POSH, etc.)
- Contract labour and gratuity rules
- Employee benefits like maternity leave, provident fund, etc.
These audits are important because:
Avoid Legal Penalties: Non-compliance can lead to heavy fines, lawsuits, or even business shutdowns.
Employee Trust & Retention: Fair labour practices improve employee satisfaction and reduce disputes.
Maintain Business Reputation: Compliant companies attract better talent and investors.
Government Scrutiny: With stricter enforcement (e.g., Labour Codes 2023), audits help avoid sudden inspections.
Mergers & Acquisitions: Investors check labour compliance before funding or buying a business
Key Laws Covered in a Labour Law Compliance Audit
The following are the primary laws and regulations usually covered in such an audit:
1. Minimum Wages Act, 1948
Ensures employees are paid at least the government-mandated minimum wages for their category and region.
Each region may have different minimum wage rates. Audits check if your wages meet or exceed legal standards and all employees are being paid fairly
2. Payment of Wages Act, 1936 / 1965
This law ensures your workers get paid on time and without unfair deductions.
Auditors will look at your salary records, whether you’re paying wages by the legal due date and any illegal or missing deductions.
3. Factories Act, 1948
This law matters if you run a factory or manufacturing unit.
It governs health, safety, welfare, working hours, and leave for workers in factories.
4. Contract Labour (Regulation and Abolition) Act, 1970
This Act regulates the employment and working conditions of contract labour and mandates registration and licensing requirements.
5. Employee Provident Fund (EPF) & Employee State Insurance (ESI) Acts
These laws ensure employees get retirement benefits, healthcare, and insurance.
While EPR Act mandates provident fund contributions and record-keeping for eligible employees, ESI deals with provision of health insurance and benefits to employees and their families.
6. Industrial Disputes Act, 1947
It covers the investigation and settlement of industrial disputes, including layoff procedures and unfair dismissals of its employees.
7. Industrial Employment (Standing Orders) Act, 1946
Requires organizations to define and display service rules, disciplinary procedures, and grievance redressal mechanisms.
8. Shops and Establishments Act (State-specific)
This applies to offices, shops, and commercial businesses. Each state or region may have its own version
It regulates conditions of work, holidays, working hours, and other employment terms.
9. Maternity Benefit Act, 1961
It governs maternity leave and benefits for female employees.
It applies to all establishments with 10+ employees.
Areas Covered in a Labour Law Compliance Audit
A Labour Law compliance audit thoroughly examines various aspects of employment in an organisation. The key areas covered include:
Employee Records and Contracts
Ensures proper documentation of employee details and contracts.
Key Checks:
- Appointment letters – clearly stating terms, salary, role, etc.
- Employment contracts – permanent, temporary, or fixed-term
- Personal files with Aadhaar, PAN, address proof, educational certificates
- Form 12 (Register of Employees) under EPF rules.
- ESI records including IP numbers
Wage and Salary Records
Ensures employees are paid correctly and on time.
Key Checks:
- Payroll reports
- Payslips issued on time
- Compliance with minimum wage laws
- Overtime calculation and payment
- Proper bonus calculations
- Equal pay for equal work without gender bias
- Salary slips with clear breakup of basic, HRA, deductions
Statutory Contributions & Deductions
Ensures proper PF, ESI, TDS, and other deductions.
Key Checks:
- EPF contributions
- ESI contributions
- Professional Tax deductions, state-wise
- TDS on salary (as per Income Tax Act)
- Gratuity provisions after 5 years of service
Attendance and Leave Records
Ensures proper tracking of attendance, leaves, and holidays.
Key Checks:
- Daily attendance registers – manual/biometric
- Leave records (casual, sick, earned leave)
- Maternity leave (26 weeks paid) compliance
- Weekly offs (as per state Shops Act)
Working Hours & Overtime Compliance
Ensures employees are not overworked illegally.
Key Checks:
- Maximum 8-9 hours/day & 48 hours/week
- Overtime wages (double rate) for extra work
- Weekly holiday usually Sunday or compensatory off
Health & Safety Compliance
Ensures a safe and hygienic workplace.
Key Checks:
- First aid kits & fire safety equipment
- Proper ventilation, drinking water, and sanitation
- POSH compliance (Internal Complaints Committee)
- Safety training & protective gear
Contractor and Third-Party Compliance
Ensures contract workers are treated fairly.
Key Checks:
- Contractor license if employing 20+ contract workers
- Equal wages & facilities for contract workers
- No illegal replacement of permanent staff
Grievance Redressal System
Ensures employee complaints are addressed legally.
Key Checks:
- Internal Complaints Committee (ICC) for POSH
- Grievance handling policy in place
- Labour welfare committee (for large factories)
Employee Exit Process & Final Settlement
Ensures legal termination and full & final payment.
Key Checks:
- Notice period served or paid in lieu
- Full & final settlement within 2 days of exit
- Form 10C & Form 19 for PF withdrawal
- Gratuity payment (if eligible)
Labour Law Compliance Audit Checklist
A labour law compliance checklist is essential in order to conduct the audit efficiently.
Although, the checklist will vary for each company depending on its size, industry and location, here’s how it should look like:
Step-by-Step Process of Conducting Labour Law Compliance Audit
Here’s a structured 8-step process to conduct an effective labour law compliance audit for your organisation:
Step 1: Pre-Audit Planning
This step is all about preparing and organizing for conducting the audit. It covers:
Define Scope:
- Identify industry type – manufacturing, IT, retail, etc.
- Determine employee count to determine EPF/ESI applicability
- List state-specific laws like Shops Act, Contract Labour Act, etc.
Select Audit Team:
- Internal Team: HR, Legal, Finance.
- External Consultants like PKC for complex laws
Set Timeline:
- Decide audit duration (typically 1-4 weeks).
Step 2: Collect All Relevant Documents
Gather every piece of paper and digital record you’ll need, such as:
Employee Records:
- Appointment letters, contracts, personal files
- Attendance & leave registers
Salary & Benefits Records:
- Salary slips, wage registers, bonus records
- PF/ESI challans, gratuity records
Statutory Registrations:
- EPF/ESI registration certificates
- Shops & Establishment License
- Factory License (if applicable)
Safety & Compliance Records:
- POSH committee details
- Safety inspection reports
Step 3: Review Policies and Procedures
Now it’s time to read and analyze everything. You want to find anything outdated, missing, or illegal.
Check Compliance Against Laws:
- Wages: Minimum wages, overtime, bonus
- Working Hours: Max 8-9 hrs/day, weekly offs
- Social Security: EPF, ESI, gratuity
- Health & Safety: Factories Act, POSH
Verify Internal Policies:
- Leave policy (casual, sick, maternity)
- Grievance redressal system
- Contract labour policy (if applicable)
Step 4: Interview Key People
This step is about assessing if employees are aware of their rights, if policies are followed, and if anything seems off. You can talk to:
- HR & Payroll Team
- Sample of Employees
- Contractors (If Applicable)
Step 5: Identify Non-Compliance or Gaps
Based on your review, list all the problems. Every issue should be logged in a compliance gap report.
Examples:
- Late wage payments
- Unregistered employees for PF/ESI
- No sexual harassment committee
- Contractors not contributing to welfare fund
- Illegal contract labour hiring
Step 6: Prepare a Detailed Audit Report
The findings need to be put in a detailed audit report. Its key sections include:
- Summary of Findings (Compliant/Non-Compliant Areas)
- Legal Risks (Fines, lawsuits, shutdown risks)
- Corrective Actions Needed (Immediate & Long-Term)
Step 7: Take Corrective Action
Next, is fixing the issues.
Immediate Fixes:
- Pay pending wages, PF, gratuity
- Form POSH committee (if missing)
Long-Term Solutions:
- Update HR policies
- Train staff on labour laws
Document Actions Taken:
- Keep proof of compliance (e.g., PF challans).
Step 8: Follow-Up Audit or Monitoring
After a few weeks or months, do a follow-up. You can even create a monthly mini-audit checklist to stay on track all year.
Schedule Regular Checks:
- Quarterly reviews for high-risk areas.
- Annual full audit for compliance updates.
Stay Updated on Law Changes:
- Track amendments like Labour Codes 2024)
How Can PKC Help With Labour Law Compliance Audits?
✅100% compliance record across all industry sectors
✅Same-day response guarantee for all compliance queries
✅Dedicated knowledge team tracking regulatory changes daily
✅Comprehensive assessments covering internal and government requirements
✅On-site audit services with face-to-face consultations
✅Ongoing monitoring and support post-audit completion
✅Business advisory for growth while maintaining compliances
✅Cost-effective solutions starting from affordable pricing tiers
✅Follow-up implementation support ensuring sustained compliance
Frequently Asked Questions
1. Why is a Labour Law Compliance Audit important?
It helps you avoid government fines, lawsuits, and public backlash. Audits also improve employee trust and reduce business risks.
2. How often should a company do a Labour Law Compliance Audit?
Ideally, an annual audit works for most businesses. High-risk industries like manufacturing, and construction may need bi-annual checks.
3. What documents are required for a labour law audit?
You’ll need contracts, payroll records, leave registers, statutory returns, and safety manuals. Everything that proves your employees are being treated legally must be reviewed.
4. Which laws are checked in a Labour Law Audit?
Key laws include EPF, ESI, Minimum Wages Act, Factories Act, and POSH. The audit also verifies state-specific Shops & Establishment rules.
5. Who can conduct a labour audit?
Companies can use internal HR teams for basic checks. For thorough audits, labour law consultants or experienced firms like PKC Management Consulting are recommended.
