Labour Law Audit Checklist for Companies in India

1. Executive Answers

Internal audit, statutory inspection and third-party audit are different exercises.

Under the Codes, inspections are carried out by inspector-cum-facilitators, with web-based and randomised inspection schemes. An internal audit is the only exercise in which you control the timing, the scope and the sequence of corrective action.

Primary liability exposure points

1. Wage base errors. Excluded allowances above 50% of total remuneration are added back to wages, which affects PF, ESIC, gratuity, bonus and overtime. A single structural error can be repeated across thousands of payslips and many months.
2. Remittance trail breaks. Deductions that do not match challans, late or short PF and ESIC deposits, and deduct-and-not-deposit cases. These carry interest at 12% per annum, graded damages, and prosecution exposure for responsible officers.
3. Register and record gaps. Muster rolls, wage registers, overtime registers and leave records that do not reconcile to payroll are the evidence base for every wage claim and every inspection finding.
4. Contractor structure. Unlicensed contractors, core-activity contracting, missing principal employer registration, and no proof of contractor wage and social security payment.
5. Working-time and welfare lapses. Overtime without consent or at the wrong rate, State cap breaches, night shift for women without prescribed safeguards, missing appointment letters, health check-ups, safety committees and POSH Internal Committees.
6. State-level enactments. Shops and Establishments, Professional Tax, Labour Welfare Fund, licence and consent renewals.

Financial impact of historical discoveries. A discovered gap is rarely a single-period item. The exposure is the shortfall for each affected period, plus interest (12% per annum on late or short PF), damages on a graded scale, employee wage claims, and the cost of remediation and representation. The exposure compounds with the age of the gap and the number of establishments that share the same error. Findings made before an inspector arrives can be cured by deposit and correction filing; findings made after are priced with damages and may be contested in proceedings.

Operating rule: audit what a regulator would test, using the evidence a regulator would ask for, and classify each finding by severity and by exposure.

2. Scope & Applicability

2.1 Audit triggers by establishment type

2.2 Headcount triggers to test in every audit

Test headcount using the correct definition for each statute, including contract workers where the statute counts them, and check the date on which each threshold was first crossed. Registration and contribution obligations run from that date.

2.3 Multi-state and jurisdictional verification

• Each location is a separate audit unit. Registrations, State levies, working-hour rules and inspection authorities differ by State.
• Appropriate government. Most private establishments fall under the State Government as the appropriate government; specified sectors fall under the Central Government. Confirm which applies for each unit.
• State rule status. For every State, record whether the rules under each Code are final, draft or pending, and use the legacy rules as the interim reference only where the State has not notified the new ones.
• EPF and ESIC codes. Verify the establishment code or sub-code, and for ESIC the State-wise employer code, against each work location.
• Posting and transfers. Test employees posted across States for PT, LWF and registration at the worksite.
• Audit period split. Divide the look-back at 21 November 2025, and further at 8 and 9 May 2026 and 17 September 2026 where the Central Rules or the EPF ceiling matter.

3. Detailed Guide

3.1 Audit method

1. Define scope: entities, locations, workforce categories, audit period and statutes.
2. Request documents: use the evidence list in Section 4, issued with a due date and a named owner for each item.
3. Sample and test: select samples by risk, including joiners, leavers, salary changes, high-overtime employees, ceiling-crossover cases and contractor workers. Use full-population tests for wage mapping and contribution reconciliation where data allows.
4. Trace transactions end to end: attendance, to payroll, to payslip, to bank payment, to challan, to portal credit.
5. Rate findings: critical (statutory deduction not deposited, no registration where required, unlicensed contractor), high (systemic wage base error, missing registers), medium (isolated lapses), low (documentation weakness).
6. Quantify exposure: shortfall, interest, damages, potential claims and remediation cost, by period and entity.
7. Report and remediate: findings register, owners, due dates and evidence of closure.

3.2 Domain 1: Statutory registers and records

What to verify

• Registration and licences: OSHWC registration for each establishment, factory licence where applicable, Shops and Establishments registration or its successor, contractor licences, EPF and ESIC codes, PT enrolment, LWF registration, and display of the required notices.
• Core registers: employee register, appointment letters, attendance or muster roll, wage register, deductions and advances, overtime, leave, accident and dangerous-occurrence records, inspection book, and contractor and contract-worker registers.
• Prescribed forms: the Central and State Rules prescribe the forms and permit combined or electronic registers. Check each register against the form and content required by the Rules applicable to that location, and confirm the legacy form where the State has not yet notified the new one.
• Muster roll integrity: each employee's entry, signature or biometric trace, correction trail and date of entry.
• Electronic maintenance: retrievability by employee and period, audit trail, backup, access control and the ability to produce a printout on demand.
• Retention: records kept for the longest period applicable under the Codes, the Rules and State law.

Typical findings: muster rolls not matching payroll; registers missing for contractor workers; registers maintained at head office but not available at the worksite; corrections with no audit trail.

3.3 Domain 2: Wage computation verification

Minimum and floor wages

• Confirm that each category of employee is paid at or above the higher of the national floor wage and the applicable State minimum wage, by zone, skill and sector.
• Verify that minimum wage revisions and variable dearness allowance changes were applied from their effective dates.
• Confirm that deductions stay within the aggregate cap in the Code on Wages and are authorised.

The 50% rule

• Map every pay component to its treatment for PF, ESIC, gratuity, bonus and overtime.
• Test the exclusion cap: excluded components above 50% of total remuneration are added back to wages.
• Worked test: total remuneration of Rs 80,000, basic Rs 28,000, excluded allowances Rs 52,000. The cap is Rs 40,000, so Rs 12,000 is added back and Code wages are Rs 40,000. If payroll used Rs 28,000 as the wage base, the base is understated by Rs 12,000 per month for that employee; repeat across the affected population and period.
• Check that the wage definition was applied consistently from 21 November 2025, and that the earlier definition was used for earlier periods.

Payment and settlement

• Monthly wages by the 7th of the following month, with electronic payslips.
• Final settlement within two working days of separation, with leave encashment, notice pay, bonus and gratuity where due.
• Overtime at not less than twice the normal rate, computed on the correct hourly rate.
• Equal remuneration for same or similar work, without discrimination on gender, including transgender persons.

3.4 Domain 3: Social security contribution trails

EPF, EPS and EDLI

• Establishment coverage from the date of crossing 20 employees, and employee enrolment from joining.
• Contribution base against the correct ceiling: Rs 15,000 up to 16 September 2026 and Rs 25,000 from 17 September 2026. Check the September 2026 split-month computation and the enrolment of newly covered employees.
• Employer split into EPF (3.67%), EPS (8.33% on wages capped at the ceiling) and EDLI (0.5% on wages capped at the ceiling), with administration charges.
• UAN verification, KYC match, exit dates, and non-contributory days.
• Monthly trace from payroll deduction, to ECR, to challan, to EPFO passbook credit.

ESIC

• Registration within 15 days of applicability, and IP numbers for all covered employees from joining.
• Contribution at 0.75% (employee) and 3.25% (employer) on wages up to Rs 21,000 (Rs 25,000 for persons with disability), with the daily wage exemption for the employee share where applicable.
• Contribution period handling: April to September and October to March, with the ceiling test at the start of each.
• Monthly trace from payroll, to contribution file, to challan, to ESIC contribution history.

Gratuity

• Applicability at 10 or more employees, eligibility after five years' continuous service for permanent employees, and pro rata for fixed-term employees after one year.
• Calculation at 15 days' wages per completed year on Code wages, nominations on file, and payment within 30 days of becoming due.
• Provision or fund adequacy against an actuarial valuation.

Statutory bonus

• Applicability at 20 or more employees, eligibility within the earnings ceiling, minimum 8.33% and maximum 20%, and payment within eight months of financial year-end.
• Wage ceiling and calculation base used, allocable surplus treatment where relevant, and bonus register.

Maternity and other benefits: 26 weeks' leave for the first two children, creche and work-from-home provisions at the prescribed establishment size, and employees' compensation coverage.

3.5 Domain 4: Working hours, overtime and leave

• Hours: 8 hours per day and 48 hours per week, with prescribed rest intervals and spread-over, tested against attendance data for each shift and department.
• Weekly off: per the State rule for the establishment type.
• Overtime: employee consent, approval, payment at twice the normal rate, and the quarterly cap set by the State. Reconcile the overtime register, the attendance system and the payroll for the highest-hours employees.
• Night shifts for women: consent, transport, security and grievance arrangements as prescribed, with records.
• Leave: annual leave with wages accruing at the rate prescribed in the Code (one day for every twenty days worked, for eligible employees), casual, sick and maternity leave per the Code or State rule, leave register and encashment at exit.
• Appointment letters and health check-ups: issued to all workers, and annual health check-ups for workers above the prescribed age, with records.
• State amendments: confirm that State-specific changes to daily hours, spread-over and overtime caps are reflected in shift design and payroll rules.

3.6 Domain 5: Third-party contractor compliance (CLRA validation)

The Contract Labour (Regulation and Abolition) Act has been subsumed into the OSHWC Code. Test legacy and current requirements as follows.

• Threshold and registration: principal employer registration where 50 or more contract workers are engaged, and contractor licences for each contractor.
• Licence validity and scope: licence number, validity, State, scope of work, and worker-number limits against actual deployment.
• Core-activity test: each contract role classified as core or non-core, with the exception applied (for example, work not ordinarily needing full-time workers, sudden volume increases, or specialised work) and documented.
• Wage proof: contractor wage register and bank payment evidence for each month, and for each contract worker on site.
• Social security proof: ECR and challan, ESIC challan, with matching worker lists.
• Statutory benefits: bonus, leave, overtime, welfare facilities and safety arrangements for contract workers.
• Contract terms: audit rights, invoice holdback until proof is received, indemnity, set-off and termination for default.
• Returns: periodic contractor returns as prescribed, and the principal employer's own return where required.
• Residual liability: principal employer exposure for unpaid wages and contributions where the contractor defaults.

3.7 Industrial relations and workplace committees

• Standing Orders: certified or model orders where 300 or more workers are employed.
• Grievance Redressal Committee: constituted at 20 or more workers, with minutes and disposal timelines.
• POSH Internal Committee: constituted for each workplace of 10 or more employees, with an external member, policy display, training records and the annual report.
• Fixed-term employment: contract terms, benefit parity, gratuity treatment and renewal records.
• Retrenchment, layoff and closure: notice, compensation, Reskilling Fund deposit and permission where required, for any such events in the audit period.

4. Table / Checklist

Evidence request list (minimum)

• Entity and location master with registrations and licence expiry dates
• Payroll registers for the audit period, and payslips for a sample
• Salary structures and the wage component mapping table
• Attendance, muster, overtime and leave data
• ECR files, challans, EPFO passbook; ESIC contribution files, challans and history
• Gratuity valuation and bonus workings
• Contractor agreements, licences, wage and contribution proofs
• Policies, Standing Orders, committee orders and minutes
• Notices received and replies sent
• State PT, LWF and TDS challans and returns