Industrial and Labour Laws Audit: formula sheet

Key formulas

Core audit test

Finding = Legal requirement − Actual practice (gap)

Every labour audit finding states the provision, the facts found, the gap and the recommended fix.

Overriding effect with favourable-benefit protection

Code prevails over inconsistent law/contract, but more favourable existing benefits continue

Code on Social Security s.161, OSH Code s.120 and IR Code s.76 contain the proviso. Code on Wages s.61 states the overriding effect only.

Statutes in scope

4 Codes: Wages + Industrial Relations + Social Security + OSH

Audit scope follows these four Codes, plus rules and State-specific requirements.

Code on Wages exclusions (s.41)

Chapter on bonus does not apply to listed employees, e.g. LIC, RBI, government, universities, non-profit institutions

Section 41(2) applies the Chapter to establishments where 20 or more persons are or were employed on any day in an accounting year.

Social Security Chapter exclusion (s.20)

Chapter not to apply to certain establishments, e.g. small co-operatives without power, or those with own contributory PF schemes

Check applicability before testing compliance. Section 20(2) lets the Central Government exempt a class by notification.

Who audits (s.116(1))

Accounts of each Social Security Organisation → audited annually by the CAG

Audit is yearly. The auditor is the CAG, not a chartered accountant chosen by the organisation.

Cost of audit (s.116(1))

CAG's audit expenditure → payable by the Social Security Organisation to the CAG

The audited body bears the cost.

Powers of auditor (s.116(2))

CAG or person appointed by CAG = same rights, privileges and authority as in audit of Government accounts

Includes demanding books, accounts, connected vouchers, documents and papers, and inspecting any office of the organisation.

Reporting chain (s.116(3))

Certified accounts + audit report → Social Security Organisation → (with its comments) → appropriate Government

The organisation must add its comments on the CAG's report before forwarding.

Empanelment power (s. 37(1))

Appropriate Government + notification → scheme to empanel experts for specified start-up establishments or classes of establishments

Experts must have the qualifications and experience that are prescribed. Coverage depends on the notification.

Assignment (s. 37(2)(a))

Audit and certification assigned randomly, by the appropriate Government, through a web-based scheme

The employer does not choose the auditor.

Conduct (s. 37(2)(b))

Audit and certification done in the manner and for the purpose specified in the scheme

The scheme governs the method and purpose.

Reporting (s. 37(2)(c))

Report → concerned employer AND Inspector-cum-Facilitator

Two recipients. Duties are those specified in the scheme.

Employer duties under Section 123, Code on Social Security, 2020

Maintain records and registers + display notices + issue wage slips + file returns

Records cover days and hours worked, wages paid, leave and overtime, employee identification number, accidents and compensation, statutory deductions, cess on construction work, employee counts, recruitment, occupational details and unfilled vacancies. Section 96 of the OSH Code does not apply to a default under this section; check the consequence in the Code on Social Security itself.

Employer duties under Section 33, OSH Code, 2020

Register in prescribed form + notices + wage slips + return to Inspector-cum-Facilitator

The register covers work performed, normal hours, weekly rest day, wages and receipts, leave, overtime, attendance, dangerous occurrences and employment of adolescents.

Penalty for non-maintenance or non-filing, Section 96(1), OSH Code

₹50,000 minimum to ₹1,00,000 maximum

Applies only to OSH Code defaults: failure to maintain a required register or document, to file returns, or to produce a register, plan, record, report or other document when required. It does not cover failure to issue wage slips, and it does not cover Code on Social Security duties.

Repeat conviction, Section 96(2), OSH Code

₹50,000 minimum to ₹2,00,000 maximum

Applies where a person convicted of an offence punishable under Section 96(1) is again convicted under the same provision.

Falsification of records, Section 98(1), OSH Code

Imprisonment up to 3 months, or fine up to ₹1,00,000, or both

For a repeat conviction: imprisonment up to 6 months, or fine of ₹1,00,000 to ₹2,00,000, or both.

Registration, Section 3, Code on Social Security, 2020

Registered under another Central labour law = deemed registered under this Code

Check registration first. The proviso saves an establishment from registering again.

Liability of persons in charge (OSH Code, s.109(1))

Offence by company → company + every person in charge of and responsible for the conduct of business = deemed guilty

Defence: offence without his knowledge, or he exercised all due diligence to prevent it. He must prove this.

Consent, connivance or neglect (OSH Code, s.109(2))

Proved consent / connivance / neglect → director, manager, company secretary or other officer = deemed guilty

Applies notwithstanding s.109(1). The company secretary is named expressly.

Social Security Code, s.135

Offence under the Chapter by company → company + person directly in charge and responsible = deemed guilty; consent, connivance or neglect → director, secretary or other officer also guilty

Same due diligence and no-knowledge defence. Applies to offences under the relevant Chapter.

Meaning of 'company' for these sections

Company = any body corporate, including a firm or other association of individuals

So partnership firms are covered. 'Director' for a firm means a partner.

Audit of social security bodies (s.116, Code on Social Security)

Accounts of each Social Security Organisation audited annually by the CAG

This is not a CS audit. Know it only to avoid confusion.

Employer's accounts in bonus dispute (Code on Wages, s.48)

Pending bonus claim + employer not a company/corporation + accounts not audited by a qualified auditor → authority may direct audit; employer pays

Auditor must be qualified under section 141 of the Companies Act, 2013. Cost is determined by the authority and paid by the employer.

Quick revision

• A labour law audit checks compliance with labour laws against records, filings and practices, and ends in a report.
• Section 116, Code on Social Security: accounts of each Social Security Organisation are audited annually by the CAG.
• The audit expenditure of the CAG is payable by the respective Social Security Organisation.
• The CAG and persons appointed by him can demand books, accounts, vouchers, documents and papers and inspect offices.
• Certified accounts and the audit report go to the Social Security Organisation, which forwards them with its comments to the appropriate Government.
• Section 37, OSH Code: the appropriate Government may notify a scheme to empanel experts for third party audit and certification.
• The scheme under Section 37 applies to start-up establishments or classes of establishments specified in the notification.
• Empanelled experts are assigned audits in a randomised manner through a web-based scheme.
• The expert's report under Section 37 goes to the employer and to the Inspector-cum-Facilitator.
• Section 141 sets up Social Security Funds with separate accounts for each source; Section 115 of the OSH Code sets up a fund for unorganised workers.
• A good audit report states the finding, the legal provision, the risk and the recommended action.
• In answers, name the provision first, apply it to the facts, then conclude clearly.

Common mistakes

• Calling a labour law audit a type of financial audit. Fix: State that financial audit gives a true and fair view opinion on accounts. Labour audit tests legal compliance with the Codes.
• Listing the old repealed Acts as the scope. Fix: Name the four Codes as the base. Mention old Acts only if the question asks for contrast.
• Treating section 116 as an audit of an employer's establishment. Fix: Remember that section 116 covers accounts of Social Security Organisations only. Employer-level labour audit is a separate topic.
• Saying a chartered accountant or company secretary conducts the audit. Fix: Write that the CAG audits, or a person appointed by the CAG for that purpose.
• Saying every establishment must get a third party audit. Fix: Write that it applies only to start-up establishments or classes of establishments specified in the notification under a scheme.
• Saying the employer appoints the auditor. Fix: State that the appropriate Government assigns the expert in a randomised manner through a web-based scheme.
• Treating the audit as only a check of whether registers exist. Fix: Always say you trace entries to source records such as muster roll, payroll and challans, and check accuracy as well as existence.
• Mixing up Section 123 of the Code on Social Security with Section 33 of the OSH Code. Fix: Remember that Section 123 is social security and covers statutory deductions and employee counts; Section 33 is OSH and covers rest day, hours and adolescent employment, with returns to the Inspector-cum-Facilitator.
• Saying a CS is automatically liable for every offence of the company. Fix: State the conditions: in charge of and responsible for the business, or consent, connivance or neglect. Then add the defence of no knowledge or due diligence.
• Confusing the CAG audit under section 116 or the bonus accounts audit under section 48 with the CS compliance audit. Fix: Remember who audits what: CAG audits Social Security Organisations; section 48 deals with employer accounts in bonus disputes; the CS audit is a compliance review.

Exam tips

• Write the four Codes by name in every answer on scope. It shows you know the current law.
• For distinction questions, use four or five labelled points. Examiners award marks per point.
• In case-based questions, follow provision, analysis and conclusion. Quote the section only where you are sure.
• Always check applicability exclusions in the facts before concluding that the employer is in default.
• Close with a practical recommendation, such as rectifying the register or filing the return.
• Begin every answer with the section number, 116, and the three sub-parts: auditor, powers, reporting.
• Always say audit is by the CAG and is annual. These two facts are the most likely marking points.
• In a case question, first check whether the body is a Social Security Organisation. If not, say so before applying anything.