Indian startups and entrepreneurs have to understand Labour Law Due Diligence for managing risks and ensuring compliance for long-term success. Reviewing labour laws helps identify potential legal and financial risks related to employment practices, employee benefits and industrial relations, enabling investors and acquirers to make informed decisions. The following blog shall decode what aspects of Labour Law Due Diligence entail and why it is important for Startups and Entrepreneurs in India.
Key Components of Labour Law Due Diligence:
Provident Fund (PF)
Applicability: PF is mandatory in the case of those employees whose monthly salary does not exceed INR 15,000. Check whether the Company has deducted and contributed for all those employees to whom PF is applicable in a timely manner.
Payments: Verify whether PF has been paid within the prescribed time. In case of delayed payment, 12% per annum of interest on the same for each day of such delay shall be applicable.
Verification Of Records: Check the PF registration certificate obtained by the company. Also test the payroll workings to ascertain the correctness of the PF workings, returns, and challans.
Provision For PF Liability: Verify whether the Company has properly created a provision for employer as well as employee's contribution for PF and has been setting off the same against the payment made in the books of accounts on a regular basis.
Contribution To PF: In the PF scheme, both the employee and the employer pay a certain amount each month in equal portions of 12% of basic salary and dearness allowance. Verify whether the contribution to PF has been correctly calculated and paid to the credit of the government in time.
EPF Form 11 - Self Declaration: EPF Form 11 is a self-declaration form to be filled by the employee at the time of joining the new organization. By means of this form, an employee can decide whether he/she wants to be a part of the PF structure or not. For those employees who don’t opt for PF check whether Form 11 has been filled in and submitted properly.2. Employee State Insurance Corporation (ESIC)
Applicability: ESI shall apply to every establishment covered under the ESI Act and every factory, wherein more than 10 employees are engaged and the wage paid is less than or up to Rs.21,000 per month (INR 25,000 in case of employees with disability). Check the applicability of ESI employee-wise and ensure registration is obtained.
Payments : Check if ESI payments are made on time, and if delayed, ensure interest is calculated at 12% p.a. for each day of delay.
Verification Of Records: Verify the company's ESI registration and ensure accurate payroll calculations, returns, and challans. Also, reconcile ESI workings with financial records to ensure correct recording and compliance.
ESIC Rate: Ensure that the ESI deductions and contributions are correctly computed and paid, where 0.75% is contributed by employees from gross salary and 3.25% by employers on gross pay, in adherence to government rules.
ESIC Returns: Check if ESI Returns are filed on time, and late fees are paid promptly if delays occur.
Verification With Salary Register: Check ESI calculations in the salary register and accounting records, and investigate any variations in monthly contributions.
Professional Tax
Applicability: Ensure that the firm has registered and obtained the Professional Tax Registration Certificate (PTRC) and Professional Tax Enrollment Certificate (PTEC).
Payments: Ensure that professional tax-related calculations are accurate and paid in full to the authorities on time.
Verification Of Records: Verify PTRC and PTEC registration certificates, accurate payroll workings, correct preparation of professional tax workings, returns, and challans, and reconcile workings with financial records.
PTRC & PTEC: Ensure accurate calculation and payment of employee professional tax using the Professional Tax Registration Certificate (PTRC) and company professional tax using the Professional Tax Enrollment Certificate (PTEC) and verify correct filings of both PTRC and PTEC for compliance.
PT Returns: Verify timely filing of Professional Tax Returns and payment of late fees, if any, to the government.
Professional Tax As Per Salary Register: Verify if Professional Tax has been properly calculated in the salary register and appropriately recorded in the books of accounts. Further, any changes in the amount of contribution month on month is inquired and reviewed.
Gratuity
Applicability: Verify the Company's compliance with the Gratuity Act, including annual provision for gratuity liability in the books, applicable after 5 years of service (or 1 year in case of death/disability).
Actuarial Reports: Provisioning for gratuity shall be made based on an Actuarial Report. Check whether the provision for gratuity as provided in the books of accounts tallies with the Actuarial Report.
Computation Of Gratuity Contribution: Verify accurate computation of Gratuity Payable at 15 days' salary per year of service, with >6 months treated as a full year, and proper provision in the books of accounts.
Sample Review: On the basis of sample checking, review the underlying data of the employees which is being considered for preparing the Gratuity workings and matching the same with details captured in the Actuary Report.
Conclusion
In a nutshell, labour law due diligence is one of the most important exercises that any startup or entrepreneur in India willing to comply with different labours' legislation needs to perform. It will further help businesses mitigate risks, avoid legal complications and financial penalties, and make informed decisions through knowing due diligence performed in professional tax, ESIC, PF, gratuity, etc.
At Constellation Blu, we are committed to offering the best possible labour law due diligence services to help entrepreneurs achieve success as well as being compliant while doing business. Feel free to contact us today for more information about our services and how we can help in your growth.
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